Friday, 

August 18, 2006 

Part II 

Department of 

Health and Human 

Services 

Centers for Medicare & Medicaid Services 

42 CFR Parts 409, 410, 412, et al. 

Revision to Hospital Inpatient Prospective 

Payment Systems—2007 FY Occupational 

Mix Adjustment to Wage Index; 

Implementation; Final Rule 


bajohnson on PROD1PC67 with RULES2
47870 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 409, 410, 412, 413, 414, 

424, 485, 489, and 505 

[CMS–1488–F; CMS–1287–F; CMS–1320–F; 

and CMS–1325–IFC4] 

RINs 0938–AO12; 0938–AO03; 0938–AN93; 

and 0938–AN58 

Medicare Program; Changes to the 

Hospital Inpatient Prospective 

Payment Systems and Fiscal Year 2007 

Rates; Fiscal Year 2007 Occupational 

Mix Adjustment to Wage Index; Health 

Care Infrastructure Improvement 

Program; Selection Criteria of Loan 

Program for Qualifying Hospitals 

Engaged in Cancer-Related Health 

Care and Forgiveness of 

Indebtedness; and Exclusion of 

Vendor Purchases Made Under the 

Competitive Acquisition Program 

(CAP) for Outpatient Drugs and 

Biologicals Under Part B for the 

Purpose of Calculating the Average 

Sales Price (ASP) 

AGENCY: Centers for Medicare and 

Medicaid Services (CMS), HHS. 

ACTION: Final rules and interim final 

rule with comment period. 

SUMMARY: We are revising the Medicare 

hospital inpatient prospective payment 

systems (IPPS) for operating and capitalrelated costs to implement changes 

arising from our continuing experience 

with these systems, and to implement a 

number of changes made by the Deficit 

Reduction Act of 2005 (Pub. L. 109– 

171). In addition, in the Addendum to 

this final rule, we describe the changes 

to the amounts and factors used to 

determine the rates for Medicare 

hospital inpatient services for operating 

costs and capital-related costs. We also 

are setting forth rate-of-increase limits 

as well as policy changes for hospitals 

and hospital units excluded from the 

IPPS that are paid in full or in part on 

a reasonable cost basis subject to these 

limits. These changes are applicable to 

discharges occurring on or after October 

1, 2006. 

In this final rule, we discuss public 

comments we received on our proposals 

to refine the diagnosis-related group 

(DRG) system under the IPPS to better 

recognize severity of illness among 

patients—to use a hospital-specific 

relative value (HSRV) cost center 

weighting methodology to adjust DRG 

relative weights; and to implement 

consolidated severity-adjusted DRGs or 

alternative severity adjustment methods. 

Among the other policy changes that 

we are making are those changes related 

to: limited revisions of the 

reclassification of cases to DRGs; the 

long-term care (LTC)–DRGs and relative 

weights; the wage data, including the 

occupational mix data, used to compute 

the wage index; applications for new 

technologies and medical services addon payments; payments to hospitals for 

the direct and indirect costs of graduate 

medical education; submission of 

hospital quality data; payments to sole 

community hospitals and Medicaredependent, small rural hospitals; and 

provisions governing emergency 

services under the Emergency Medical 

Treatment and Labor Act of 1986 

(EMTALA). 

We are responding to requested 

public comments on a number of other 

issues that include performance-based 

hospital payments for services and 

health information technology, as well 

as how to improve health data 

transparency for consumers. 

In addition, we are responding to 

public comments received on a 

proposed rule issued in the Federal 

Register on May 17, 2006 that proposed 

to revise the methodology for 

calculating the occupational mix 

adjustment to the wage index for the FY 

2007 hospital inpatient prospective 

payment system by applying an 

adjustment to 100 percent of the wage 

index using new 2006 occupational mix 

survey data collected from hospitals. 

We are finalizing two policy 

documents published in the Federal 

Register relating to the implementation 

of the Health Care Infrastructure 

Improvement Program, a hospital loan 

program for cancer research, established 

under the Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003. 

This final rule also revises the 

definition of the term ‘‘unit’’ to specify 

the exclusion of units of drugs sold to 

approved Medicare Competitive 

Acquisition Program (CAP) vendors for 

use under the CAP from average sales 

price (ASP) calculations for a period of 

up to 3 years, at which time we will 

reevaluate our policy. 

DATES: Effective Dates: The provisions 

of these final rules are effective on 

October 1, 2006, with the exception of 

the provisions in § 412.8, § 414.802, and 

the procedures for withdrawing or 

terminating reclassifications established 

in section III.H.4. of the preamble. The 

provisions of § 412.8, § 414.802, and the 

procedures for withdrawing or 

terminating reclassifications established 

in section II.H.4. of the preamble are 

effective August 18, 2006. This rule is 

a major rule as defined in 5 U.S.C. 

804(2). Pursuant to 5 U.S.C. 

801(a)(1)(A), we are submitting a report 

to the Congress on this rule on August 

1, 2006. 

Comment Date: We will consider 

comments on the exclusion of CAP 

drugs from the ASP calculation 

(§ 414.802) as discussed in section XII. 

of the preamble of this final rule, if we 

receive them at one of the addresses 

provided below, no later than 5 p.m. on 

October 2, 2006. 

ADDRESSES: In commenting, on section 

XII. of this rule, please refer to file code 

CMS–1325–IFC4. 

Because of staff and resource 

limitations, we cannot accept comments 

by facsimile (FAX) transmission. 

You may submit comments in one of 

four ways (no duplicates, please): 

1. Electronically. You may submit 

electronic comments on specific issues 

in this regulation to http:// 

www.cms.hhs.gov/eRulemaking. Click 

on the link ‘‘Submit electronic 

comments on CMS regulations with an 

open comment period.’’ (Attachments 

should be in Microsoft Word, 

WordPerfect, or Excel; however, we 

prefer Microsoft Word.) 

2. By regular mail. You may mail 

written comments (one original and two 

copies) to the following address ONLY: 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, Attention: CMS–1325– 

IFC4, P.O. Box 8011, Baltimore, MD 

21244–1850. 

Please allow sufficient time for mailed 

comments to be received before the 

close of the comment period. 

3. By express or overnight mail. You 

may send written comments (one 

original and two copies) to the following 

address ONLY: Centers for Medicare & 

Medicaid Services, Department of 

Health and Human Services, Attention: 

CMS–1325–IFC4, Mail Stop C4–26–05, 

7500 Security Boulevard, Baltimore, MD 

21244–1850. 

4. By hand or courier. If you prefer, 

you may deliver (by hand or courier) 

your written comments (one original 

and two copies) before the close of the 

comment period to one of the following 

addresses. If you intend to deliver your 

comments to the Baltimore address, 

please call telephone number (410) 786– 

7195 in advance to schedule your 

arrival with one of our staff members. 

Room 445-G, Hubert H. Humphrey 

Building, 200 Independence Avenue, 

SW., Washington, DC 20201; or 7500 

Security Boulevard, Baltimore, MD 

21244–1850. 

(Because access to the interior of the 

HHH Building is not readily available to 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 47871 

persons without Federal Government 

identification, commenters are 

encouraged to leave their comments in 

the CMS drop slots located in the main 

lobby of the building. A stamp-in clock 

is available for persons wishing to retain 

a proof of filing by stamping in and 

retaining an extra copy of the comments 

being filed.) 

Comments mailed to the addresses 

indicated as appropriate for hand or 

courier delivery may be delayed and 

received after the comment period. 

For information on viewing public 

comments, see the beginning of the 

SUPPLEMENTARY INFORMATION section. 

FOR FURTHER INFORMATION CONTACT:

Marc Hartstein, (410) 786–4548, 

Operating Prospective Payment, 

Diagnosis-Related Groups (DRGs), 

Wage Index, Occupational Mix 

Adjustment, New Medical Services 

and Technology Add-On Payments, 

Hospital Geographic Reclassifications, 

Sole Community Hospital, 

Disproportionate Share Hospital, and 

Medicare-Dependent, Small Rural 

Hospital Issues. 

Tzvi Hefter, (410) 786–4487, Capital 

Prospective Payment, Excluded 

Hospitals, Graduate Medical 

Education, Critical Access Hospitals, 

Long-Term Care (LTC)-DRGs, and 

Terms of Hospital Loans under Health 

Care Infrastructure Improvement 

Program Issues. 

Siddhartha Mazumdar, (410) 786–6673, 

Rural Community Hospital 

Demonstration Issues. 

Sheila Blackstock, (410) 786–3502, 

Quality Data for Annual Payment 

Update Issues. 

Thomas Valuck, (410) 786–7479, 

Hospital Value-Based Purchasing 

Issues. 

Frederick Grabau, (410) 786–0206, 

Services in Foreign Hospitals Issues. 

Brian Reitz, (410) 786–5001, Obsolete 

Paper Claims Forms Issues. 

Melinda Jones, (410) 786–7069, Loan 

Forgiveness Criteria for Health Care 

Infrastructure Improvement Program. 

Corinne Axelrod, (410) 786–5620, 

Competitive Acquisition Program 

(CAP) for Part B Drugs Issues. 

Angela Mason, (410) 786–7452, 

Payment for Covered Outpatient 

Drugs and Biologicals Issues. 

Submitting Comments: We welcome 

comments from the public on all issues 

set forth in this rule to assist us in fully 

considering issues and developing 

policies. You can assist us by 

referencing the file code CMS–1325–

IFC4 and the specific ‘‘issue identifier’’

that precedes the section on which you 

choose to comment. 

Inspection of Public Comments: All 

comments received before the close of 

the comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. We post all comments 

received before the close of the 

comment period on a public Web site as 

soon as possible after they are received: 

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

Clink on the link ‘‘Electronic Comments 

on CMS Regulations’’ on that Web site 

to view public comments. 

Comments received timely will also 

be available for public inspection as 

they are received, generally beginning 

approximately 3 weeks after publication 

of a document, at the headquarters of 

the Centers for Medicare & Medicaid 

Services, 7500 Security Boulevard, 

Baltimore, Maryland 21244, Monday 

through Friday of each week from 8:30 

a.m. to 4 p.m. To schedule an 

appointment to view public comments, 

phone 1–800–743–3951. 

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 page address is 

http://www.gpoaccess.gov/, by using 

local WAIS client software, or by telnet 

to swais.access.gpo.gov, then login as 

guest (no password required). Dial-in 

users should use communications 

software and modem to call (202) 512–

1661; type swais, then login as guest (no 

password required). 

Acronyms 

AHA American Hospital Association 

AHIMA American Health Information 

Management Association 

AHRO Agency for Health Care 

Research and Quality 

AMI Acute myocardial infarction 

AOA American Osteopathic 

Association 

APR DRG All Patient Refined 

Diagnosis-Related Group System 

ASC Ambulatory surgical center 

ASP Average sales price 

AWP Average wholesale price 

BBA Balanced Budget Act of 1997, 

Pub. L. 105–33 

BBRA Medicare, Medicaid, and SCHIP 

[State Children’s Health Insurance 

Program] Balanced Budget 

Refinement Act of 1999, Pub. L. 106–

113 

BIPA Medicare, Medicaid, and SCHIP 

[State Children’s Health Insurance 

Program] Benefits Improvement and 

Protection Act of 2000, Pub. L. 106–

554 

BLS Bureau of Labor Statistics 

AH Critical access hospital 

AP Competitive Acquisition Program 

CART CMS Abstraction & Reporting 

Tool 

CBSAs Core-based statistical areas 

CC Complication or comorbidity 

CDAC Clinical Data Abstraction Center 

CIPI Capital input price index 

CPI Consumer price index 

CMI Case-mix index 

CMS Centers for Medicare & Medicaid 

Services 

CMSA Consolidated Metropolitan 

Statistical Area 

COBRA Consolidated Omnibus 

Reconciliation Act of 1985, Pub. L. 

99–272 

CPI Consumer price index 

CRNA Certified registered nurse 

anesthetist 

CY Calendar year 

DRA Deficit Reduction Act of 2005, 

Pub. L. 109–171 

DRG Diagnosis-related group 

DSH Disproportionate share hospital 

ECI Employment cost index 

EMR Electronic medical record 

EMTALA Emergency Medical 

Treatment and Labor Act of 1986, 

Pub. L. 99–272 

FDA Food and Drug Administration 

FFY Federal fiscal year 

FIPS Federal information processing 

standards 

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 

HCAHPS Hospital Consumer 

Assessment of Healthcare Providers 

and Systems 

HCFA Health Care Financing 

Administration 

HCRIS Hospital Cost Report 

Information System 

HHA Home health agency 

HHS Department of Health and 

Human Services 

HIC Health insurance card 

HIPAA Health Insurance Portability 

and Accountability Act of 1996, Pub. 

L. 104–191 

HIPC Health Information Policy 

Council 

HIS Health information system 

HIT Health information technology 

HMO Health maintenance 

organization 

HSA Health savings account 

HSCRC Maryland Health Services Cost 

Review Commission 


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HSRV Hospital-specific relative value 

HSRVcc Hospital-specific relative 

value cost center 

HQA Hospital Quality Alliance 

HQI Hospital Quality Initiative 

HwH Hospital-within-a-hospital 

ICD–9–CM International Classification 

of Diseases, Ninth Revision, Clinical 

Modification 

ICD–10–PCS International 

Classification of Diseases, Tenth 

Edition, Procedure Coding System 

ICU Intensive care unit 

IHS Indian Health Service 

IME Indirect medical education 

IOM Institute of Medicine 

IPF Inpatient psychiatric facility 

IPPS Acute care hospital inpatient 

prospective payment system 

IRF Inpatient rehabilitation facility 

IRP Initial residency period 

JCAHO Joint Commission on 

Accreditation of Healthcare 

Organizations 

LAMCs Large area metropolitan 

counties 

LTC-DRG Long-term care diagnosisrelated group 

LTCH Long-term care hospital 

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 

MMA Medicare Prescription Drug, 

Improvement, and Modernization Act 

of 2003, Pub. L. 108–173 

MRHFP Medicare Rural Hospital 

Flexibility Program 

MSA Metropolitan Statistical Area 

NAICS North American Industrial 

Classification System 

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 

NICU Neonatal intensive care unit 

NQF National Quality Forum 

NTIS National Technical Information 

Service 

NVHRI National Voluntary Hospital 

Reporting Initiative 

OES Occupational employment 

statistics 

OIG Office of the Inspector General 

OMB Executive Office of Management 

and Budget 

O.R. Operating room 

OSCAR Online Survey Certification 

and Reporting (System) 

PRM Provider Reimbursement Manual 

PPI Producer price index 

PMSAs Primary metropolitan 

statistical areas 

PPS Prospective payment system 

PRA Per resident amount 

ProPAC Prospective Payment 

Assessment Commission 

PRRB Provider Reimbursement 

Review Board 

PS&R Provider Statistical and 

Reimbursement (System) 

QIG Quality Improvement Group, CMS 

QIO Quality Improvement 

Organization 

RHC Rural health clinic 

RHQDAPU Reporting hospital quality 

data for annual payment update 

RNHCI Religious Nonmedical Health 

Care Institution 

RRC Rural referral center 

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 

SNF Skilled nursing facility 

SOCs Standard occupational 

classifications 

SOM State Operations Manual 

SSA Social Security Administration 

SSI Supplemental Security Income 

TAG Technical Advisory Group 

TEFRA Tax Equity and Fiscal 

Responsibility Act of 1982, Pub. L. 

97–248 

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 

a. Inpatient Rehabilitation Facilities (IRFs) 

b. Long-Term Care Hospitals (LTCHs) 

c. Inpatient Psychiatric Facilities (IPFs) 

3. Critical Access Hospitals (CAHs) 

4. Payments for Graduate Medical 

Education (GME) 

B. Provisions of the Deficit Reduction Act 

of 2005 (DRA) 

C. Summary of the Provisions of the FY 

2007 IPPS and FY 2007 Occupational 

Mix Adjustment to the Wage Index 

Proposed Rules 

1. DRG Reclassifications and Recalibrations 

of Relative Weights 

2. Changes to the Hospital Wage Index 

3. Other Decisions and Changes to the IPPS 

for Operating Costs, GME Costs, and 

Promoting Hospitals’ Effective Use of 

Health Information Technology 

4. Changes to the PPS for Capital-Related 

Costs 

5. Changes for Hospitals and Hospital 

Units Excluded from the IPPS 

6. Payments for Services Furnished 

Outside the United States 

7. Payment for Blood Clotting Factor 

Administered to Inpatients with 

Hemophilia 

8. Limitation on Payments to Skilled 

Nursing Facilities for Bad Debt 

9. Determining Prospective Payment 

Operating and Capital Rates and Rate-ofIncrease Limits 

10. Impact Analysis 

11. Recommendation of Update Factors for 

Operating Cost Rates of Payment for 

Inpatient Hospital Services 

12. Discussion of Medicare Payment 

Advisory Commission Recommendations 

13. Appendix C and Appendix D 

D. Public Comments Received in Response 

to the FY 2007 IPPS and FY 2007 

Occupational Mix Adjustment to the 

Wage Index Proposed Rules 

E. Interim Final Rule on Selection Criteria 

of Loan Program for Qualifying Hospitals 

Engaged in Cancer-Related Health Care 

F. Proposed Rule on Forgiveness of 

Indebtedness under the Health Care 

Infrastructure Improvement Program 

G. Interim Final Rule on the Exclusion of 

Vendor Purchases Made Under the 

Competitive Acquisition Program for 

Part B Outpatient Drugs and Biologicals 

for the Purpose of Calculating the 

Average Sales Price 

II. Changes to DRG Classifications and 

Relative Weights 

A. Background 

B. DRG Reclassifications 

1. General 

2. Yearly Review for Making DRG Changes 

C. Revisions to the DRG System Used 

Under the IPPS 

1. MedPAC Recommendations 

2. Refinement of the Relative Weight 

Calculation 

3. Refinement of DRGs Based on Severity 

of Illness 

a. Comparison of the CMS DRG System and 

the APR DRG System 

b. CS DRGs for Use in the IPPS 

c. Changes to CMI from a New DRG System 

4. Effect of CS DRGs on the Outlier 

Threshold 

5. Impact of Refinement of DRG System on 

Payments 

6. Conclusions 

7. Severity Refinement to CMS DRGs 

a. MDC 1 (Diseases and Disorders of the 

Nervous System) 

b. MDC 4 (Diseases and Disorders of the 

Respiratory System): Respiratory System 

Diagnosis with Ventilator Support 

c. MDC 6 (Diseases and Disorders of the 

Digestive System) 

d. MDC 11 (Diseases and Disorders of the 

Kidney and Urinary Tract): Major 

Bladder Procedures 

e. MDC 16 (Diseases and Disorders of the 

Blood and Blood Forming Organs and 

Immunological Disorders): Major 

Hematological and Immunological 

Diagnoses 

f. MDC 18 (Infectious and Parasitic 

Diseases (Systemic or Unspecified 

Sites)): O.R. Procedure for Patients with 

Infectious and Parasitic Diseases 


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g. Severe Sepsis 

D. Changes to Specific DRG Classifications 

1. Pre-MDCs 

a. Heart Transplant or Implant of Heart 

Assist System: Addition of Procedure to 

DRG 103 

b. Pancreas Transplants 

2. MDC 1 (Diseases and Disorders of the 

Nervous System) 

a. Implantation of Intracranial 

Neurostimulator System for Deep Brain 

Stimulation (DBS) 

b. Carotid Artery Stents 

3. MDC 5 (Diseases and Disorders of the 

Circulatory System) 

a. Insertion of Epicardial Leads for 

Defibrillator Devices 

b. Application of Major Cardiovascular 

Diagnoses (MCVs) List to Defibrillator 

DRGs 

4. MDC 8 (Diseases and Disorders of the 

Musculoskeletal System and Connective 

Tissue) 

a. Hip and Knee Replacements 

b. Spinal Fusion 

c. CHARITETM Spinal Disc Replacement 

Device 

5. MDC 18 (Infectious and Parasitic 

Diseases (Systemic or Unspecified 

Sites)): Severe Sepsis 

6. Medicare Code Editor (MCE) Changes 

a. Edit: Newborn Diagnoses 

b. Edit: Diagnoses for Pediatric—Age 0–17 

Years Old 

c. Edit: Maternity Diagnoses—Age 12 

through 55 

d. Edit: Diagnoses Allowed for Females 

Only 

e. Edit: Diagnoses Allowed for Males Only 

f. Edit: Procedures Allowed for Females 

Only 

g. Edit: Manifestations Not Allowed as 

Principal Diagnosis 

h. Edit: Nonspecific Principal Diagnosis 

i. Edit: Unacceptable Principal Diagnosis 

j. Edit: Nonspecific O.R. Procedures 

k. Edit: Noncovered Procedures 

l. Edit: Bilateral Procedure 

7. Surgical Hierarchies 

8. Refinement of Complications and 

Comorbidities (CC) List 

a. Background 

b. Comprehensive Review of the CC List 

c. CC Exclusions List for FY 2007 

9. Review of Procedure Codes in DRGs 468, 

476, and 477 

a. Moving Procedure Codes from DRG 468 

or DRG 477 to MDCs 

b. Reassignment of Procedures among 

DRGs 468, 476, and 477 

c. Adding Diagnosis or Procedure Codes to 

MDCs 

10. Changes to the ICD–9–CM Coding 

System 

11. Other Issues 

a. Chronic Kidney Disease 

b. Bronchial Valve 

c. Female Reproductive System 

Reconstruction Procedures 

d. Devices That are Replaced Without Cost 

or Where Credit for a Replaced Device is 

Furnished to the Hospital 

E. Recalibration of DRG Weights 

F. LTC–DRG Reclassifications and Relative 

Weights for LTCHs for FY 2007 

1. Background 

2. Changes in the LTC–DRG Classifications 

a. Background 

b. Patient Classifications into DRGs 

3. Development of the FY 2007 LTC–DRG 

Relative Weights 

a. General Overview of Development of the 

LTC–DRG Relative Weights 

b. Data 

c. Hospital-Specific Relative Value 

Methodology 

d. Low-Volume LTC–DRGs 

4. Steps for Determining the FY 2007 LTC–

DRG Relative Weights 

5. Summary of Public Comments and 

Departmental Responses 

G. Add-On Payments for New Services and 

Technologies 

1. Background 

2. Public Input Before Publication of a 

Notice of Proposed Rulemaking on AddOn Payments 

3. FY 2007 Status of Technologies 

Approved for FY 2006 Add-On Payments 

a. Kinetra Implantable Neurostimulator 

(Kinetra) for Deep Brain Stimulation 

b. Endovascular Graft Repair of the 

Thoracic Aorta 

c. Restore Rechargeable Implantable 

Neurostimulator 

4. FY 2007 Applications for New 

Technology Add-On Payments 

a. C-Port Distal Anastomosis System 

b. NovoSeven for Intracerebral 

Hemorrhage 

c. X STOP Interspinous Process 

Decompression System 

5. Interim and Final Cost Threshold Tables 

Due to Changes to Wage Index and 

Budget Neutrality Factors 

III. Changes to the Hospital Wage Index 

A. Background 

B. Core-Based Statistical Areas for the 

Hospital Wage Index 

C. Occupational Mix Adjustment to the FY 

2007 Wage Index 

1. Development of Data for the FY 2007 

Occupational Mix Adjustment 

2. Timeline for the Collection, Review, and 

Correction of the Occupational Mix Data 

3. Calculation of the Occupational Mix 

Adjustment 

D. Worksheet S–3 Wage Data for the FY 

2007 Wage Index Update 

E. Verification of Worksheet S–3 Wage 

Data 

F. Computation of the FY 2007 Unadjusted 

Wage Index 

G. Implementation of the FY 2007 

Occupational Mix Adjustment to the 

Wage Index 

H. Revisions to the Wage Index Based on 

Hospital Redesignations 

1. General 

2. Effects of Reclassification/Redesignation 

3. FY 2007 MGCRB Reclassifications 

4. Procedures for Hospitals Applying for 

Reclassification Effective in FY 2008 and 

Reinstating Reclassifications in FY 2008 

5. FY 2007 Redesignations Under Section 

1886(d)(8)(B) of the Act 

6. Reclassifications Under Section 508 of 

Pub. L. 108–173 

7. Wage Indices for Reclassified Hospitals 

and Reclassification Budget Neutrality 

Factor 

I. FY 2007 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 Wage Index 

for FY 2007 

L. Proxy for the Hospital Market Basket 

IV. Other Decisions and Changes to the IPPS 

for Operating Costs and GME Costs 

A. Reporting of Hospital Quality Data for 

Annual Hospital Payment Update 

1. Background 

2. New Procedures for Hospital Reporting 

of Quality Data 

a. Two Percentage Point Reduction 

b. New Procedures 

c. Expanded Quality Measures 

d. HCAHPS Survey 

e. Data Submission 

f. RHQDAPU Program Withdrawal and 

Chart Validation Requirements 

g. Data Validation and Attestation 

h. Public Display and Reconsideration 

Procedures 

i. Conclusion 

3. Electronic Medical Records 

B. Value-Based Purchasing 

1. Introduction 

2. Premier Hospital Quality Incentive 

Demonstration 

3. RHQDAPU Program 

a. Section 501(b) of Pub. L. 108–173 

(MMA) 

b. Section 5001(a) of Pub. L. 109–171 

(DRA) 

4. Plan for Implementing Hospital ValueBased Purchasing Beginning with FY 

2009 

a. Measure Development and Refinement 

b. Data Infrastructure 

c. Incentive Methodology 

d. Public Reporting 

5. Considerations Related to Certain 

Conditions, Including Hospital-Acquired 

Infections 

6. Promoting Effective Use of Health 

Information Technology 

C. Sole Community Hospitals (SCHs) and 

Medicare-Dependent, Small Rural 

Hospitals (MDHs) 

1. Background 

2. Volume Decrease Adjustment for SCHs 

and MDHs 

a. HAS/Monitrend Data 

b. HAS/Monitrend Data Book Replacement 

Alternative 

3. Mandatory Reporting Requirements for 

Any Changes in the Circumstances 

Under Which a Hospital Was Designated 

as an SCH or MDH 

4. Payment Changes for MDHs under the 

DRA of 2005 

a. Background 

b. Regulation Changes 

5. Technical Change 

D. Rural Referral Centers 

1. Case-Mix Index 

2. Discharges 

E. Indirect Medical Education (IME) 

Adjustment 

1. Background 

2. IME Adjustment Factor for FY 2007 

3. Technical Change to Revise CrossReference 

F. Payment Adjustment for 

Disproportionate Share Hospitals (DSHs) 


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47874 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

1. Background 

2. Technical Corrections 

3. Reinstatement of Inadvertently Deleted 

Provisions on DSH Payment Adjustment 

Factors 

4. Enhanced DSH Adjustment for MDHs 

G. Geographic Reclassifications 

1. Background 

2. Reclassifications under Section 508 of 

Pub. L. 108–173 

3. Multicampus Hospitals 

4. Urban Group Hospital Reclassifications 

5. Effect of Change of Ownership on Urban 

County Group Reclassifications 

6. Requested Reclassification for Hospitals 

Located in a Single Hospital MSA 

Surrounded by Rural Counties 

7. Special Adjustment for the Hospital 

Group Reclassification Denied on the 

Basis of Incomplete CSA Listing 

H. Payment for Direct Graduate Medical 

Education 

1. Background 

2. Determination of Weighted Average Per 

Resident Amounts (PRAs) for Merged 

Teaching Hospitals 

3. Determination of Per Resident Amounts 

(PRAs) for New Teaching Hospitals 

4. Requirements for Counting and 

Appropriate Documentation of FTE 

Residents: Clarification 

5. Resident Time Spent in Nonpatient Care 

Activities as Part of Approved Residency 

Programs 

6. Medicare GME Affiliated Groups: 

Technical Changes to Regulations 

I. Payment for the Costs of Nursing and 

Allied Health Education Activities: 

Clarification 

J. Hospital Emergency Services under 

EMTALA 

1. Background 

2. Role of the EMTALA Technical 

Advisory Group (TAG) 

3. Definition of ‘‘Labor’’

4. Application of EMTALA Requirements 

to Hospitals Without Dedicated 

Emergency Departments 

5. Clarification of Reference to ‘‘Referral 

Centers’’

K. Other Technical Changes 

1. Cross-Reference Correction in 

Regulations on Limitations on 

Beneficiary Charges 

2. Cross-Reference Corrections in 

Regulations on Payment Denials Based 

on Admissions and Quality Reviews 

3. Cross-Reference Correction in 

Regulations on Outlier Payments 

4. Removing References to Two Paper 

Claims Forms 

L. Rural Community Hospital 

Demonstration Program 

M. Health Care Information Transparency 

Initiative 

V. Changes to the PPS for Capital-Related 

Costs 

A. Background 

B. Treatment of Certain Urban Hospitals 

Reclassified as Rural Hospitals Under 

§ 412.103 

C. Other Technical Corrections Relating to 

the Capital PPS Geographic Adjustment 

Factors 

VI. Changes for Hospitals and Hospital Units 

Excluded from the IPPS 

A. Payments to Excluded Hospitals and 

Hospital Units 

1. Payments to Existing Excluded and New 

Hospitals and Hospital Units 

2. Separate PPS for IRFs 

3. Separate PPS for LTCHs 

4. Separate PPS for IPFs 

5. Grandfathering of Hospitals-WithinHospitals (HwHs) and Satellite Facilities 

6. Changes to the Methodology for 

Determining LTCH Cost-to-Charge Ratios 

(CCRs) and the Reconciliation of HighCost and Short-Stay Outlier Payments 

under the LTCH PPS 

a. Background 

b. High-Cost Outliers 

c. Short-Stay Outliers 

d. CCR Ceiling 

e. Statewide Average CCRs 

f. Data Used to Determine a CCR 

g. Reconciliation of Outlier Payments Upon 

Cost report Settlement 

7. Technical Corrections Relating to LTCHs 

8. Cross-Reference Correction in Authority 

Citations for 42 CFR 412 and 413 

9. Report of Adjustment (Exceptions) 

Payments 

B. Critical Access Hospitals (CAHs) 

1. Background 

2. Sunset of Designation of CAHs as 

Necessary Providers: Technical 

Correction 

VII. Payment for Services Furnished Outside 

the United States 

A. Background 

B. Proposed Clarification of Regulations 

VIII. Payment for Blood Clotting Factor 

Administered to Inpatients with 

Hemophilia 

IX. Limitation on Payments to Skilled 

Nursing Facilities for Bad Debt 

A. Background 

B. Changes Made by Section 5004 of Pub. 

L. 109–171 

C. Proposed Regulation Changes 

X. MedPAC Recommendations 

XI. Health Care Infrastructure Improvement 

Program: Selection Criteria for Loan 

Program for Qualifying Hospitals 

Engaged in Cancer-Related Health Care 

and Forgiveness of Indebtedness 

A. Background 

B. Issuance of an Interim Final Rule with 

Comment Period and a Proposed 

Regulation 

C. Provisions of the Interim Final Rule 

With Comment Period 

1. Loan Qualifying Criteria 

2. Selection Criteria 

3. Terms of the Loan 

4. Public Comments Received on the 

Interim Final Rule With Comment Period 

5. Provisions of this Final Rule 

D. Proposed Rule on Forgiveness of 

Indebtedness 

1. Conditions for Loan Forgiveness 

2. Plan Criteria for Meeting the Conditions 

for Loan Forgiveness 

3. Public Comments Received on the 

Proposed Rule and Our Responses 

4. Provisions of the Final Rule 

E. Statutory Requirements for Issuance of 

Regulations 

XII. Exclusion of Vendor Purchases Made 

Under the Competitive Acquisition 

Program (CAP) for Outpatient Drugs and 

Biologicals Under Part B for the Purpose 

of Calculating the Average Sales Price 

(ASP) 

A. Background 

1. Average Sales Price (ASP) 

2. Competitive Acquisition Program (CAP) 

3. Regulatory History 

B. Regulation Change 

XIII. Other Required Information 

A. Requests for Data from the Public 

B. Collection of Information Requirements 

C. Waiver of Proposed Rulemaking and 

Delay in the Effective Date 

D. Response to Comments 

Regulation Text 

Addendum—Schedule of Tentative 

Standardized Amounts, Tentative 

Update Factors and Rate-of-Increase 

Percentages Effective With Cost 

Reporting Periods Beginning On or After 

October 1, 2006 

I. Summary and Background 

II. Changes to Prospective Payment Rates for 

Hospital Inpatient Operating Costs 

A. Calculation of the Tentative Adjusted 

Standardized Amount 

1. Standardization of Base-Year Costs or 

Target Amounts 

2. Computing the Tentative Average 

Standardized Amount 

3. Updating the Tentative Average 

Standardized Amount 

4. Other Adjustments to the Average 

Standardized Amount 

a. Recalibration of DRG Weights and 

Updated Wage Index—Budget Neutrality 

Adjustment 

b. Reclassified Hospitals—Tentative 

Budget Neutrality Adjustment 

c. Outliers 

d. Tentative Rural Community Hospital 

Demonstration Program Adjustment 

(Section 410A of Pub. L. 108–173) 

5. Tentative FY 2007 Standardized Amount 

B. Tentative Adjustments for Area Wage 

Levels and Cost-of-Living 

1. Tentative Adjustment for Area Wage 

Levels 

2. Final Adjustment for Cost-of-Living in 

Alaska and Hawaii 

C. DRG Relative Weights 

D. Calculation of the Prospective Payment 

Rates 

1. Federal Rate 

2. Hospital-Specific Rate (Applicable Only 

to SCHs and MDHs) 

a. Calculation of Hospital-Specific Rate 

b. Updating the FY 1982, FY 1987, FY 

1996, and FY 2002 Hospital-Specific 

Rates for FY 2007 

3. General Formula for Calculation of 

Prospective Payment Rates for Hospitals 

Located in Puerto Rico Beginning On or 

After October 1, 2006, and Before 

October 1, 2007 

a. Puerto Rico Rate 

b. National Rate 

III. Changes to Payment Rates for Acute Care 

Hospital Inpatient Capital-Related Costs 

for FY 2007 

A. Determination of Federal Hospital 

Inpatient Capital-Related Prospective 

Payment Rate Update 

1. Projected Capital Standard Federal Rate 

Update 


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a. Description of the Update Framework 

b. Comparison of CMS and MedPAC 

Update Recommendation 

2. Outlier Payment Adjustment Factor 

3. Budget Neutrality Adjustment Factor for 

Changes in DRG Classifications and 

Weights and the GAF 

4. Exceptions Payment Adjustment Factor 

5. Capital Standard Federal Rate for FY 

2007 

6. Special Capital Rate for Puerto Rico 

Hospitals 

B. Calculation of the Inpatient CapitalRelated Prospective Payments for FY 

2007 

C. Capital Input Price Index 

1. Background 

2. Forecast of the CIPI for FY 2007 

IV. Payment Rates for Excluded Hospitals 

and Hospital Units: Rate-of-Increase 

Percentages 

A. Payments to Existing Excluded 

Hospitals and Units 

B. New Excluded Hospitals and Units 

V. Payment for Blood Clotting Factor 

Administered to Inpatients with 

Hemophilia 

Tables 

The following tables are included as part of 

this final rule: 

Table 1A—National Adjusted Operating 

Standardized Amounts, Labor/Nonlabor 

(69.7 Percent Labor Share/30.3 Percent 

Nonlabor Share If Wage Index Is Greater 

Than 1) (Tentative) 

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) (Tentative) 

Table 1C—Adjusted Operating Standardized 

Amounts for Puerto Rico, Labor/ 

Nonlabor (Tentative) 

Table 1D—Capital Standard Federal Payment 

Rate (Tentative) 

Table 4J—Out-Migration Wage Adjustment—

FY 2007 (Tentative) 

Table 5—List of Diagnosis-Related Groups 

(DRGs), Relative Weighting Factors, and 

Geometric and Arithmetic Mean Length 

of Stay (LOS) (Tentative) 

Table 6A—New Diagnosis Codes 

Table 6B—New Procedure Codes 

Table 6C—Invalid Diagnosis Codes 

Table 6D—Invalid Procedure Codes 

Table 6E—Revised Diagnosis Code Titles 

Table 6F—Revised Procedure Code Titles 

Table 6G—Additions to the CC Exclusions 

List 

Table 6H—Deletions from the CC Exclusions 

List 

Table 7A—Medicare Prospective Payment 

System Selected Percentile Lengths of 

Stay: FY 2005 MedPAR Update March 

2006 GROUPER V23.0 

Table 7B—Medicare Prospective Payment 

System Selected Percentile Lengths of 

Stay: FY 2005 MedPAR Update March 

2006 GROUPER V24.0 

Table 8A—Statewide Average Operating 

Cost-to-Charge Ratios—July 2006 

Table 8B—Statewide Average Capital Cost-toCharge Ratios—July 2006 

Table 8C— Statewide Average Total Cost-toCharge Ratios for LTCHs—July 2006 

Table 9A—Hospital Reclassifications and 

Redesignations by Individual Hospital 

and CBSA for FY 2007 (Tentative) 

Table 9B—Hospital Reclassifications and 

Redesignation by Individual Hospital 

Under Section 508 of Pub. L. 108–173 for 

FY 2007 (Tentative) 

Table 9C—Hospitals Redesignated as Rural 

under Section 1886(d)(8)(E) of the Act 

for FY 2007 (Tentative) 

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 Diagnosis-Related Group (DRG)—July 

2006 (Tentative) 

Table 11—FY 2007 LTC–DRGs, Relative 

Weights, Geometric Average Length of 

Stay, and 5⁄6ths of the Geometric Average 

Length of Stay 

Appendix A—Regulatory Impact Analysis 

I. Overall Impact 

II. Objectives 

III. Limitations on Our Analysis 

IV. Hospitals Included In and Excluded From 

the IPPS 

V. Effects on Excluded Hospitals and 

Hospital Units 

VI. Quantitative Effects of the Policy Changes 

Under the IPPS for Operating Costs 

A. Basis and Methodology of Estimates 

B. Analysis of Table I 

C. Effects on the Hospitals that Failed the 

Quality Data Submission Process 

(Column 2) 

D. Effects of the DRA Provision Related to 

MDHs (Column 3) 

E. Effects of the Changes to the DRG 

Reclassifications and Relative Cost-Based 

Weights (Column 4) 

F. Effects of Wage Index Changes (Column 

5) 

G. Combined Effects of DRG and Wage 

Index Changes, Including Budget 

Neutrality Adjustment (Column 6) 

H. Effects of the 3-Year Provision Allowing 

Urban Hospitals that Were Converted to 

Rural as a Result of the FY 2005 Labor 

Market Area Changes to Maintain the 

Wage Index of the Urban Labor Market 

Area in Which They Were Formerly 

Located (Column 7) 

I. Effects of MGCRB Reclassifications 

(Column 8) 

J. Effects of the Wage Index Adjustment for 

Out-Migration (Column 9) 

K. Effects of All Changes (Column 10) 

L. Effects of Policy on Payment 

Adjustments for Low-Volume Hospitals 

M. Impact Analysis of Table II 

VII. Effects of Other Policy Changes 

A. Effects of LTC–DRG Reclassifications 

and Relative Weights for LTCHs 

B. Effects of New Technology Add-On 

Payments 

C. Effects of Requirements for Hospital 

Reporting of Quality Data for Annual 

Hospital Payment Update 

D. Effects of Other Policy Changes 

Affecting Sole Community Hospitals 

(SCHs) and Medicare-Dependent, Small 

Rural Hospitals (MDHs) 

E. Effects of Policy on Payment for Direct 

Costs of Graduate Medical Education 

1. Determination of Weighted Average 

GME PRAs for Merged Teaching 

Hospitals 

2. Determination of PRAs for New 

Teaching Hospitals 

3. Requirements for Counting and 

Appropriate Documentation of FTE 

Residents 

4. Resident Time Spent in Nonpatient Care 

Activities as Part of an Approved 

Residency Program 

F. Effects of Policy Changes Relating to 

Emergency Services under EMTALA 

G. Effects of Policy on Rural Community 

Hospital Demonstration Program 

H. Effects of Policy on Hospitals-withinHospitals and Satellite Facilities 

I. Effects of Policy Changes to the 

Methodology for Determining LTCH 

CCRs and the Reconciliation of LTCH 

PPS Outlier Payments 

J. Effects of Policy on Payment for Services 

Furnished Outside the United States 

K. Effects of Final Policy on Limitation on 

Payments to SNFs 

L. Effects of Policy on CAP for Outpatient 

Drugs and Biologicals under Part B for 

the Purpose of Calculating the ASP 

VIII. Impact of Changes in the Capital PPS 

A. General Considerations 

B. Results 

IX. Impact of Changes Relating to the Loan 

Program for Capital Cost under the 

Health Care Infrastructure Improvement 

Program 

A. Effects on Hospitals 

B. Effects on the Medicare and Medicaid 

Programs 

X. Alternatives Considered 

XI. Overall Conclusion 

XII. Accounting Statement 

XIII. Executive Order 12866 

Appendix B—Recommendation of Update 

Factors for Operating Cost Rates of 

Payment for Inpatient Hospital Services 

I. Background 

II. Secretary’s Final Recommendation for 

Updating the Prospective Payment 

System Standardized Amounts 

III. Secretary’s Final Recommendation for 

Updating the Rate-of-Increase Limits for 

Excluded Hospitals and Hospital Units 

IV. Secretary’s Recommendation for 

Updating the Capital Prospective 

Payment Amounts 

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 


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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 

into a labor-related share and a 

nonlabor-related share. The laborrelated share is adjusted by the wage 

index applicable to the area where the 

hospital is located; and 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 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 may vary 

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 outlier payment due 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 the 

higher of a hospital-specific rate based 

on their costs in a base year (the higher 

of FY 1982, FY 1987, FY 1996, or FY 

2002) or the IPPS rate based on the 

standardized amount. For example, sole 

community hospitals (SCHs) are the sole 

source of care in their areas, and 

Medicare-dependent, small rural 

hospitals (MDHs) are a major source of 

care for Medicare beneficiaries in their 

areas. Both of these categories of 

hospitals are afforded special payment 

protection in order to maintain access to 

services for beneficiaries. (Through FY 

2007, an MDH receives the IPPS rate 

plus 50 percent of the difference 

between the IPPS rate and its hospitalspecific rate if the hospital-specific rate 

is higher than the IPPS rate. In addition, 

an MDH may not use FY 1996 as its base 

year for the hospital-specific rate. As 

discussed below, for discharges 

occurring on or after October 1, 2007, 

but before October 1, 2011, an MDH will 

receive the IPPS rate plus 75 percent of 

the difference between the IPPS rate and 

its hospital-specific rate, if the hospitalspecific rate is higher than the IPPS 

rate.) 

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 PPS, 

payments are adjusted by the same DRG 

for the case as they are under the 

operating IPPS. Capital PPS 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 specialty 

hospitals and hospital units are 

excluded from the IPPS. These hospitals 

and units are: inpatient rehabilitation 

hospitals and units (commonly referred 

to as inpatient rehabilitation facilities 

(IRFs); long-term care hospitals 

(LTCHs); inpatient psychiatric hospitals 

and units (commonly referred to as 

inpatient psychiatric facilities (IPFs); 

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 (Pub. L. 105–33), the Medicare, 

Medicaid and SCHIP [State Children’s 

Health Insurance Program] Balanced 

Budget Refinement Act of 1999 (Pub. L. 

106–113), and the Medicare, Medicaid, 

and SCHIP Benefits Improvement and 

Protection Act of 2000 (Pub. L. 106–554) 

provide for the implementation of PPSs 

for IRFs, LTCHs, and IPFs, as discussed 

below. Children’s hospitals, cancer 

hospitals, and RNHCIs continue to be 

paid solely under a reasonable costbased system. 

The existing regulations governing 

payments to excluded hospitals and 

hospital units are located in 42 CFR 

Parts 412 and 413. 

a. Inpatient Rehabilitation Facilities 

(IRFs) 

Under section 1886(j) of the Act, IRFs 

have been transitioned from payment 

based on a blend of reasonable cost 

reimbursement and the adjusted IRF 

Federal prospective payment rate for 

cost reporting periods beginning on or 

after January 1, 2002, through 

September 30, 2002, to payment at 100 

percent of the Federal rate effective for 

cost reporting periods beginning on or 

after October 1, 2002. IRFs subject to the 

blend were also permitted to elect 

payment based on 100 percent of the 

Federal rate. The existing regulations 

governing payments under the IRF PPS 

are located in 42 CFR Part 412, Subpart 

P. 

b. Long-Term Care Hospitals (LTCHs) 

Under the authority of sections 123(a) 

and (c) of Pub. L. 106–113 and section 

307(b)(1) of Pub. L. 106–554, LTCHs 

that do not meet the definition of ‘‘new’’

under § 412.23(e)(4) are being 

transitioned from being paid for 

inpatient hospital services based on a 

blend of reasonable cost-based 

reimbursement under section 1886(b) of 

the Act to 100 percent of the Federal 

rate during a 5-year period with cost 

reporting periods beginning on or after 

October 1, 2002. Those LTCHs that do 

not meet the definition of ‘‘new’’ may 

elect to be paid based on 100 percent of 

the Federal prospective payment rate 

instead of a blended payment in any 

year during the 5-year transition. For 

cost reporting periods beginning on or 

after October 1, 2006, LTCHs will be 

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. 

c. Inpatient Psychiatric Facilities (IPFs) 

Under the authority of sections 124(a) 

and (c) of Pub. L. 106–113, IPFs are paid 

under the IPF PPS. Under the IPF PPS, 

some IPFs are transitioning from being 

paid for inpatient hospital services 

based on a blend of reasonable costbased payment to a Federal per diem 


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payment rate, effective for cost reporting 

periods beginning on or after January 1, 

2005 (November 15, 2004 IPF PPS final 

rule (69 FR 66922) and May 9, 2006 IPF 

PPS final rule (71 FR 27040)). For cost 

reporting periods beginning on or after 

January 1, 2008, all IPFs will be paid 

100 percent of the Federal per diem 

payment amount. The existing 

regulations governing payment under 

the IPF PPS are located in 42 CFR 412, 

Subpart N. 

3. Critical Access Hospitals (CAHs) 

Under sections 1814, 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 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. 

4. 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 Deficit Reduction 

Act of 2005 (DRA) 

On February 8, 2006, the Deficit 

Reduction Act of 2005 (DRA), Pub. L. 

109–171, was enacted. Pub. L. 109–171 

made a number of changes to the Act 

relating to prospective payments to 

hospitals and other providers for 

inpatient services. This final rule 

implements amendments made by the 

following sections of Pub. L. 109–171: 

• Section 5001(a), which, effective for 

FY 2007 and subsequent years, allows 

for expansion of the requirements for 

hospital quality data reporting. 

• Section 5003, which makes several 

changes to the MDH program. It extends 

special payment provisions, requires 

MDHs to use FY 2002 as their base year 

for determining whether use of their 

hospital-specific rate enhances payment 

(but permits them to continue to use 

either their 1982 or 1987 hospitalspecific rate if using either of those rates 

results in higher payments), and 

removes the application of the 12- 

percent cap on the DSH payment 

adjustment factor for MDHs. 

• Section 5004, which reduces certain 

allowable SNF bad debt payments by 30 

percent. Payments for the bad debts of 

full-benefit, dual eligible individuals are 

not reduced. 

In this final rule, we also discuss the 

provisions of section 5001(b) of Pub. L. 

109–171, which require us to develop a 

plan to implement, beginning with FY 

2009, a value-based purchasing plan for 

section 1886(d) hospitals and 

summarize the public comments 

received in response to our invitation 

for public comments. This discussion 

also includes the provisions of section 

5001(c) of Pub. L. 109–171, which 

requires a quality adjustment in DRG 

payments for certain hospital-acquired 

conditions, effective for FY 2008. 

C. Summary of the Provisions of the FY 

2007 IPPS and FY 2007 Occupational 

Mix Adjustment to the Wage Index 

Proposed Rules 

In the FY 2007 IPPS proposed rule, 

we set forth proposed changes to the 

Medicare IPPS for operating costs and 

for capital-related costs in FY 2007. We 

also set forth proposed changes relating 

to payments for GME costs, payments to 

certain hospitals and units that continue 

to be excluded from the IPPS and paid 

on a reasonable cost basis, and 

payments for SCHs and MDHs. The 

changes were proposed to be effective 

for discharges occurring on or after 

October 1, 2006, unless otherwise noted. 

After publication of the FY 2007 IPPS 

proposed rule, the United States Court 

of Appeals for the Second Circuit issued 

a decision in the Bellevue case that 

caused us to modify our proposals on 

the implementation of the occupational 

mix adjustment. As a result, we 

published a second proposed rule in the 

May 17, 2006 Federal Register that 

superseded the occupational mix 

proposals that had been made in the FY 

2007 IPPS proposed rule (published 

April 25, 2006). The following is a 

summary of the major changes that we 

proposed to make and the issues that we 

addressed in the FY 2007 IPPS and FY 

2007 Occupational Mix Adjustment to 

the Wage Index proposed rules: 

1. DRG Reclassifications and 

Recalibrations of Relative Weights 

As required by section 1886(d)(4)(C) 

of the Act, we proposed limited annual 

revisions to the DRG classifications 

structure. In this section, we responded 

to several recommendations made by 

MedPAC intended to improve the DRG 

system. We also proposed to use, for FY 

2007, hospital-specific relative values 

(HSRVs) for 10 cost centers to compute 

DRG relative weights. In addition, we 

proposed to use consolidated severityadjusted DRGs or alternative severity 

adjustment methods in FY 2008 (if not 

earlier). 

We presented our reevaluation of 

certain FY 2006 applicants for add-on 

payments for high-cost new medical 

services and technologies, and our 

analysis of FY 2007 applicants 

(including public input, as directed by 

Pub. L. 108–173, obtained in a town hall 

meeting). 

We proposed the annual update of the 

long-term care diagnosis-related group 

(LTC–DRG) classifications and relative 

weights for use under the LTCH PPS for 

FY 2007. 

2. Changes to the Hospital Wage Index 

We proposed revisions to the wage 

index and the annual update of the 

wage data. Specific issues addressed 

include the following: 

• The FY 2007 wage index update, 

using wage data from cost reporting 

periods that began during FY 2003. 

• The FY 2007 occupational mix 

adjustment to the wage index (discussed 

inthe May 17, 2006 proposed rule). 

• The revisions to the wage index 

based on hospital redesignations and 

reclassifications. 

• The adjustment to the wage index 

for FY 2007 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 that will be in 

effect for the proposed FY 2007 wage 

index. 

• The special timetable that will 

apply in FY 2007 in order to allow us 

to make presumptive reclassification 

withdrawal or termination decisions on 

behalf of affected hospitals which will 

then become final unless reversed or 

modified by the affected hospitals in 

accordance with CMS procedural rules. 

• The labor-related share for the FY 

2007 wage index, including the laborrelated share for Puerto Rico. 

3. Other Decisions and Changes to the 

IPPS for Operating Costs, GME Costs, 

and Promoting Hospitals’ Effective Use 

of Health Information Technology 

In the proposed rule, we discussed a 

number of provisions of the regulations 

in 42 CFR Parts 412 and 413 and related 

proposed changes, including the 

following: 

• The reporting of hospital quality 

data as a condition for receiving the full 

annual payment update increase. 

• Changes in payments to SCHs and 

MDHs. 


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• Updated national and regional casemix values and discharges for purposes 

of determining rural referral center 

status. 

• The statutorily-required IME 

adjustment factor for FY 2007. 

• Changes relating to hospitals’

geographic classifications, including 

reclassifications under section 508 of 

Pub. L. 108–173, multicampus 

hospitals, urban group hospital 

reclassification and the effect of change 

in ownership on urban county group 

reclassifications. 

• Changes and clarifications relating 

to GME that address determining the per 

resident amounts (PRAs) for merged 

hospitals and new teaching hospitals, 

counting and appropriate 

documentation of FTE residents, and 

counting of resident time spent in 

nonpatient care activities as part of 

approved residency programs. 

• Changes relating to payment for 

costs of nursing and allied health 

education programs. 

• Changes relating to requirements for 

emergency services for hospitals under 

EMTALA. 

• Discussion of the third year of 

implementation of the Rural 

Community Hospital Demonstration 

Program. 

We also invited comments on 

promoting hospitals’ effective use of 

health information technology. 

4. Changes to the PPS for CapitalRelated Costs 

In the proposed rule, we discussed 

the payment policy requirements for 

capital-related costs and capital 

payments to hospitals and proposed 

several technical corrections to the 

regulations. 

5. Changes for Hospitals and Hospital 

Units Excluded From the IPPS 

In the proposed rule, we discussed 

payments made to excluded hospitals 

and hospital units, proposed policy 

changes regarding decreases in square 

footage or decreases in the number of 

beds of the ‘‘grandfathering’’ HwHs and 

satellite facilities, and proposed changes 

to the methodology for determining 

LTCH CCRs and the reconciliation of 

high-cost and short-stay outlier 

payments under the LTCH PPS. In 

addition, we proposed a technical 

change relating to the designation of 

CAHs as necessary providers. 

6. Payments for Services Furnished 

Outside the United States 

In the proposed rule, we set forth 

proposed changes to clarify what is 

considered ‘‘outside the United States’’

for Medicare payment purposes. 

7. Payment for Blood Clotting Factor 

Administered to Inpatients With 

Hemophilia 

In the proposed rule, we discussed 

the proposed changes in payment for 

blood clotting factor administered to 

Medicare beneficiaries with hemophilia 

for FY 2007. 

8. Limitation on Payments to Skilled 

Nursing Facilities for Bad Debt 

In the proposed rule, we proposed to 

implement section 5004 of Pub. L. 109–

171 relating to reduction in payments to 

SNFs for bad debt. 

9. Determining Prospective Payment 

Operating and Capital Rates and Rate-ofIncrease Limits 

In the Addendum to the proposed 

rule, we set forth proposed changes to 

the amounts and factors for determining 

the FY 2007 prospective payment rates 

for operating costs and capital-related 

costs. We also proposed to establish the 

threshold amounts for outlier cases. In 

addition, we addressed the proposed 

update factors for determining the rateof-increase limits for cost reporting 

periods beginning in FY 2007 for 

hospitals and hospital units excluded 

from the PPS. 

10. 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 hospitals. 

11. Recommendation of Update Factors 

for Operating Cost Rates of Payment for 

Inpatient Hospital 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 2007 for the 

following: 

• A single average standardized 

amount for all areas for hospital 

inpatient services paid under the IPPS 

for operating costs (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 hospitals 

and hospital units excluded from the 

IPPS. 

12. Discussion of Medicare Payment 

Advisory Commission 

Recommendations 

Under section 1805(b) of the Act, 

MedPAC is required to submit a report 

to the Congress, no later than March 1 

of each year, in which MedPAC reviews 

and makes recommendations on 

Medicare payment policies. MedPAC’s 

March 2006 recommendation 

concerning hospital inpatient payment 

policies addressed the update factor for 

inpatient hospital operating costs and 

capital-related costs under the IPPS and 

for hospitals and distinct part hospital 

units excluded from the IPPS. This 

recommendation was addressed in 

Appendix B of the proposed rule. For 

further information relating specifically 

to the MedPAC reports or to obtain a 

copy of the reports, contact MedPAC at 

(202) 220–3700 or visit MedPAC’s Web 

site at: www.medpac.gov. 

13. Appendix C and Appendix D 

In Appendix C of the proposed rule, 

we listed the combinations of the 

consolidated severity-adjusted DRGs 

that we proposed to implement on FY 

2008 (if not earlier), as discussed in 

section II.C. of the preamble of the 

proposed rule. In Appendix D of the 

proposed rule, we provided a crosswalk 

of the proposed consolidated severityadjusted DRG system to the respective 

All Patient Related Diagnosis-Related 

Group (APR DRG) system. 

D. Public Comments Received in 

Response to the FY 2007 IPPS and FY 

2007 Occupational Mix Adjustment to 

the Wage Index Proposed Rules 

We received over 2,300 timely items 

of correspondence containing multiple 

comments on the FY 2007 IPPS 

proposed rule. We also received over 

100 timely items of correspondence on 

the FY 2007 Occupational Mix 

Adjustment to the Wage Index proposed 

rule. Summaries of the public comments 

and our responses to those comments 

are set forth under the appropriate 

heading. 

E. Interim Final Rule on Selection 

Criteria of Loan Program for Qualifying 

Hospitals Engaged in Cancer-Related 

Health Care 

On September 30, 2005, we published 

in the Federal Register (70 FR 57368) an 

interim final rule with comment period 

(CMS–1287–IFC) that set forth the 

criteria for implementing a loan 

program for qualifying hospitals 

engaged in research in the causes, 

prevention, and treatment of cancer, as 

specified in section 1016 of the 

Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003 (Pub. L. 108–173). Specifically, 

this interim final rule established a loan 

application process by which qualifying 

hospitals, including specified entities, 

may apply for a loan for the capital costs 

of health care infrastructure 

improvement projects. The interim final 

rule was effective on November 29, 

2005. 

We received seven timely items of 

correspondence on the interim final 


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rule. In section XI. of the preamble to 

this final rule, we are finalizing this 

interim final rule with comment period. 

In that section, we discuss the 

provisions of the program, the public 

comments received, our responses to 

those comments, and the final policy. 

F. Proposed Rule on Forgiveness of 

Indebtedness under the Health Care 

Infrastructure Improvement Program 

On September 30, 2005, we published 

in the Federal Register (70 FR 57376) a 

proposed rule (CMS–1320–P) to 

establish the loan forgiveness criteria for 

qualifying hospitals who receive loans 

under the Health Care Infrastructure 

Improvement Program that was 

established under section 1016 of Pub. 

L. 108–173. 

We received one timely item of 

correspondence on this proposed rule. 

We address the provisions of the 

proposed rule, a summary of the public 

comments received and our responses, 

and the provisions of the final rule in 

section XI. of the preamble of this final 

rule. 

G. Interim Final Rule on the Exclusion 

of Vendor Purchases Made Under the 

Competitive Acquisition Program for 

Part B Outpatient Drugs and Biologicals 

for the Purpose of Calculating the 

Average Sales Price 

In November 21, 2005 Federal 

Register (70 FR 70748), we published an 

interim final rule with comment period 

(CMS–1325–IFC3) to clarify and solicit 

comments on the relationship between 

drugs supplied under the CAP for Part 

B Drugs and Biologicals and the 

calculation of the ASP. 

We did not receive any timely items 

of correspondence on this interim final 

rule with comment period. We 

summarize the provisions of the July 6, 

2005 and the November 21, 2005 

interim final rules and the current 

interim final provisions in section XII. 

of the preamble of this final rule. 

II. Changes to 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, we pay 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. DRG Reclassifications 

1. General 

As discussed in section II.D. of the 

preamble to the FY 2007 IPPS proposed 

rule (71 FR 24030), for FY 2007, we are 

making only limited changes to the 

current DRG classifications that will be 

applicable to discharges occurring on or 

after October 1, 2006. We are limiting 

our changes because, as discussed in 

detail in section II.C. of the preamble to 

the proposed rule and to this final rule, 

we are focusing our efforts on 

addressing the recommendations made 

last year by MedPAC to refine the entire 

CMS DRG system by taking into account 

severity of illness and applying 

hospital-specific relative value (HSRV) 

weights to DRGs. 

Currently, cases are classified into 

CMS DRGs for payment under the IPPS 

based on the principal diagnosis, up to 

eight additional diagnoses, and up to six 

procedures performed during the stay. 

In a small number of 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). 

The process of forming the 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 formed by physician 

panels as the first step toward ensuring 

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 DRG could contain patients in 

different MDCs. Most MDCs are based 

on a particular organ system of the 

body. For example, MDC 6 is Diseases 

and Disorders of the Digestive System. 

This approach is used because clinical 

care is generally organized in 

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 2006, 

cases are assigned to one of 526 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. 


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MAJOR DIAGNOSTIC CATEGORIES (MDCS)—Continued 

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 a DRG. 

However, for FY 2006, there are nine 

DRGs to which cases are directly 

assigned on the basis of ICD–9–CM 

procedure codes. These 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 for tracheostomies. 

Cases are assigned to these DRGs before 

they are classified to an MDC. The table 

below lists the nine current pre-MDCs. 

PRE-MAJOR DIAGNOSTIC CATEGORIES (PRE-MDCS) 

DRG 103 ...... Heart Transplant or Implant of Heart Assist System. 

DRG 480 ...... Liver Transplant and/or Intestinal Transplant. 

DRG 481 ...... Bone Marrow Transplant. 

DRG 482 ...... Tracheostomy for Face, Mouth, and Neck Diagnoses. 

DRG 495 ...... Lung Transplant. 

DRG 512 ...... Simultaneous Pancreas/Kidney Transplant. 

DRG 513 ...... Pancreas Transplant. 

DRG 541 ...... ECMO or Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck Diagnosis with Major O.R. 

DRG 542 ...... Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck Diagnosis without Major O.R. 

Once the MDCs were defined, each 

MDC was evaluated to identify those 

additional patient characteristics that 

would have a consistent effect on the 

consumption of hospital resources. 

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 a comorbidity (CC). 

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 DRG 

assignment for certain principal 

diagnoses. An example is extracorporeal 

shock wave lithotripsy for patients with 

a principal diagnosis of urinary stones. 

Once the medical and surgical classes 

for an MDC were formed, each class of 

diagnoses was evaluated to determine if 

complications, comorbidities, or the 

patient’s age would consistently affect 

the consumption of hospital resources. 

Physician panels classified each 

diagnosis code based on whether the 

diagnosis, when present as a secondary 

condition, would be considered a 

substantial CC. A substantial CC was 

defined as a condition which, because 

of its presence with a specific principal 

diagnosis, would cause an increase in 

the length of stay by at least one day in 

at least 75 percent of the patients. Each 

medical and surgical class within an 

MDC was tested to determine if the 

presence of any substantial CC would 

consistently affect the consumption of 

hospital resources. 

A patient’s diagnosis, procedure, 

discharge status, and demographic 

information is fed 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 a DRG. 

After patient information is screened 

through the MCE and any further 

development of the claim is conducted, 

the cases are classified into the 

appropriate DRG by the Medicare 

GROUPER software program. The 

GROUPER program was developed as a 

means of classifying each case into a 

DRG on the basis of the diagnosis and 

procedure codes and, for a limited 

number of DRGs, demographic 

information (that is, sex, age, and 

discharge status). 

After cases are screened through the 

MCE and assigned to a DRG by the 

GROUPER, the PRICER software 

calculates a base DRG payment. The 

PRICER calculates the payment for each 

case covered by the IPPS based on the 

DRG relative weight and additional 

factors associated with each hospital, 

such as IME and DSH adjustments. 

These additional factors increase the 

payment amount to hospitals above the 

base 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 DRG 

classification changes and to recalibrate 

the DRG weights. However, in the July 

30, 1999 IPPS final rule (64 FR 41500), 

we discussed a process for considering 

non-MedPAR data in the recalibration 

process. 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 depends upon the nature and 

quality of the non-MedPAR data 

submitted. Generally, however, a 

significant sample of the non-MedPAR 


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data should be submitted by midOctober for consideration in 

conjunction with the next year’s 

proposed rule. This allows us time to 

test the data and make a preliminary 

assessment as to the feasibility of using 

the data. Subsequently, a complete 

database should be submitted by early 

December for consideration in 

conjunction with the next year’s 

proposed rule. 

In the FY 2007 IPPS proposed rule, 

we proposed limited changes to the 

DRG classification system for FY 2007 

for the FY 2007 GROUPER, Version 24.0 

and to the methodology used to 

recalibrate the DRG weights. The 

changes we proposed, the public 

comments we received concerning the 

proposed changes, the final DRG 

changes, and the methodology used to 

calculate the DRG weights are set forth 

below. The changes we are 

implementing in this final rule will be 

reflected in the FY 2007 GROUPER, 

Version 24.0, and are effective for 

discharges occurring on or after October 

1, 2006. Unless otherwise noted in this 

final rule, our DRG analysis is based on 

data from the March 2006 update of the 

FY 2005 MedPAR file, which contains 

hospital bills received through March 

31, 2006, for discharges occurring in FY 

2005. 

2. Yearly Review for Making DRG 

Changes 

Many of the changes to the DRG 

classifications are the result of specific 

issues brought to our attention by 

interested parties. We encourage 

individuals with concerns about DRG 

classifications to bring those concerns to 

our attention in a timely manner so they 

can be carefully considered for possible 

inclusion in the annual proposed rule 

Therefore, similar to the timetable for 

interested parties to submit nonMedPAR data for consideration in the 

DRG recalibration process, concerns 

about DRG classification issues should 

be brought to our attention 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 

DRGs was, and continues to be, highly 

iterative, involving a combination of 

statistical results from test data 

combined with clinical judgment. For 

purposes of this final rule, in deciding 

whether to create a separate DRG, we 

consider 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 

existing DRG. We evaluate patient care 

costs using average charges and lengths 

of stay as proxies for costs and rely on 

the judgment of our medical officers to 

decide whether patients are clinically 

distinct or similar to other patients in 

the DRG. In evaluating resource costs, 

we consider both the absolute and 

percentage differences in average 

charges between the cases we are 

selecting for review and the remainder 

of cases in the DRG. We also consider 

variation in charges within these 

groups; that is, whether observed 

average differences are consistent across 

patients or attributable to cases that are 

extreme in terms of charges or length of 

stay, or both. Further, we also consider 

the number of patients who will have a 

given set of characteristics and generally 

prefer not to create a new DRG unless 

it will include a substantial number of 

cases. 

C. Revisions to the DRG System Used 

Under the IPPS 

1. MedPAC Recommendations 

In the FY 2006 IPPS final rule, we 

discussed a number of 

recommendations made by MedPAC 

regarding revisions to the DRG system 

used under the IPPS (70 FR 47473 

through 47482). 

In Recommendation 1–3 in the 2005 

Report to Congress on Physician-Owned 

Specialty Hospitals, MedPAC 

recommended that CMS refine the 

current DRGs to more fully capture 

differences in severity of illness among 

patients, including: 

• Base the DRG relative weights on 

the estimated cost of providing care. 

• Base the weights on the national 

average of the hospital-specific relative 

values (HSRVs) for each DRG (using 

hospital-specific costs to derive the 

HSRVs). 

• Adjust the DRG relative weights to 

account for differences in the 

prevalence of high-cost outlier cases. 

• Implement the case-mix 

measurement and outlier policies over a 

transitional period. 

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. Following the publication of the 

FY 2006 IPPS final rule, we contracted 

with 3M Health Information Systems to 

assist us in performing this analysis. 

Beginning with MedPAC’s relative 

weight recommendations, we analyzed 

MedPAC’s recommendations to move to 

a cost-based HSRV weighting 

methodology. In performing this portion 

of the analysis, we studied hospital cost 

report data, departmental cost-to-charge 

ratios (CCRs), MedPAR claims data, and 

HSRV weighting methodology. Our 

intention in undertaking this portion of 

the analysis was to find an 

administratively feasible approach to 

improving the accuracy of the DRG 

weights. As we described in the 

proposed rule, we believe some changes 

can be made to MedPAC’s methodology 

for determining the relative weights that 

will make it more feasible to replicate 

on an annual basis but will result in 

similar impacts. 

In conjunction with analyzing 

MedPAC’s relative weight 

recommendations, we looked at refining 

the current DRG system to better 

recognize severity of illness. Starting 

with the APR DRG GROUPER used by 

MedPAC in its analysis, we studied 

Medicare claims data. Based on this 

analysis, we developed a CS DRG 

GROUPER that we believe could be a 

better alternative for recognizing 

severity of illness among the Medicare 

population. We note that MedPAC’s 

recommendations with regard to 

revising the DRGs to better recognize 

severity of illness may have 

implications for the outlier threshold, 

the measurement of real case-mix versus 

apparent case-mix, and the IME and the 

DSH adjustments. We discuss these 

implications in more detail in the 

following sections. 

As we present below, we believe that 

the recommendations made by 

MedPAC, or some variants of them, 

have significant promise to improve the 

accuracy of the payment rates in the 

IPPS. We agree with MedPAC about 

exploring possible refinements to our 

payment methodology even in the 

absence of concerns about the 

proliferation of specialty hospitals. In 

the FY 2006 final rule, we indicated that 

until we had completed further analysis 

of the options and their effects, we 

could not predict the extent to which 

changing to APR DRGs would provide 

payment equity between specialty and 

general hospitals. In fact, we cautioned 

that any system that groups cases will 

always present some opportunities for 

providers to specialize in cases they 

believe to have higher margins. We 

believe that improving payment 

accuracy should reduce these 

opportunities and potentially reduce the 


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incentives that Medicare payments may 

provide for the further development of 

specialty hospitals. 

We considered MedPAC’s 

recommendation to adjust the relative 

weights to account for differences in the 

prevalence of outlier cases. However, 

we placed most of our attention and 

resources on the recommendations 

related to refinement of the current 

DRGs to more fully capture differences 

in severity of illness among patients, as 

we do not have the statutory authority 

to make the specific changes to our 

outlier policy that MedPAC 

recommended. While we have not made 

MedPAC’s recommendation regarding 

outliers a central focus of our analysis, 

we do intend to examine this issue in 

more detail in the future. In sections 

II.C.2. through C.6. of the FY 2007 

proposed rule, we discussed a number 

of issues related to the MedPAC 

recommendations. We also presented 

our analysis and specific proposals for 

FY 2007 and FY 2008 including their 

estimated impacts. In this final rule, we 

present the public comments received 

on the proposed rule, our responses to 

those comments, our final decisions for 

FY 2007 and our intended actions for 

FY 2008. 

2. Refinement of the Relative Weight 

Calculation 

MedPAC made two recommendations 

with respect to the DRG relative weight 

calculation. First, MedPAC 

recommended that CMS base the DRG 

relative weights on the estimated cost of 

providing care. Second, MedPAC 

recommended that CMS base the 

weights on the national average of 

hospitals’ relative values in each DRG. 

Because both of these recommendations 

address the relative weight calculation, 

we are addressing them together. The 

work we have done to address these 

recommendations was discussed in 

detail in the proposed rule (71 FR 

24006–24011). 

MedPAC recommended that CMS 

replace its charge-based relative weight 

methodology with cost-based weights, 

as it believed that the charge-based 

relative weight methodology that CMS 

has utilized since 1985 has introduced 

bias into the weights due to differential 

markups for ancillary services among 

the DRGs. In analyzing claims data, it is 

evident to us that some hospital types 

(for example, teaching hospitals) are 

systematically more expensive overall 

than the average hospital and certain 

case types are more commonly treated at 

these more expensive facilities. Higher 

average charges for cases that are treated 

at more expensive hospitals may result 

in higher weights for these types of 

cases. MedPAC suggested a hospitalspecific relative value (HSRV) 

methodology which MedPAC believed 

would reduce the effect of cost 

differences among hospitals that may be 

present in the national relative weights 

due to differences in case-mix adjusted 

costs. 

Under the HSRV methodology 

recommended by MedPAC, charges are 

standardized for each provider by 

converting its charges for each case to 

hospital-specific relative charge values 

and then adjusting those values for the 

hospital’s case-mix. The first step in this 

process involves dividing the charge for 

each case at the hospital by the average 

charge for all cases at the hospital in 

which the case was treated. The 

hospital-specific relative charge value, 

by definition, averages 1.0 for each 

hospital. The resulting ratio is then 

multiplied by the hospital’s case-mix 

index (CMI). In this way, each hospital’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 hospitals. We discuss this issue 

in further detail below. 

Our analysis of departmental-level 

CCRs from the Medicare cost report data 

has shown that charges for routine days, 

intensive care days, and various 

ancillary services are not marked up by 

a consistent amount. For example, the 

markup amounts for cardiology services 

are higher than average. Because charges 

are the current basis for the DRG relative 

weights, the practice of differential 

markups can lead to bias in the DRG 

weights because various DRGs use, on 

average, more or less of particular 

ancillary services. MedPAC believes 

that the bias in the national DRG 

relative weights that may arise as a 

result of differential markups across 

various cost centers can be removed by 

moving from charge-based to cost-based 

weights. Based on the analysis we have 

conducted, we agree that it is 

appropriate to adjust the DRG relative 

weights to account for the differences in 

charge markups across cost centers. 

In the proposed rule, we indicated 

several concerns about the methodology 

used by MedPAC. MedPAC’s 

methodology to reduce hospital charges 

to cost is administratively burdensome, 

not only to develop, but also to 

maintain. First, MedPAC developed 

CCRs for individual hospitals at the 

most detailed department level. 

Specifically, in calculating costs as the 

basis for the relative weights, MedPAC 

applied hospital-specific CCRs from 

each provider’s cost report to the line 

item charges on the claims that the 

hospital submitted during the same time 

period. This methodology required 

matching cost report data to claims data, 

and because cost report data take longer 

to compile and file, the method 

necessitates using older claims data to 

set relative weights. The most recent 

complete set of Medicare cost reports 

available to us is from FY 2003. Thus, 

if we were to model the exact approach 

used by MedPAC and use claims data 

for a matching year, we would be using 

claims data from FY 2003 instead of 

using FY 2005 claims data, as we would 

if we were to continue with our current 

methodology. In addition, MedPAC’s 

hospital-specific approach required 

detailed cost center distinctions for each 

hospital that are difficult to define, map, 

and apply. This approach also required 

the use of the Standard Analytic File 

(SAF) because MedPAR data that we 

currently use to set DRG weights did not 

have the necessary level of detail. Using 

the SAF increases processing time and 

adds further complexity to the process 

of setting the relative weights. 

Second, because MedPAC applied 

these CCRs at the individual claim level, 

missing or invalid data resulted in 

MedPAC deleting a large number of 

claims (approximately 10 percent) from 

the relative weight calculation. Lastly, 

MedPAC acknowledged that its method 

was too difficult to replicate on an 

annual basis and suggested that the 

weights be recalculated once every 5 

years with other adjustments based on 

charges during the intervening years. 

As we explained in the FY 2007 IPPS 

proposed rule, we developed an 

alternative to MedPAC’s approach that 

we believe achieves similar results in a 

more administratively feasible manner. 

This method involves developing 

hospital-specific charge relative weights 

at the cost center level and then scaling 

the weights to costs using the national 

cost center charge ratios developed from 

the cost report data. After studying 

Medicare cost report data, we 

established 10 cost center categories 

based upon broad hospital accounting 

definitions. In our cost center categories, 

there are 8 ancillary cost groups in 

addition to routine day costs and 

intensive care day costs, and each 

category represents at least 5 percent of 

the charges in the claims data. The 

specific cost report lines that contribute 

to each category and the corresponding 

charge lines from the MedPAR claims 

data are itemized in Table A below. 

In the proposed rule, we stated that 

this alternative approach, which we 

labeled as the HSRV cost center 

(HSRVcc) methodology, has several 

advantages. First, the use of national 

average rather than hospital-specific 

CCRs avoids the complexity 


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encountered with cost center CCRs at 

the hospital level and allows us to retain 

more data for use in the relative weight 

calculation. In addition, the 

methodology eliminates the need to 

match claims to the time period of the 

CCRs, resulting in the ability to use 

more timely claims data. Furthermore, 

the alternative approach makes it more 

feasible to update the relative weights 

annually using a single methodology. 

We do not have to replicate the 

methodology once every 5 years and 

make adjustments based on changes in 

charges in the intervening years. The 

HSRVcc methodology is described in 

detail in the proposed rule (71 FR 24008 

through 24011). 

Comment: Several commenters 

supported CMS’ effort to restructure the 

DRG relative weights based on cost. 

They stated that using charges as a 

proxy for hospital costs in determining 

resource utilization under the current 

system is inappropriate and encouraged 

CMS to implement a cost-based system 

consistent with the agency’s original 

intent without delay. 

Response: We appreciate the 

commenters’ support of our proposal to 

implement a cost-based weighting 

methodology. We believe that adopting 

cost-based weights will result in 

significant improvements to Medicare’s 

IPPS payments. MedPAC concluded 

after an extensive analysis of Medicare 

hospital inpatient claims and cost data 

that the IPPS payment rates are badly 

distorted, resulting in Medicare paying 

too much for some types of patients and 

too little for others. As indicated below, 

we are making some modifications to 

our proposals in response to the public 

comments. However, we are adopting a 

system of cost-based weights for FY 

2007 to address the concerns raised by 

MedPAC. As a result, all hospitals, 

including specialty hospitals, will be 

paid more appropriately. In addition, 

based on our analysis, we concur with 

MedPAC that the current DRG system 

needs to be changed to better account 

for severity of illness among patients. 

This issue is discussed in more detail in 

the next section of this final rule. 

Comment: A majority of commenters 

supported CMS’ efforts to improve the 

accuracy of the DRG weights, and better 

reflect variations in patients’ severity of 

illness. However, many commenters 

viewed the HSRVcc proposal as flawed 

from both a methodological and policy 

perspective, and believed the proposal 

to implement cost-based weights should 

be delayed for at least a year. They 

believed that CMS needs to further 

consider a number of issues raised in 

the public comments before such 

sweeping changes are implemented. In 

addition, the commenters indicated that 

CMS needs to provide hospitals with 

more lead-time before implementing 

changes so they can budget accurately. 

They urged CMS to use the current 

standardized charge-based approach in 

FY 2007 until these issues can be 

addressed. At a minimum, they believed 

CMS should address what were 

characterized as methodological flaws 

and publish revised relative weights 

along with hospital impacts for public 

comment prior to implementation. 

Response: We appreciate the 

commenters’ concerns with regard to a 

rapid and full implementation of the 

changes we proposed to the relative 

weight methodology. However, based on 

our analysis and study of the MedPAC 

recommendations that we presented in 

our proposed rule, it has come to our 

attention that differential markups 

between routine and ancillary cost 

centers have introduced significant bias 

into the relative weights. In order to 

reduce the bias in weights and make 

more appropriate payments under the 

IPPS, we believe it is necessary to 

initiate the transition to a cost-based 

relative weight methodology in FY 

2007. However, we have considered the 

commenters’ requests to further review 

the HSRV methodology. Therefore, in 

this final rule, we are not adopting our 

proposal to standardize charges using 

the HSRV methodology. However, we 

are adopting our proposal to reduce 

charges to estimated costs prior to 

setting DRG weights. We will undertake 

further analysis of the HSRV 

methodology during the next year. 

Based on this analysis, we will consider 

proposing further changes to adopt the 

HSRV methodology for FY 2008. 

Comment: Many commenters 

disagreed with CMS’ assertion that the 

more administratively feasible HSRVcc 

approach achieves similar results to the 

MedPAC methodology. While they 

supported CMS’ efforts to ensure the 

DRG weights are updated annually to 

reflect the most recent trends in 

inpatient care, they expressed concern 

with the specifics of the HSRVcc 

methodology. 

First, they noted that CMS stated in 

the proposed rule that organ acquisition 

costs were eliminated from hospital 

charges before the HSRVcc weights were 

calculated. However, it had come to 

their attention that organ acquisition 

charges were actually included in the 

calculation of DRG weights under the 

proposed methodology. They stated that 

organ acquisition is reimbursed by 

Medicare on a cost basis and should not 

be included in the weight calculation. 

Furthermore, the commenters asserted 

that the inclusion of organ acquisition 

charges improperly overstated the 

transplant DRG HSRVcc weights. 

Commenters recommended that CMS 

remove the organ acquisition charges 

from the computation of the DRG 

weights if the HSRVcc methodology is 

to be adopted. 

Second, commenters believe CMS 

made questionable methodological 

decisions when calculating the national 

CCRs. Under the proposed 

methodology, CMS calculated hospitalweighted rather than charge-weighted 

CCRs for each of the 10 cost centers 

used to scale the charge-based weights. 

Because the averages are unweighted, 

the commenters stated that the CCRs do 

not account for the differential 

contribution of each hospital to total 

charges. The commenters asserted that, 

mathematically, the only correct way to 

get from total hospital charges to total 

hospital costs is to use a chargeweighted average of hospital CCRs. 

Failure to use charge-weighted averages 

overestimates routine and ICU costs and 

underestimates ancillary costs, which 

ultimately exaggerates the shift in 

payments, according to the commenters. 

Therefore, commenters believed CMS 

should recalculate the mean national 

CCRs using a charge-weighted method. 

Third, commenters believed CMS 

applied questionable trimming criteria 

in computing the cost center CCRs. 

They stated that trimming the cost 

center CCRs at 1.96 standard deviations 

(rather than 3 standard deviations) from 

the geometric mean inappropriately 

excluded over 200 large hospitals that 

account for 25 percent of routine 

accommodation charges. They noted 

that the CCRs for these hospitals appear 

to be predominantly correct. In 

addition, the commenters noted that 

CMS applied the CCRs to the charge 

data for hospitals that were excluded 

from the national average CCR 

calculation. Thus, the commenters 

argued there is a significant mismatch 

between the hospital data that was 

included in the CCR and HSRVcc 

calculations. These commenters 

recommended that CMS exclude 

hospital data from the CCRs if it is more 

than 3 standard deviations (rather than 

1.96) from the mean CCR. Many 

commenters characterized these 

methodological decisions as errors and 

indicated that their combined impact is 

significant. If CMS is to use the HSRVcc 

methodology, the commenters indicated 

that these issues should be addressed. 

A few commenters stated that we 

made incorrect assumptions that may 

have resulted in new distortions to the 

relative weights. Specifically, the 

commenters stated that we were 

incorrect in applying the same CCR 


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1Carter, Grace ‘‘How recalibration method, 

pricing, and coding affect DRG weights,’’ Health 

Care Financing Review, Winter 1992. 

across all hospitals for a given cost 

center and applying the same percent 

mix of services by cost center to all 

DRGs. The commenters recommended 

that we first convert charges to costs for 

each hospital and DRG, and then 

compute hospital-specific relative 

values. They stated that the reversal of 

the calculations in the HSRVcc 

methodology accommodates cost center 

mix and charge markup differences 

across hospitals and across DRGs. 

Many commenters argued that the 

hospital-specific relative value 

methodology is unnecessary and 

compresses the DRG weights. 

Commenters cited past research 

indicating that HSRV has a 

disproportionate impact on certain 

types of hospitals and types of care, and 

reduces the range of DRG weights 

between the lowest and highest weight 

DRGs.1 Commenters noted that the 

HSRV methodology ‘‘produces more 

compressed DRG weights’’ than the 

existing standardization methodology 

and that ‘‘the greater compression of the 

HSRV weights is counter balanced by 

the fact that more high-weighted cases 

qualify as [high cost] outlier cases.’’ A 

few commenters expressed concern that 

adopting MedPAC’s recommendation to 

exclude high-cost outliers in addition to 

statistical outliers from the computation 

of the DRG weights so that the weights 

reflect the average cost only of inlier 

cases would compound the DRG weight 

compression caused by the HSRV 

methodology because high-cost outlier 

cases occur most frequently in highweighted DRGs. The commenters 

indicated that the finding raises the 

concern of patient access to care for 

services in higher cost DRGs. 

Commenters also believed that the 

HSRV methodology fails to take into 

account legitimate variation in costs that 

occur between hospitals. Therefore, any 

hospital-level variation in cost that is 

not explained by the IPPS case mix 

index is simply ignored, according to 

the commenters. To the extent that 

certain services are provided most 

frequently in hospitals with higher than 

average cost, the commenters believed 

that the HSRV methodology will result 

in inappropriately lower DRG weights 

for these services. 

Therefore, commenters strongly 

recommended that the HSRV 

methodology be eliminated in favor of 

the cost-based weighting methodology 

adopted under the OPPS. They stated 

that the main difference between these 

two approaches is the treatment of cost 

variation that is not otherwise explained 

with IPPS payment factors. In the 

standardization approach employed by 

OPPS, any variation in hospital costs 

that is not explained by CMS payment 

factors affects the calibration of DRG 

weights. They stated that the HSRV 

approach proposed by CMS, by contrast, 

ignores any hospital level variation in 

charges that is not explained by the case 

mix index. Many commenters added 

that CMS could propose to remove other 

sources of cost variation beyond its 

current practice of standardizing for 

wage index, DSH, and IME. They 

believed a factor-specific approach to 

standardization would lead to more 

precise and valid adjustments than 

those recognized under the HSRV 

methodology, which eliminates all 

sources of charge variation irrespective 

of whether there are legitimate 

differences among hospitals in costs that 

are not taken into account in the 

payment system. 

Response: In preparing the FY 2007 

relative weights, the costs of organ 

acquisition were inadvertently included 

in the relative weight for the calculation 

of ‘‘other services.’’ The costs of organ 

acquisition are paid by Medicare on a 

cost basis and should not be included in 

setting the IPPS relative weights. These 

costs have been excluded from the IPPS 

relative weights calculated for this final 

rule. 

In response to the concerns expressed 

regarding the CCR calculation, we 

proposed to establish the geometric 

mean CCRs using a hospital-weighted 

methodology because we believed that it 

served as an acceptable measure of 

central tendency. In addition, we 

proposed to trim the CCRs on the basis 

of 1.96 standard deviations since we 

were using national averages and 

thought a more stringent statistical trim 

would be appropriate. In response to 

comments, however, we have 

reconsidered our approach and have 

implemented the 3 standard deviation 

statistical trim supported by 

commenters. Further, we are also 

adopting the charge-weighted method of 

calculating CCRs, as we now believe it 

may be more appropriate to apply CCRs 

based on aggregate costs and charges 

among hospitals to the charges that are 

aggregated by DRG and used to set the 

relative weights. 

Although commenters asserted that 

the HSRV methodology exacerbates the 

effect of charge compression on the 

relative weights, we have not had 

sufficient time between the close of the 

comment period and the publication of 

this final rule to analyze this assertion. 

Therefore, in response to comments 

(and as stated above), we are postponing 

the implementation of the HSRV 

methodology until we can study this 

comment further. Instead, as suggested 

by many commenters, we are using an 

approach to calculating the IPPS relative 

weights that is more similar to the 

approach used in the OPPS. That is, 

rather than using a hospital-specific 

relative weighting methodology, we are 

standardizing charges to remove 

relevant payment factor adjustments 

and then adjusting those charges to 

costs using national cost center CCRs. 

As we stated in the proposed rule, it is 

not administratively feasible to adjust 

charges to cost using hospital-specific 

cost to charge ratios. Therefore, while 

we are standardizing charges for the 

IPPS cost-based weights using a similar 

process to the OPPS, we are still 

utilizing national average CCRs to 

determine cost. Specifically, we are 

standardizing the charges for each DRG 

by cost center to remove differences in 

wage index, indirect medical education 

and disproportionate share adjustments 

and are then reducing the standardized 

charges to cost using the national 

average CCRs. The relative weights we 

are adopting in this final rule are 

calculated based on the average total 

cost for a DRG in relation to the national 

average total cost. 

Comment: Many commenters 

expressed concern that CMS collapsed 

the full set of at least 37 cost centers into 

only 10. They believed this approach 

eliminates detail that is available on the 

cost report. The commenters requested 

that CMS elaborate on the process it 

went through to derive the 10 cost 

centers used to calculate the HSRVcc 

weights. Some commenters stated CMS 

should use all 37 cost centers that are 

used in calculating the OPPS relative 

weights for the IPPS. Other commenters 

suggested that CMS expand the number 

of cost centers used in the calculation. 

MedPAC found that the CCRs within the 

proposed 10 cost centers varied 

significantly in some areas and 

recommended that CMS expand the 

number to 13 by distinguishing 

anesthesia and labor and delivery from 

the operating room cost center and 

distinguishing inhalation therapy from 

the therapy services cost center. Several 

commenters supported MedPAC’s 

recommendation. Further, MedPAC 

recommended that the CCRs be based 

on Medicare-specific costs and charges 

rather than on the costs and charges for 

the entire facility. Some commenters 

advocated that a separate cost center be 

added for implantable devices. They 

believed this additional cost center 

would better identify the mark-up for 

high cost technological devices than 


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using the average for all supplies and 

equipment. 

Several commenters encouraged CMS 

to specifically incorporate nursing costs 

into the weighting methodology. They 

stated that nursing care represents 

approximately 30 percent of all hospital 

expenditures and nearly half of all 

direct care costs and have been 

essentially ignored in the payment 

formula. Specifically, these commenters 

urged CMS to create a unique Nursing 

Cost Center that identifies the inpatient 

direct and indirect costs for registered 

nurses, licensed practical nurses, and 

unlicensed assistive personnel. They 

defined direct nursing costs as those 

associated with licensed and assistive 

nursing personnel assigned to care for 

an individual patient. Indirect nursing 

costs are all other salary and benefits 

related to licensed and assistive nursing 

personnel not directly assigned to care 

for individual patients. They suggested 

that the routine and intensive care cost 

centers in the proposed HSRVcc 

methodology be replaced with a nursing 

cost center and a separate facility cost 

center to identify the non-nursing cost 

component of care. They urged CMS to 

set aside funds to study and implement 

the above recommendation using 

methodologically sound research and 

demonstration projects. 

Response: As we stated in the 

proposed rule, we established 10 cost 

center categories based upon broad 

hospital accounting definitions. These 

10 cost center categories consist of 8 

ancillary cost groups, a routine days 

cost group, and an intensive care days 

cost group. These cost centers were 

selected because each category 

represents at least 5 percent of the 

charges in the claims data. 

We thoroughly reviewed the 

comments advocating that we expand 

the number of cost centers used in the 

calculation. We currently use the 

MedPAR data set for charge detail. The 

MedPAR file does not provide enough 

granularity in the charge detail to 

support 37 different cost centers. In 

addition, in the proposed methodology, 

we eliminated claims for providers that 

did not have costs greater than zero for 

at least 8 of the 10 cost centers. At least 

96 percent of the providers in the 

MedPAR file had charges for at least 8 

of the 10 cost centers. We believe that 

if we were to expand to the full set of 

37 cost centers outlined in the cost 

report, we would eliminate a greater 

number of claims in the calculation of 

the DRG relative weights. 

While we do not believe expanding to 

37 cost centers is feasible, we agree with 

MedPAC that we may have consolidated 

a few revenue centers that have 

significantly different CCRs. Upon 

further examination of the data, in this 

final rule, we are expanding the number 

of cost centers from 10 to 13 by creating 

separate cost centers for anesthesia, 

labor and delivery, and inhalation 

therapy. We also agree with MedPAC 

that it would be more appropriate to set 

the CCRs based on Medicare-specific 

charges and costs rather than on the 

costs and charges for the entire facility. 

Therefore, in this final rule, we are 

modifying our CCR calculations to 

incorporate Medicare-specific charge 

data from Worksheet D Part 4 in 

addition to the cost and charge data 

from Worksheet C Part I that we used in 

the proposed rule. 

Other commenters suggested that we 

also create separate cost centers for 

implantable devices and nursing. As 

noted in the comments, the MedPAR 

file does not contain the necessary 

detail to identify a separate cost center 

for implantable devices or nursing. In 

addition, we did not have enough time 

to evaluate whether it would be 

reasonable to utilize a nursing cost 

center in the methodology in the future. 

However, we anticipate undertaking 

further analysis of the relative weight 

methodology over the next year in 

conjunction with the research we are 

doing on charge compression to 

determine if additional cost centers are 

necessary. 

Comment: Commenters, referring to 

Table A, ‘‘Charge Line Items from 

MedPAR Included in Cost Center 

Charge Group,’’ noted that MedPAR 

charge descriptions do not match the 

Form CMS–2552–96 Cost Center 

description(s) for several cost centers. 

For example: 

(a) MedPAR lists (18) Lithotripsy 

Charges where the cost reporting form 

lists Radioisotopes; 

(b) MedPAR lists (6) Other Services 

where the cost reporting form lists 

Whole Blood and Packed Red Blood 

Cells; 

(c) MedPAR lists (19) Cardiology 

Charges as including line 54 of the cost 

report, which is 

Electroencephalography; 

(d) MedPAR lists (16) Blood 

Administration Charges where the cost 

reporting form lists ASC (Non-Distinct 

Part); 

(e) MedPAR lists (24) Outpatient 

Services Charges where the cost 

reporting form lists Emergency; 

(f) MedPAR lists (25) Emergency 

Room Charges where the cost reporting 

form lists Ambulance Services; 

(g) MedPAR lists (26) Ambulance 

Charges where the cost reporting form 

lists Renal Dialysis; 

(h) MedPAR lists (29) ESRD Revenue 

Setting Charges where the cost reporting 

form lists Clinic; 

(i) MedPAR lists (30) Clinic Visit 

Charges where the cost reporting form 

lists Other Outpatient Services, Other 

Ancillary, Home Program Dialysis and 

Ambulance Services; 

(j) Ambulance Services appear to be 

included twice, once in (30) Clinic Visit 

Charges and once in (25) Emergency 

Room Charges; 

(k) Lithotripsy is included in 

Radiology Services; 

(l) Line 62 ‘‘Observation Beds’’ is not 

reflected separately in Table A; and 

(m) Line 68 ‘‘Other reimbursement’’ of 

the cost report is not listed in Table A. 

In addition, commenters were unclear 

as to whether CMS accounted for 

subscripted lines in the cost report 

when calculating CCRs. The 

commenters noted that subscripted lines 

did not appear in Table A. Commenters 

believed this inconsistency in reporting 

may lead to distorted DRG weights. 

Therefore, commenters recommended 

that CMS examine this issue thoroughly 

before implementing cost-based 

weights. Several commenters requested 

that CMS publish a crosswalk of the 

revenue codes that are used for each 

MedPAR charge data group and require 

intermediaries to review cost report data 

to ensure that providers have reported 

data consistent with the mapping to the 

MedPAR data. 

Response: We wish to clarify to the 

commenters that the charge description 

titles shown in the MedPAR charge 

description column in Table A were not 

meant to also be interpreted as the title 

for each of the cost report line items. 

That is, we were simply using Table A 

to illustrate the MedPAR charge groups 

and the cost report line numbers that 

were used to create the 10 proposed cost 

centers. To alleviate this confusion, we 

are revising Table A to show both the 

MedPAR charge titles and the titles of 

the cost report line items. In response to 

comments (j) and (l), we note that the 

cost report line item number 65 for 

ambulance was inadvertently listed 

twice in the proposed rule; line item 62, 

observation beds, was used in 

establishing the CCR for the other 

services category. Line 65 for ambulance 

was only used once in the actual other 

services CCR calculation. Line item 62 

should have appeared in the ‘‘other 

services’’ cost center grouping printed 

in Table A in the proposed rule. We 

have corrected this error in the final 

version of Table A. In addition, in 

regards to comment (k) above, we have 

moved the lithotripsy charges from 

MedPAR to the ‘‘other services’’ cost 

center grouping and we have also 


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revised the CCR for ‘‘other services’’ to 

include the cost report line item 43 for 

radioisotopes, which was formerly 

included in the radiology CCR. 

In response to the commenters’

question regarding the inclusion of 

subscripted lines, when we calculated 

the CCRs for the proposed rule and 

subsequently for this final rule, we 

relied on a HCRIS data set that contains 

rolled-up cost report fields such that 

line items which are subscripted 

contain the total value for the line item 

and any subscripted lines below. 

Therefore, most subscripted lines were 

included in the proposed rule CCRs and 

continue to be included in the final rule 

CCR calculations. However, some 

subscripted line items are not rolled up 

and continue to have their own field on 

the HCRIS data set that we used to 

calculate the CCRs. Therefore, we are 

now including the cost report line item 

6201 for observation beds, the cost 

report line item 6350 for Rural Health 

clinics and the cost report line item 

6360 for Federally Qualified Health 

clinics in the other services CCR. Cost 

report line items 6350 and 6360 are only 

reported by provider-based Rural Health 

clinics and Federally Qualified Health 

clinics and are necessary in order to 

identify all incurred costs applicable to 

furnishing an observation bed prior to a 

decision to admit a patient to the 

hospital. Further, we are now including 

the cost report line item 68 for other 

reimbursement in the other services 

CCR, and we are including professional 

services charges from MedPAR in the 

other services charge grouping. In 

response to the commenters’ requests 

that we show the revenue codes that 

comprise the MedPAR charges, we have 

also inserted an additional column in 

Table A that lists the revenue codes 

MedPAR groups into each charge field 

that we are using in the final 13 cost 

centers. The final version of Table A 

appears below: 

BILLING CODE 4120-01-P 


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Comment: Many commenters warned 

that the redistribution of payments from 

the surgical to the medical DRGs under 

the proposed methodology may create 

unintended consequences. Several of 

these commenters stated that this 

redistribution poses a threat to patients’

access to the latest medical advances 

and highest quality care. They feared 

that hospitals will invest less in new 

medical technologies because Medicare 

would not pay sufficiently for the DRGs 

that use them. Another commenter 

stated that the increased reimbursement 

for psychiatric DRGs may create an 

incentive for IPFs to decertify and 

become inpatient units. 

Response: We appreciate the 

commenters’ concern that payment 

redistribution may create the potential 

for unintended consequences. However, 

we wish to emphasize that the 

redistribution of payments among DRGs 

is necessary to improve payment 

accuracy and eliminate the distortions 

in the current IPPS payment rates. 

Under the methodology in this final 

rule, we will increase payment for 

relatively underpaid cases and reduce 

payment for relatively overpaid cases. 

We are adopting a methodology that 

will realign payments with costs to pay 

more appropriately for services 

rendered by hospitals. Therefore, we do 

not believe altering the DRG relative 

weighting methodology will affect 

patients’ access to quality medical care. 

Patients should have continued and 

uninterrupted access to new, innovative 

technologies. 

We have analyzed the impact of the 

increased reimbursement for psychiatric 

DRGs in response to the commenter’s 

concern that increased reimbursement 

may provide incentives for IPFs to 

decertify their units and be paid under 

the IPPS. Because of the differences in 

payment between the IPPS and the IPF 

PPS, we do not believe that the DRG 

relative weights we are adopting in this 

final rule will provide increased 

incentive for IPFs to decertify units. 

Whereas under the IPF PPS, hospitals 

receive a daily base rate and 

adjustments to account for certain 

patient and facility characteristics, 

hospitals paid under the IPPS are paid 

a specified amount based on the DRG 

for the same cases, regardless of the 

length of the hospital stay. Our analysis 

suggests that even though the average 

payment per day (total payment divided 

by average length of stay) for the 

psychiatric DRGs in the IPPS proposed 

rule may be higher than under the IPF 

PPS, the total average payment per 

episode of care remains lower (product 

of the average IPF payment per day and 

the average length of stay). Thus, 

because payments per episode of care 

remain lower under the IPPS than under 

the IPF PPS, we are not concerned that 

IPFs will decertify to get paid using the 

IPPS. In addition, as indicated above, 

we are making some modifications to 

our methodology in response to the 

public comments. Based on these 

changes, the increase in the relative 

weights for the psychiatric DRGs 

presented in this final rule will not be 

as significant as those contained in the 

proposed rule. 

Comment: Commenters expressed 

concern that because hospitals often 

allocate charges on the cost reports 

differently than charges on the claims, 

the cost-center level CCRs are calculated 

based on a different set of charges than 

the charges on the claims to which the 

CCRs are later applied. Commenters 

expressed concern that Medicare cost 

report data are not detailed enough or 

consistently reported accurately to 

determine costs accurately at a DRG 

level since such data lack specific cost 

data on individual items and services. 

They reiterated that the Medicare cost 

reports, which serve as the primary 

source of data under the proposed 

system, were not designed to be used in 

a prospective payment system and have 

not been used to establish hospital rates 

for inpatient services for some time. 

They noted several limitations in using 

the cost reports to derive estimated costs 

utilized in the DRG relative weight 

calculations that should be carefully 

examined and addressed before moving 

forward with the proposed system of 

hospital-specific cost weights. 

First, the commenters believed that 

CMS should address cost report 

accuracy. The commenters stated that 

because the cost reports have only been 

used for payment in limited 

circumstances (DSH, IME, outlier 

policy), hospitals have had little 

incentive to report accurately and 

completely for the services provided to 

Medicare beneficiaries. In addition, they 

claimed the cost reports do not contain 

the level of detail necessary to 

accurately determine costs at the DRG 

level. Instead, the cost report provides 

payments, costs, and some 

reimbursement totals by department or 

cost center. The commenters also 

advised that CMS perform additional 

auditing of the cost reports to ensure 

accuracy. The commenters were 

concerned that if CMS implements a 

cost-based weighting methodology, the 

DRG weights will be based on largely 

un-audited cost reports since 

approximately 15 percent of hospital 

cost reports are audited each year. They 

noted that MedPAC estimated that a 

full-scale audit could require 1,000 to 

2,000 hours from a fiscal intermediary, 


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as well as additional time and resources 

from the hospital. In addition, a few 

commenters stated that CMS should 

only use final settled cost report data, 

not as-submitted data, in calculating 

DRG weights. 

Second, some commenters contended 

that CMS should evaluate the overall 

timeliness of cost report data. They 

stated that cost report data used to 

recalibrate the DRG weights are 

outdated and significantly older than 

the charge-based data currently used to 

determine DRG weights under the IPPS. 

Under the proposed methodology, CMS 

used hospital claims data from FY 2005 

and hospital cost reports from FY 2003. 

The commenters were concerned that 

because a lag between the cost report 

year and the payment year exists, the 

proposed methodology would rely on 

older data that does not reflect the costs 

of many newer technologies. The 

commenters supported an approach that 

uses more recent claims and cost report 

data and also urge CMS to explore 

options for using alternative data 

sources that include current information 

on the costs of inpatient care. 

Third, the commenters stated that 

CMS should examine the comparability 

of cost reports due to variability in how 

hospitals allocate costs. Commenters 

explained that a cost allocation 

methodology must be used to estimate 

the cost of individual items and services 

from the aggregate costs reported for 

each cost-center on the cost-report. They 

stated that the proposed methodology 

assumes that all hospitals consistently 

allocate costs to the same cost centers. 

However, hospitals may have 

inconsistent cost accounting practices or 

use different cost allocation methods 

(for example, utilization or squarefootage) according to the commenters. 

The commenters suggested these factors 

and the compression of charges both 

within and across cost-centers, limits 

the usefulness of cost report data to 

accurately estimate costs. According to 

the commenters, each hospital uses its 

own method to allocate costs among 

cost centers, often resulting in cost 

assignments that do not reflect the 

departments to which charges are 

assigned in the MedPAR data. For 

example, some commenters indicated 

that they included cardiac 

catheterization in lines other than 53 

and 54 that group to the cardiac cost 

center. In addition, several commenters 

noted that hospitals report medical 

supply costs inconsistently. While some 

report them in the supply cost center, 

others report the medical supply cost in 

the cost center for the procedure in 

which the device was used (that is, 

medical supplies specific to the 

Emergency Room are included in line 

61 of the cost report). The commenters 

suggested that more specific cost report 

instructions may be necessary to ensure 

that hospitals report the information 

correctly and consistently. Some 

commenters believed that cost report 

data were not intended or designed to 

be used to develop accurate payment 

rates and suggested developing a proxy 

to more accurately allocate costs at the 

DRG level, such as collecting data from 

hospitals that utilize ‘‘sophisticated cost 

accounting tools that provide more 

accurate allocation of costs.’’

Some commenters also recommended 

that CMS convene an expert panel to 

explore ways to address the current 

limitations of the cost report. They 

stated that this effort should identify 

methods to better use or improve 

hospital cost reports for use in setting 

the inpatient and outpatient relative 

weights. The expert panel should aim to 

identify changes to the cost report that 

reduce the net information burden on 

hospitals, while improving overall 

payment accuracy. The panel should 

report its recommendations by April 

2007 to enable CMS enough time to 

consider the recommendations in 

setting the relative weights for FY 2008. 

Other commenters advocated that CMS 

initiate a national project to correct any 

misalignments between cost and charges 

in cost reports and on the MedPAR 

claims. Other commenters suggested 

that CMS postpone the adoption of the 

proposed HSRVcc methodology until 

such time that providers improve the 

accuracy of the source data used in the 

determination of the DRG weights. 

Response: With respect to the 

commenters’ recommendation regarding 

the reporting of costs and charges for 

services, CMS requires hospitals to 

report their costs and charges through 

the cost report with sufficient specificity 

to support CMS’ use of cost report data 

for monitoring and payment. Within 

generally accepted principles of cost 

accounting, CMS allows providers 

flexibility to accommodate the unique 

attributes of each institution’s 

accounting systems. For example, 

providers must match the generally 

intended meaning of the line-item cost 

centers, both standard and nonstandard, to the unique configuration of 

department and service categories used 

by each hospital’s accounting system. 

Also, while the cost report provides a 

recommended basis of allocation for the 

general service cost centers, a provider 

is permitted, within specified 

guidelines, to use an alternative basis 

for a general service cost if it can 

support to its intermediary that the 

alternative is more accurate than the 

recommended basis. This approach 

creates internal consistency between a 

hospital’s accounting system and the 

cost report but cannot guarantee the 

precise comparability of costs and 

charges for individual cost centers 

across institutions. 

However, we believe that achieving 

greater uniformity by, for example, 

specifying the exact components of 

individual cost centers, would be very 

burdensome for hospitals and auditors. 

Hospitals would need to tailor their 

internal accounting systems to reflect a 

national definition of a cost center. It is 

not clear that the marginal improvement 

in precision created here is worth the 

additional administrative burden. The 

current hospital practice of matching 

costs to the generally intended meaning 

of a cost center ensures that most 

services in the cost center will be 

comparable across providers, even if the 

precise composition of a cost center 

among hospitals differs. Further, every 

hospital provides a different mix of 

services. Even if CMS specified the 

components of each cost center, costs 

and charges on the cost report would 

continue to reflect each hospital’s mix 

of services. At the same time, internal 

consistency is very important to the 

IPPS. Costs are estimated on claims by 

matching CCRs for a given hospital to 

their own claims data through a cost 

center-to-revenue code crosswalk. 

Despite the concerns raised in the 

comments, we believe that costs and 

charges are reported through the cost 

report with sufficient specificity to 

support CMS’ use of cost report data to 

develop cost-based weights. The 

information we obtained from the cost 

report on the differing level of charge 

markups occurring between routine and 

ancillary hospital departments supports 

MedPAC’s conclusions that the most 

profitable DRGs that are leading to the 

development of specialty hospitals are 

those that require a lot of ancillary 

services with high markups and low 

CCRs. To the extent that charge markups 

vary significantly between the various 

routine and ancillary hospital 

departments, we believe that there is a 

need to adjust charges to cost prior to 

setting the relative weights. We will 

continue to rely on the cost report to 

establish the CCRs that we are finalizing 

to use to adjust the DRG charges to 

costs. 

However, we continue to be interested 

in receiving suggestions on ways that 

hospitals can uniformly and 

consistently report charges and costs 

related to all cost centers that also 

acknowledge the ubiquitous tradeoff 

between greater precision in developing 

CCRs and administrative burden 


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2Medicare Payment Advisory Commission: 

Report to Congress on Physician-Owned Specialty 

Hospitals, March 2005, p. 37–38. 

3Hackbarth, Glenn, MedPAC Comments on the 

IPS Rule, June 12, 2006, page 2. 

4Hackbarth, Glenn, MedPAC Comments on the 

IPPS Rule, June 12, 2006, page 2. 

coupled with reduced flexibility in 

hospital accounting practices. Another 

issue to consider is the potential 

changes to the relative weights from 

undertaking efforts of this magnitude 

that will be costly for both CMS, its 

fiscal intermediaries and costly and 

burdensome to hospitals. Although we 

are not modifying the cost report or our 

cost report instructions at this time, we 

would be open to making improvements 

in the future. 

Comment: Several commenters 

applauded CMS’ efforts to find ‘‘an 

administratively feasible approach to 

improving the accuracy of the DRG 

weights.’’ However, they expressed 

serious concerns about whether the 

proposed approach achieves that goal. 

Many commenters asserted that CMS 

proposes to move to a new cost-based 

methodology without offering any 

evidence that the proposed method 

actually improves payment accuracy. 

A few commenters submitted analyses 

that suggest that the impact of the 

proposed HSRVcc methodology is 

substantially different than the MedPAC 

recommendations, and may even 

decrease payment accuracy relative to 

the charge-based weights. A few 

commenters specifically noted that 

cardiac procedures are more adversely 

impacted by the HSRVcc methodology. 

The proposed methodology reduces 

relative weights for the three major 

implantable cardioverter defibrillator 

(ICD) DRGs (515, 535, and 536) by 25 

percent or more. While these proposed 

reductions imply that the weights based 

on the existing charge-based 

methodology overstate the costs of ICD 

procedures and therefore overpay them, 

the commenters presented analyses 

suggesting that these cases are actually 

underpaid. One such analysis by 

MedPAC, in its report on physicianowned specialty hospitals, found ICD 

procedures to have ‘‘lower marginal’’

profitability or ‘‘possibly a loss’’ for 

hospitals, based on calculation of 

payment-to-cost ratios and surveys of 

specialty hospitals. They also indicated 

that CMS, in approving cardiac 

resynchronization therapy defibrillators 

(CRT–D) for new technology add-on 

payments, found the device to be 

inadequately paid and granted the addon payments to defray the costs of the 

therapy. Given that payment rates under 

the charge-based weights appear to be 

inadequate in many of the 

cardiovascular DRGs, the commenters 

believed the severe reductions resulting 

from the proposed HSRVcc 

methodology appear to be unjustified 

and provide ample reason to believe 

that the proposed methodology does not 

accomplish the goal of improving 

payment accuracy. 

These commenters emphasized that 

while measuring improved payment 

accuracy is difficult, the large degree to 

which the weights fluctuate given the 

methodological changes alone indicates 

the need for further analysis and study. 

The commenters believed CMS should 

publish reliable indicators that 

demonstrate how the goal of payment 

accuracy is achieved. One commenter 

requested that CMS produce and 

publish estimates of payment-to-cost 

ratios and the relative profitability by 

DRG to determine the effectiveness of 

different weight-setting and patient 

classification methodologies in 

improving overall payment accuracy. 

The commenter emphasized that such 

estimates must be adjusted to account 

for the cost of providing services that 

include high-technology devices that are 

understated in the cost reports. Another 

commenter recommended that CMS 

construct a process to test the sensitivity 

of weights to various methodological 

assumptions and publicly share the 

results, including: a comparison of the 

CMS weights to MedPAC’s HSRV cost 

approach; a comparison of CMS weights 

to an approach using standardized costs 

(as opposed to HSRV); comparison of 

CMS weights to weights calculated by 

estimating costs at the claim level using 

the 10 cost center approach; evaluation 

of other alternative methodologies for 

estimating costs; and an evaluation of 

the stability of weights over time. 

Response: We appreciate the 

commenters concerns regarding the 

HSRVcc relative weight setting 

methodology we proposed and the large 

change in the relative weights that result 

from the application of this 

methodology. As we stated in the FY 

2006 IPPS final rule, given the potential 

for significant redistribution in 

payments, the MedPAC 

recommendations should be studied 

extensively before any broad 

fundamental changes are made to the 

current system. In the proposed rule, we 

provided the results of such an 

extensive analysis and concluded that 

changes can be made to the relative 

weight methodology and the DRG 

system to improve payment accuracy. 

Although we agree that adopting a 

methodology that results in large 

changes in payment should not be 

adopted without careful study, we do 

not believe that the mere presence of 

such significant impacts invalidates the 

methodology. On the contrary, we 

believe large payment impacts may 

suggest there is a significant degree of 

distortion present in the current 

payment system. In our view, we 

believe that the changes to the IPPS 

should be evaluated based on whether 

they represent an improvement to the 

current system. MedPAC has studied 

the IPPS extensively and found that 

improvement can be found in payment 

accuracy from adopting its 

recommendations that are similar to 

those we proposed.2

While we acknowledge the need for 

further study and evaluation of the 

HSRVcc methodology, we continue to 

believe that the differential markups 

among departmental CCRs have 

introduced distortion into the chargebased relative weights. We note that 

MedPAC found that ‘‘the current 

payment system encourages community 

hospitals to allocate capital to profitable 

services such as cardiology and 

stimulates the formation of specialty 

hospitals that often focus on providing 

profitable services and tend to care for 

low-severity patients.’’ 3 The 

information we obtained from the cost 

reports on the differing level of charge 

markups occurring between routine and 

ancillary hospital departments supports 

MedPAC’s conclusions that the most 

profitable DRGs that are leading to the 

development of cardiac specialty 

hospitals are those that require a lot of 

ancillary services with high markups 

and low CCRs. We note that the 

proposed rule showed that these 

hospitals are almost exclusively affected 

by changes to the relative weight 

methodology providing further evidence 

of bias and distortion in the relative 

weights by setting them using hospital 

charges. To the extent that charge 

markups vary significantly between the 

various routine and ancillary hospital 

departments, we believe that there is a 

need to adjust charges to cost prior to 

setting the relative weights. Although it 

suggested refinements to CMS’ proposal 

(all of which we have adopted in this 

final rule), we note that MedPAC found 

that the CMS proposals made great 

strides toward achieving the goal of 

improvements in payment accuracy.4

Therefore, as discussed in section II. C., 

we are using the national average CCRs 

to adjust the cost center charges for each 

DRG to cost prior to setting the relative 

weights. While we acknowledge that no 

payment methodology can be perfect 

because DRG-specific costs cannot be 

determined, we believe the cost-based 

methodology we are finalizing in this 

rule represents a significant 


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improvement over the current chargebased methodology for all of the reasons 

we specified above. Under the costbased methodology in this final rule, we 

will increase payment for relatively 

underpaid cases and reduce payment for 

relatively overpaid cases. We believe 

this reform is badly needed to reduce 

the bias in the weights and make more 

appropriate payments for both medical 

and surgical DRGs. 

In order to mitigate the impact of the 

changes in the relative weights, we are 

implementing the new cost-based 

weight methodology in a 3-year 

transition, where the weights in the first 

year will be set based on 33 percent of 

the cost-based weight and 67 percent of 

the charge based weight. We will 

continue to study the HSRVcc 

methodology, the potential effects of 

charge compression and ways in which 

we can better account for severity of 

illness within the DRG system in the 

coming year. 

With respect to the changes in the 

new patient classification system, the 

proposed rule noted that we modeled 

the CS DRGs and observed a 12-percent 

increase in the explanatory power (or Rquare statistic) of the DRG system to 

explain hospital charges. That is, we 

found more uniformity among hospital 

total charges within the CS DRGs than 

we did with Medicare’s current DRG 

system (71 FR 24027). Thus, we believe 

that there is clear evidence that 

improvements can be made to the 

current DRG system that will reduce 

heterogeneity among patients within a 

given DRG. While this statistic indicates 

that the current CMS DRG system can be 

refined to improve payment accuracy, 

we agree that it does not necessarily 

mean we should adopt the system we 

proposed. For a variety of reasons 

explained further below, we believe that 

a number of factors must be considered 

in deciding how to revise the DRG 

system to better recognize severity of 

illness. 

Comment: One commenter asserted 

that CMS published incorrect and 

deficient information about the HSRVcc 

methodology, its impact on hospitals, 

and the underlying data utilized in 

developing the proposed rule. 

Specifically, the commenter believed 

the HSRVcc methodology was flawed 

and therefore stated that the published 

impacts were inaccurate. The 

commenter believed that we failed to 

comply with the Federal Data Quality 

Act, and OMB, HHS, and CMS 

Guidelines which address the quality of 

the data used for policy development, in 

particular, meeting standards of utility, 

objectivity, integrity, and transparency 

and reproducibility. Because the 

commenter believed that we have 

violated these data quality standards, 

the public was deprived of the 

opportunity to submit meaningful 

comments, as required by the 

Administrative Procedure Act (APA). 

The commenter urged CMS to take the 

appropriate steps that would result in 

the withdrawal of the FY 2007 IPPS 

proposed rule and the publication of a 

new proposed rule. 

Response: We disagree with the 

commenter’s claims that the data 

utilized in the development of the FY 

2007 IPPS proposed rule were 

materially flawed, did not comply with 

the Federal Data Quality Act, and did 

not meet established OMB, Department 

and CMS guidelines for data quality. 

The data sources used in estimating the 

payment impacts from policy changes 

proposed in the FY 2007 IPPS proposed 

rule were the HCRIS files that contain 

Medicare cost report data, the MedPAR 

files that contain Medicare claims data, 

the OSCAR database, and the PSF 

(which is maintained by the fiscal 

intermediaries and used in paying 

Medicare claims). These are the best and 

most reliable data sources available to 

CMS for modeling the impacts of policy 

changes. We note that these same 

databases are used in modeling payment 

impacts under the LTCH PPS, the OPPS, 

the IRF PPS, and the IPF PPS, as well 

as other payment systems. We also note 

that the comment period to the FY 2007 

IPPS proposed rule provided 

commenters with an opportunity to 

bring to our attention specific examples 

of incorrect or inaccurate data. In 

addition to our posting the impact files 

from the FY 2007 IPPS proposed rule on 

the CMS Web site, as always, 

commenters had access to the same 

CMS data files that we utilized through 

communication with our Office of 

Information Services (OIS). 

The fact that the data we used in the 

development of the FY 2007 IPPS 

proposed rule were available and 

transparent to the public was attested by 

the detailed data analyses included with 

a significant number of the public 

comments we received on the FY 2007 

IPPS proposed rule. Therefore, for the 

reasons stated above, we disagree with 

the commenter’s assertion that the data 

used by CMS in the FY 2007 IPPS 

proposed rule does not meet the 

transparency and reproducibility 

standards. As is the case with any 

change in policy, we do not base policy 

decisions on mere assumptions, but 

rather we analyze the relevant data and 

any comments submitted in response to 

a proposed rule. 

Comment: One commenter stated that 

it was unclear whether the weights 

published for CS DRGs included using 

the transfer-adjusted charges prior to 

calculating weights. 

Response: We used the hospital’s 

charge on the claim in the HSRVcc 

methodology. We presume the 

commenter is asking whether we 

adjusted the number of cases in setting 

the relative weights to reflect early 

transfer to either a post-acute or other 

acute care setting. We did use transferadjusted case counts when we applied 

the HSRVcc methodology for the 

relative weights that were shown in 

Table 5 of the IPPS proposed rule (71 FR 

24272) and the ‘‘Consolidated severity 

adjusted DRG HSRVcc relative weights’’

provided on the CMS Web site at: 

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

AcuteInpatientPPS/FFD/list.asp

#TopOfPage. The case mix index that 

we use to iterate the proposed FY 2007 

HSRVcc weights did not reflect a 

transfer-adjusted case count. That is, we 

used the sum of all the case weights 

divided by the total number of cases 

unadjusted for transfers to post-acute or 

other acute care settings. 

Comment: Many commenters stated 

that once a cost-based system is 

implemented, CMS should provide at 

least a three-year transition. They stated 

that a three-year transition is consistent 

with MedPAC’s recommendation to 

implement the changes to the weights 

and DRG system over a transitional 

period. Commenters recommended that 

payments be made based on a blend of 

charge and cost-based weights 

culminating with full cost-based 

weights at the completion of the 

transition period. 

Response: We have in the past 

provided for transition periods when 

adopting changes that have significant 

payment implications. Given the 

significant payment impacts upon some 

hospitals because of these changes to 

the DRG weighting methodology, we 

considered options to transition to costbased weights. We believe the potential 

payment effects from the changes to the 

DRG relative weights can be mitigated 

by adopting a 3-year transition of the 

relative weights. During the first year of 

the transition, the relative weights will 

be based on a blend of 33 percent of the 

cost-based weights and 67 percent of the 

charge weights. In the second year of the 

transition, the relative weights will be 

based on a blend of 33 percent of the 

charge weights and 67 percent of the 

cost-based weights. In the third year of 

the transition, the relative weights will 

be based on 100 percent of the costbased weights. 

Comment: One commenter asserted 

that the proposed changes to improve 


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5Medicare Payment Advisory Commission, 

‘‘Meeting Brief: Study of Hospital Charge-Setting 

Practices, ’’ September 9–10, 2004. 

payment accuracy and to provide 

payment equity between specialty and 

general hospitals do not address many 

of the differences between specialty and 

full-service hospitals. The commenter 

stated that hospitals should be 

reimbursed for the additional services 

that are required to operate a full-service 

hospital which are often unnecessary in 

a specialty hospital setting. The 

commenter acknowledged that CMS 

already provides some support to 

hospitals that serve a high percentage of 

Medicaid patients through 

disproportionate share payments. 

However, the commenter suggested that 

CMS also make add-on payments to the 

base DRG payment for expenses such as: 

operation of a full-service, 24-hour 

emergency department; operation of a 

trauma service, a burn unit, or other 

high cost medically necessary services; 

sponsoring ground and helicopter 

ambulance services; operation of 24- 

hour diagnostic services; provision of 

round the clock nursing services; and 

provision of other support services such 

as clinical pharmacists, nutritionists, 

case managers, and medical social 

workers. The commenter believed these 

add-on payments will encourage 

hospitals to maintain these services 

rather than promote specialty hospitals 

that may be able to operate at a lesser 

cost without some or all of these 

services. 

Response: Medicare does pay for all of 

these services through either the IPPS or 

OPPS payment. We disagree that add-on 

payments are necessary for services that 

are commonly provided at many 

hospitals. The costs of these services 

will be incorporated in the IPPS or 

OPPS relative weights. Rather, we 

continue to believe that Medicare’s IPPS 

payment system needs to be changed to 

make more equitable payment across all 

hospitals and decrease the incentive to 

profit from patient and DRG selection. 

Comment: A few commenters stated 

that although the DRG payment changes 

proposed by CMS seek to address the 

proliferation of physician-owned, 

limited service hospitals in response to 

recommendations by MedPAC, they do 

not believe that these payment changes 

alone will remove the inappropriate 

incentives created by physician selfreferral to limited-service hospitals. 

They stated that physicians will still 

have the ability and incentive to refer 

financially attractive patients to 

facilities they own, avoid serving lowincome patients, and encourage 

utilization of profitable services. The 

commenters urged CMS to examine the 

investment structures of physicianowned, limited service hospitals and to 

continue the moratorium on issuing 

new provider numbers to physicianowned, limited service hospitals until 

the agency’s strategic plan has been 

developed and the Congress has had the 

opportunity to consider the agency’s 

final report on the topic. 

Response: We are in the process of 

completing the Final Report to Congress 

and the Strategic and Implementing 

Plan on Specialty Hospitals, as required 

by section 5006 of the DRA. Section 

5006 of the DRA requires us to consider, 

among other things, issues of bona fide 

investment and proportionality of 

investment with respect to physician 

investment in specialty (that is, cardiac, 

orthopedic or surgical) hospitals. 

Section 5006 of the DRA also provides 

that the suspension on enrollment of 

new specialty hospitals that we 

administratively instituted on June 9, 

2005, shall expire upon the date we 

issue the final report, or, if the report is 

issued after August 8, 2006, it shall 

expire on October 8, 2006. We note that 

Congress has provided for a date certain 

for the end of the suspension on 

enrollment of new specialty hospitals. 

Furthermore, we have not identified a 

need at this time to continue the 

suspension beyond that date. 

Comment: Many commenters stated 

that CMS’s proposed HSRVcc 

methodology presented in the FY 2007 

IPPS proposed rule failed to address 

issues of ‘‘charge compression.’’ The 

commenters explained that ‘‘charge 

compression’’ describes the common 

billing practice of hospitals applying 

higher percentage markups on lower 

cost items and lower percentage 

markups on higher cost items. The 

commenters noted that MedPAC 

explained that hospitals may reduce the 

mark-ups for higher-cost items to avoid 

‘‘sticker shock.’’ 5 As discussed below, 

many commenters believed that, to the 

extent ‘‘charge compression’’ exists, the 

proposed HSRVcc methodology would 

lead to systematic differences between 

estimates of costs and Medicare’s 

payments. Therefore, the commenters 

believed that the proposal failed to 

accomplish CMS’s stated goal of setting 

the DRG weights based on accurate cost 

determinations. If the proposed 

methodology is implemented, several 

commenters believed hospitals that 

perform a large volume of procedures 

requiring relatively costly supplies/ 

procedures would be severely and 

unfairly penalized through 

inappropriately reduced Medicare DRG 

payments. The treatments they provide 

would be less likely to be provided, and 

consequently, Medicare beneficiaries’

access to care may be diminished. 

Therefore, the commenters stated that if 

CMS adopts a cost-based DRG weighting 

methodology, a more accurate measure 

of determining hospitals’ actual costs 

must be developed. 

Many commenters believed that 

‘‘charge compression’’ is a concern 

because the proposed HSRVcc 

methodology uses a single CCR for a 

variety of items and services in a 

department. Specifically, under the 

proposed HSRVcc methodology, we 

proposed to aggregate hospital-level 

departmental charges into 10 cost 

centers for each DRG, and then apply 

national average cost-center level CCRs 

to determine estimated costs. The 

commenters asserted that because most 

hospitals do not apply the same uniform 

percentage mark-up when setting the 

charges of each item in the department, 

the proposed HSRVcc methodology 

underestimates the cost of relatively 

more expensive items (particularly 

devices and implants) and overestimates 

the cost of relatively less expensive 

items. The commenters believed that the 

use of a single CCR for a variety of 

different items results in a systematic 

distortion of the estimated costs, and 

consequently the DRG relative weights 

that are used in determining the IPPS 

payment rates. Specifically, many 

commenters stated that the HSRVcc 

methodology has a disproportionate 

adverse impact on DRGs that include 

implantable technologies and devices, 

and in some cases would result in 

Medicare reimbursement that is less 

than the actual cost of the device. 

Some commenters discussed cost data 

research that has been performed since 

the implementation of the OPPS to 

determine the causes and effects of 

‘‘charge compression.’’ The commenters 

asserted that OPPS payment rates are 

also affected by charge compression. 

Specifically, one commenter recently 

commissioned research to investigate 

whether Medicare claims data provided 

statistical evidence of ‘‘charge 

compression.’’ (This research was 

summarized in an executive summary 

by Christopher Hogan of Direct 

Research, LLC. entitled ‘‘A Proposed 

Solution for Charge Compression.’’) 

Many other commenters cited this 

recent research in their own comments, 

and recommended that the results of 

this research be used to develop an 

adjustment under the proposed HSRVcc 

methodology to account for ‘‘charge 

compression.’’ This analysis utilized the 

detailed coding of charges for supplies 

by revenue center on the Medicare 

claims data in the Standard Analytical 

Files (SAF) to divide the single costVerDate Aug<31>2005 16:09 Aug 17, 2006 Jkt 208001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 E:\FR\FM\18AUR2.SGM 18AUR2

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center CCR for ‘‘supplies and 

equipment’’ used under the proposed 

HSRVcc methodology into separate costcenter CCRs for 5 supplies subcategories 

(general supplies; implantables; sterile 

supplies; pacemakers and defibrillators; 

and all other supplies) based on a 

‘‘strong statistical association between 

mix of charges for supplies (by revenue 

center) in a hospital and the [overall] 

supplies CCR in a hospital.’’ Using these 

data from all hospitals, a regression 

analysis yielded a single ‘‘set of CCR 

adjustments reflecting national average 

CCRs for [each of] the [five supplies] 

sub-categories.’’ This national-average 

set of adjustments is applied to each 

hospital (and combined with each 

hospital’s actual supplies CCR) to 

determine an adjusted estimate of cost 

on each hospital’s claim in the MedPAR 

file. The results of this research showed 

that this variation in CCRs across the 

supplies subcategories would result in 

weights for some DRGs being 

significantly different than under the 

HSRVcc methodology. In particular, the 

methodology advocated by Hogan 

would increase the relative weights ‘‘for 

DRGs with substantial charges in the 

implantable devices and pacemaker/ 

defibrillator revenue centers.’’

The commenters pointed out that the 

results of this research are consistent 

with previous analyses demonstrating 

‘‘charge compression’’ in hospitals’

billing patterns. The commenters also 

noted that this research was conducted 

exclusively on Medicare claims data, 

without supplementation with any 

external data. The commenters believed 

that this research demonstrates that an 

adjustment for ‘‘charge compression’’ is 

possible. They further asserted that the 

research provides a solid analytical 

basis for a specific adjustment. The 

commenters advocated that we use the 

coefficients from this regression analysis 

to develop a ‘‘data-driven’’ adjustment 

to the CCRs for the supplies and 

equipment to address the distortion 

caused by ‘‘charge compression.’’

Another commenter supported the 

idea of a ‘‘charge compression’’

adjustment but suggested that CMS 

should ensure appropriate stakeholder 

involvement before applying such a 

policy. Other commenters also 

advocated for the use of data from the 

SAF to analyze the relationship between 

costs and charges for non-implantable 

supplies and equipment to determine 

whether an adjustment to the medicalsurgical supplies cost center on the 

MedPAR files to account for ‘‘charge 

compression’’ is also warranted. 

As a result of the concerns discussed 

above, many commenters stated that any 

change toward a cost-based DRG 

weighting methodology under the IPPS 

must address the distortion caused by 

‘‘charge compression’’ and must ensure 

that the methodology utilizes accurate 

cost determinations. Consequently, 

some commenters requested a delay in 

the implementation of the cost-based 

DRG weighting methodology until an 

adjustment for ‘‘charge compression’’

can be incorporated. In addition, some 

commenters stated that such an 

adjustment should also be used to 

address ‘‘charge compression’’ under 

the OPPS. Several commenters 

recommended that, in addition to 

including an adjustment for ‘‘charge 

compression,’’ the methodology for 

determining the cost-based DRG relative 

weights be developed without 

employing the HSRV methodology. 

However, a few other commenters 

endorsed the proposed HSRVcc 

methodology, stating that the ‘‘HSRVcc 

methodology more closely represents 

the cost of providing services than the 

current charge-based system.’’

Several commenters referenced 

various research studies on this issue 

undertaken over the past 5 to 6 years. 

These commenters asserted that the 

research supports the existence of 

‘‘charge compression’’ and its systemic 

distortion in payment rates. The 

commenters also stated that ‘‘although 

evidence of the effect of charge 

compression is not new,’’ research that 

could support an adjustment to offset 

charge compression was not available. 

However, according to the commenters, 

‘‘research just completed now presents 

a solution.’’

Response: We appreciate the 

commenters’ concerns regarding charge 

compression and its impact on the 

relative weight calculations under the 

proposed HSRVcc methodology. We are 

interested in further studying the 

analytic technique suggested in the 

comments of using a regression analysis 

to identify adjustments that could be 

made to the CCRs to account for charge 

compression. We note that the Hogan 

study’s regression model was only 

applied to expensive medical supplies 

and devices and was not applied 

uniformly to develop potential 

adjustments that could be made to costs 

and charges across all revenue and cost 

centers that could potentially be subject 

to charge compression. If such a model 

were to be applied, we believe further 

analysis would have to be undertaken to 

determine whether it should apply to all 

costs and revenue centers. At this time, 

we intend to research whether a 

rigorous model should allow an 

adjustment for ‘‘charge compression’’ to 

the extent it exists. Accordingly, we 

have engaged a contractor to undertake 

a study on charge compression and 

review the statistical models provided 

to us by the commenters. To the extent 

that we find ‘‘charge compression’’

exists, we will further study potential 

models that could adjust for it so we can 

develop more accurate systems of costbased weights to better reflect the 

relative costs of the different types of 

services provided under the IPPS. As 

suggested in the comments, we plan to 

fully involve appropriate stakeholders 

in future analysis of this issue to the 

extent feasible. Before implementing 

such an adjustment, we would fully 

describe our analysis and a potential 

proposed adjustment as part of the IPPS 

proposed rule for FY 2008. 

Further, we intend to use the charge 

compression study that we will conduct 

over the next year as an opportunity to 

better understand the costs of medical 

devices. The United States faces a 

dilemna in health care. Although the 

rate-of-increase in health care spending 

slowed last year, costs are still growing 

at an unsustainable rate. One reason 

health care costs are rising so quickly is 

that most consumers of health care are 

frequently not aware of the actual cost 

of their care due to lack of transparency. 

We believe that cost, quality, and 

patient satisfaction information should 

be available across the spectrum of care. 

Transparency of device pricing is a 

key aspect of consumer understanding 

of the cost of health care. We believe 

that the enhanced understanding of 

device pricing that will be brought 

about as part of our charge compression 

study will help accelerate the public 

release, in a consumer friendly fashion, 

of pricing information of medical 

devices. The public release of device 

pricing will help augment our overall 

efforts to empower consumers with 

better information on the health care 

they require. 

In addition, we note that in order to 

mitigate the impact of adopting a 

revised methodology for calculating 

DRG weights, we are standardizing 

charges for MedPAR claims using the 

same methodology we have used in past 

years, rather than using the HSRV 

methodology. However, as discussed in 

detail in section II.E. of this preamble to 

the final rule, we are adopting our 

proposal to adjust charges to account for 

costs prior to establishing DRG weights. 

However, we anticipate undertaking 

further analysis of the hospital-specific 

methodology over the next year in 

conjunction with the research we are 

doing on charge compression. If our 

analysis suggests that an adjustment for 

charge compression should be applied 

and/or that the hospital-specific 

methodology will result in relative 


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weights that more closely approximate 

the relative costs of care, we will 

propose further changes for FY 2008. In 

the interim, we are further mitigating 

the potential payment effects from the 

changes to the DRG relative weights by 

adopting a 3-year transition of the 

relative weights. During the first year of 

the transition, the relative weights will 

be based on a blend of 33 percent of the 

cost-based weights and 67 percent of the 

charge weights. In the second year of the 

transition, the relative weights will be 

based on a blend of 33 percent of the 

charge weights and 67 percent of the 

cost-based weights. In the third year of 

the transition, the relative weights will 

be based on 100 percent of the costbased weights. 

3. Refinement of DRGs Based on 

Severity of Illness 

For purposes of the following 

discussions, the term ‘‘CMS DRGs’’

means the DRG system we currently use 

under the IPPS; the term ‘‘APR DRGs’’

means the severity DRG system 

designed by 3M Health Information 

Systems that currently is used by the 

State of Maryland; and the term 

‘‘consolidated severity-adjusted DRGs 

(CS DRGs)’’ means the DRG system 

based on a consolidated version of the 

APR DRGs (as described in detail 

below). We discussed the CS DRGs in 

the FY 2007 IPPS proposed rule and 

solicited public comments on whether 

there are alternative DRG systems that 

could result in better recognition of 

severity than the CS DRGs we were 

proposing. As we made clear in the 

proposed rule, there are still further 

changes that are important to make to 

the CS DRG system before it is ready for 

adoption. In the remainder of this final 

rule, ‘‘CS DRGs’’ refers to the DRG 

system we analyzed and proposed for 

adoption in FY 2008. However, as we 

indicate below, we received a number of 

public comments about the proposed CS 

DRGs, potential alternatives, and a 

number of other issues related to our 

proposal. Below we summarize those 

comments, respond to the comments, 

and present our plans for adopting a 

severity-adjusted DRG system for FY 

2008. 

In the FY 2006 IPPS final rule (70 FR 

47474), we stated that we would 

consider making changes to the CMS 

DRGs to better reflect severity of illness 

among patients. We indicated that we 

would conduct a comprehensive review 

of the CC list as well as consider the 

possibility of using the APR DRGs for 

FY 2007. We did not adopt APR DRGs 

for FY 2006 because such an adoption 

would represent a significant 

undertaking that could have a 

substantial effect on all hospitals. There 

was insufficient time between the 

release of the MedPAC report in March 

2005 and the publication of the FY 2006 

IPPS final rule for us to analyze fully a 

change of this magnitude. Instead, we 

adopted a more limited policy by 

implementing severity-adjusted cardiac 

DRGs. 

After publication of the FY 2006 IPPS 

final rule, CMS contracted with 3M 

Health Information Systems to further 

analyze the MedPAC recommendations 

in support of our consideration of 

possible changes to the IPPS for FY 

2007. Under one task of this contract, 

3M Health Information Systems 

analyzed the feasibility of using a 

revised DRG system under the IPPS that 

is modeled on the APR DRGs Version 23 

to better recognize severity of illness. 

The APR DRGs have been used 

successfully as the basis of Belgium’s 

hospital prospective global budgeting 

system since 2002. The State of 

Maryland began using APR DRGs as the 

basis of its all-payer hospital payment 

system in July 2005. More than a third 

of the hospitals in the United States are 

already using APR DRG software to 

analyze comparative hospital 

performance. Many major health 

information system vendors have 

integrated this system into their 

products. Several State agencies utilize 

the APR DRGs for the public 

dissemination of comparative hospital 

performance reports. APR DRGs have 

been widely applied in policy and 

health services research. In addition to 

being used in research by MedPAC, the 

APR DRGs also contain a separate 

measure of risk of mortality that is used 

in the Quality Indicators of the Agency 

for Healthcare Research and Quality, the 

Premier Hospital Quality Incentive 

Demonstration discussed in section 

IV.B. of this preamble, and the Joint 

Commission on Accreditation of 

Healthcare Organizations (JCAHO) 

hospital accreditation survey process 

(Shared Visions-New Pathways). 

Below we present a comparison of the 

CMS DRG system and the APR DRG 

system. 

a. Comparison of the CMS DRG System 

and the APR DRG System 

The CMS DRG and APR DRG systems 

have a similar basic structure. There are 

25 MDCs in both systems. The DRG 

assignments for both systems are based 

on the reporting of ICD–9–CM diagnosis 

and procedure codes. Both DRG systems 

are composed of a base DRG that 

describes the reason for hospital 

admission and a subdivision of the base 

DRG based on other patient attributes 

that affect the care of the patient. For 

surgical patients, the base DRG is 

defined based on the type of procedure 

performed. For medical patients, the 

base DRG is defined based on the 

principal diagnosis. In Version 23.0 of 

the CMS DRG system, there are 367 base 

DRGs and 526 total DRGs. In Version 23 

of the APR DRG system, there are 314 

base DRGs and 1,258 total APR DRGs. 

Some of the base DRGs in the two 

systems are virtually identical. For 

example, there is no significant 

difference between the base DRG under 

both systems for medical treatment of 

congestive heart failure. For other base 

DRGs, there are substantial differences. 

For example, in the CMS DRG system, 

there are two base DRGs for 

appendectomy (simple and complex); in 

the APR DRG system, there is only one 

base DRG for appendectomy (the 

relative complexity of the patient is 

addressed in the subsequent subdivision 

of the base DRG into severity of illness 

subclasses). 

The focus of the CMS DRGs is on 

complexity. Complexity is defined as 

the relative volume and types of 

diagnostic, therapeutic, and bed services 

required for the treatment of a particular 

illness. Thus, the focus of payment in 

the CMS DRG system reflects the 

relative resource use needed by the 

patient in one DRG group compared to 

another. Resource use is generally 

correlated with severity of illness but 

intensive resource use does not 

necessarily indicate a high level of 

severity in every case. It is possible that 

some patients will be resource-intensive 

and require high-cost services even 

though they are less severely ill than 

other patients. The CMS DRG system 

subdivides the base DRGs using age and 

the presence of a secondary diagnosis 

that represents a CC. The age 

subdivisions primarily relate to 

pediatric patients (those who are less 

than 18 years of age). Patients are 

assigned to the CC subgroup if they have 

at least one secondary diagnosis that is 

considered a CC. The diagnoses that are 

designated as CCs are the same across 

all base DRGs. The subdivisions of the 

base CMS DRGs are not uniform: Some 

base DRGs have no subdivision; some 

base DRGs have a two-way subdivision 

based on the presence of a CC; and other 

base DRGs have a three-way subdivision 

based on a pediatric subdivision 

followed by a CC subdivision of the 

adult patients. In addition, some base 

DRGs in MDC 5 (Diseases and Disorders 

of the Circulatory System) have a 

subdivision based on the presence of a 

major cardiovascular condition or 

complex diagnosis. 

The APR DRG system subdivides the 

base DRGs by adding four severity of 


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illness subclasses to each DRG. Under 

the APR DRG system, severity of illness 

is defined as the extent of physiologic 

decompensation or organ system loss of 

function. The underlying clinical 

principle of APR DRGs is that the 

severity of illness of a patient is highly 

dependent on the patient’s underlying 

problem and that patients with high 

severity of illness are usually 

characterized by multiple serious 

diseases or illnesses. The assessment of 

the severity of illness of a patient is 

specific to the base APR DRG to which 

a patient is assigned. In other words, the 

determination of the severity of illness 

is disease-specific. High severity of 

illness is primarily determined by the 

interaction of multiple diseases. Patients 

with multiple comorbid conditions 

involving multiple organ systems are 

assigned to the higher severity of illness 

subclasses. The four severity of illness 

subclasses under the APR DRG system 

are numbered sequentially from 1 to 4, 

indicating minor (1), moderate (2), 

major (3), and extreme (4) severity of 

illness. 

The APR DRG system does not 

subdivide base DRGs based on the age 

of the patient. Instead, patient age is 

used in the determination of the severity 

of illness subclass. In the CMS DRG 

system, the CC list is generally the same 

across all base DRGs. However, there are 

CC list exclusions for secondary 

diagnoses that are related to the 

principal diagnosis. In the APR DRG 

system, the significance of a secondary 

diagnosis is dependent on the base DRG. 

For example, an infection is considered 

more significant for an immunesuppressed patient than for a patient 

with a broken arm. The logic of the CC 

subdivision in the CMS DRG system is 

a simple binary split for the presence or 

absence of a CC. In the APR DRG 

system, the determination of the 

severity subclass is based on an 18-step 

process that takes into account 

secondary diagnoses, principal 

diagnosis, age, and procedures. The 18 

steps are divided into three phases. 

There are six steps in Phase I, three 

steps in Phase II, and nine steps in 

Phase III. 

The diagram below illustrates the 

three-phase process for determining 

patient severity of illness subclass. 

BILLING CODE 4120–01–P 


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Under the CMS DRG system, a patient 

is assigned to the DRG with CC if there 

is at least one secondary diagnosis 

present that is a CC. There is no 

recognition of the impact of multiple 

CCs. Under the APR DRG system, high 

severity of illness is primarily 

determined by the interaction of 

multiple diseases. Under the CMS DRG 


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system, patients are assigned to an MDC 

based on their principal diagnosis. 

While the principal diagnosis is 

generally used to assign the patient to 

an MDC in the APR DRG system, there 

is a rerouting step that assigns some 

patients to another MDC. For example, 

lower leg amputations can be performed 

for circulatory, endocrine, or 

musculoskeletal principal diagnoses. 

Instead of having three separate 

amputation base DRGs in different 

MDCs as is done in the CMS DRG 

system, the APR DRG system reroutes 

all of these amputation patients into a 

single base APR DRG in the 

musculoskeletal MDC. The CMS DRG 

system uses death as a variable in the 

DRG definitions but the APR DRG 

system does not. Both DRG systems are 

based on the information contained in 

the Medicare Uniform Bill. The APR 

DRG system requires the same 

information used by the current CMS 

DRG system. No changes to the claims 

form or the data reported would be 

necessary if CMS were to adopt APR 

DRGs or a variant of them. 

The CMS DRG structure makes some 

DRG modifications difficult to 

accommodate. For example, high 

severity diseases that occur in low 

volume are difficult to accommodate 

because the only choice is to form a 

separate base DRG with relatively few 

patients. Such an approach could lead 

to a proliferation of low-volume DRGs. 

Alternatively, these cases may be 

included in DRGs with other patients 

that are dissimilar clinically or in costs. 

Requests for new base DRGs formed on 

the use of a specific technology may 

also be difficult to accommodate. Base 

DRGs formed based on the use of a 

specific technology would result in the 

payment weight for the DRG being 

dominated by the price set by the 

manufacturer for the technology. 

The structure of the APR DRGs 

provides a means of addressing high 

severity cases that occur in low volume 

through assignment of the case to a 

severity of illness subclass. However, 

the APR DRG structure does not 

currently accommodate distinctions 

based on complexity. Technologies that 

represent increased complexity, but not 

necessarily greater severity of illness, 

are not explicitly recognized in the APR 

DRG system. For example, in the CMS 

DRGs, there are separate DRGs for 

coronary angioplasty with or without 

insertion of stents. The APR DRGs do 

not make such a differentiation. The 

insertion of the stent makes the patient’s 

case more complex but does not mean 

the patient is more severely ill. 

However, the inability to insert a stent 

may be indicative of a patient’s more 

advanced coronary artery disease. 

Although such conflicts are relatively 

few in number, they do represent an 

underlying difference between the two 

systems. If Medicare were to adopt a 

severity DRG system based on the APR 

DRG logic but assign cases based on 

complexity as well as severity as we do 

under the current Medicare DRG 

system, such a distinction would 

represent a departure from the exclusive 

focus on severity of illness that 

currently forms the basis of assigning 

cases in the APR DRG system. 

Section 1886(d)(4) of the Act specifies 

that the Secretary must adjust the 

classifications and weighting factors at 

least annually to reflect changes in 

treatment patterns, technology, and 

other factors that may change the 

relative use of hospital resources. 

Therefore, we believe a method of 

recognizing technologies that represent 

increased complexity, but not 

necessarily greater severity of illness, 

should be included in the system. We 

plan to develop criteria for determining 

when it is appropriate to recognize 

increased complexity in the structure of 

the DRG system and how these criteria 

interact with the existing statutory 

provisions for new technology add-on 

payments. In the FY 2007 IPPS 

proposed rule, we invited public 

comments on this particular issue. 

Another difference between the CMS 

DRG system and the APR DRG system 

is the assignment of diagnosis codes in 

category 996 (Complications peculiar to 

certain specified procedures). The CMS 

DRG system treats virtually all of these 

codes as CCs. With the exceptions of 

complications of organ transplant and 

limb reattachments, these complication 

codes do not contribute to the severity 

of illness subclass in the APR DRG 

system. While these codes could be 

added to the severity logic, the 

appropriateness of recognizing codes 

such as code 998.4 (Foreign body 

accidentally left during a procedure) as 

a factor in payment calculation could 

create the appearance of incentives for 

less than optimal quality. Although 

there is no direct recognition of the 

codes under the 996 category, the 

precise complication, in general, can be 

coded separately and could contribute 

to the severity of illness subclass 

assignment. 

Comment: Some commenters strongly 

supported including the complication 

codes (996.00–999.9) when assigning a 

patient to a severity-adjusted DRG 

because the codes represent pre-existing 

or predictably higher risks upon 

admission for difficult patients who are 

typically referred to regional centers. 

The commenters stated that failure to do 

so will create new incentives for adverse 

admission selection and underpay 

hospitals that treat difficult patients. 

The commenters stated that the 996 

codes include some complications that 

should never be paid (for example, 

wrong site surgery and instruments left 

in the patient). However, the 

commenters indicated that these kinds 

of complications likely constitute less 

than one-half of one percent of all 

complications and revising the DRG 

system so that all 996 codes are not paid 

will provide incentives to hospitals to 

avoid admitting patients that are at high 

risk because of a pre-existing condition 

or other circumstance. Another 

commenter stated that all infections 

should be removed as complicating 

conditions under the DRG system. 

Response: The discussion in this 

section of the proposed rule noted that 

996 codes are used in assigning a 

patient to a CMS DRG but not to an APR 

DRG. Although the discussion in this 

section of the proposed rule did indicate 

that using these codes to assign a patient 

to a DRG may raise questions about 

incentives for less than optimal quality, 

the discussion was only intended to 

note the differences that currently exist 

between the CMS and the APR DRGs. 

The commenters raised issues that 

require further study. We will consider 

quality of care issues and payment 

incentives as we consider how to 

implement section 5001(c) of Pub. L. 

109–171 with respect to hospital 

acquired conditions, including 

infections. There is a more detailed 

discussion of this provision of the law 

in a later section of this final rule. 

Table B below summarizes the 

differences between the two DRG 

systems: 

TABLE B.—COMPARISON OF THE CMS DRG SYSTEM AND THE APR DRG SYSTEM

Element CMS DRG System APR DRG System 

Number of base DRGs ......................................................................................... 367 ........................................................ 314 

Total number of DRGs ......................................................................................... 526 ........................................................ 1,258 

Number of CC (severity) subclasses ................................................................... 2 ............................................................ 4 


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TABLE B.—COMPARISON OF THE CMS DRG SYSTEM AND THE APR DRG SYSTEM—Continued 

Element CMS DRG System APR DRG System 

Multiple CCs recognized ...................................................................................... No ......................................................... Yes. 

CC assignment specific to base DRG ................................................................. No ......................................................... Yes. 

Logic of CC subdivision ....................................................................................... Presence or absence ............................ 18-step process. 

Logic of MDC assignment .................................................................................... Principal diagnosis ................................ Principal diagnosis 

with rerouting. 

Death used in DRG definitions ............................................................................ Yes ........................................................ No. 

Data requirements ................................................................................................ Hospital claims ...................................... Hospital claims. 

To illustrate the differences between 

the two DRG systems, we compare in 

Table C below four cases that have been 

assigned to CMS DRGs and APR DRGs. 

In all four cases, the patient is a 67-yearold who is admitted for diverticulitis of 

the colon and who has a multiple 

segmental resection of the large 

intestine performed. ICD–9–CM 

diagnosis code 562.11 (Diverticulitis of 

colon (without mention of hemorrhage)) 

and ICD–9–CM procedure code 45.71 

(Multiple segmental resection of large 

intestine) would be reported to capture 

this case. In both DRG systems, the 

patient would be assigned to the base 

DRG for major small and large bowel 

procedures. These four cases would fall 

into two different CMS DRGs and four 

different APR DRGs. We include 

Medicare average charges in the table to 

illustrate the differences in hospital 

resource use. 

Case 1: The patient receives only a 

secondary diagnosis of an ulcer of anus 

and rectum (ICD–9–CM diagnosis code 

569.41). Under the CMS DRG system, 

the patient is assigned to base DRG 149 

(Major Small and Large Bowel 

Procedures Without CC). Under the APR 

DRG system, the patient is assigned to 

base DRG 221 (Major Small and Large 

Bowel Procedures) with a severity of 

illness subclass of 1 (minor). 

Case 2: The patient receives a 

secondary diagnosis of an ulcer of anus 

and rectum and an additional secondary 

diagnosis of unspecified intestinal 

obstruction (ICD–9–CM diagnosis code 

560.9). Under the CMS DRG system, the 

patient is assigned to DRG 148 (Major 

Small and Large Bowel Procedures With 

CC). Under the APR DRG system, the 

patient is assigned to base DRG 221 and 

the severity of illness subclass increases 

to 2 (moderate). 

Case 3: The patient receives multiple 

secondary diagnoses of an ulcer of anus 

and rectum, unspecified intestinal 

obstruction, acute myocarditis (ICD–9–

CM diagnosis code 422.99), and 

atrioventricular block, complete (ICD–

9–CM diagnosis code 426.0). Under the 

CMS DRG system, the patient is 

assigned to DRG 148. Under the APR 

DRG system, the patient is assigned to 

base DRG 221 and the severity of illness 

subclass increases to 3 (major). 

Case 4: The patient receives multiple 

secondary diagnoses of an ulcer of anus 

and rectum, unspecified intestinal 

obstruction, acute myocarditis, 

atrioventricular block, complete, and 

the additional diagnosis of acute renal 

failure, unspecified (ICD–9–CM 

diagnosis code 584.9). Under the CMS 

DRG system, the patient is assigned to 

DRG 148. Under the APR DRG system, 

the patient is assigned to base DRG 221 

and the severity of illness subclass 

increases to 4 (extreme). 

TABLE C.—EXAMPLE OF SAMPLE CASES ASSIGNED UNDER THE CMS DRG SYSTEM AND UNDER THE APR DRG SYSTEM

Principal diagnosis code: 562.11 

Procedure code: 45.71 

CMS DRG System APR DRG System 

DRG assigned Average 

charge DRG assigned Average charge 

Case 1—Secondary Diagnosis: 569.41 .......................................... 149 without CC .......... $25,147 221 with severity of illness subclass 1.$25,988 

Case 2—Secondary Diagnoses: 569.41, 560.9 ............................. 148 with CC ............... 59,519 221 with severity of illness subclass 2.38,209 

Case 3—Secondary Diagnoses: 569.41, 560.9, 422.99, 426.0 ..... 148 with CC ............... 59,519 221 with severity of illness subclass 3.66,597 

Case 4—Secondary Diagnoses: 569.41, 560.9, 422.99, 426.0, 

584.9.

148 with CC ............... 59,519 221 with severity of illness subclass 4.130,750 

The largest significant difference in 

average charges is seen in case 4 where 

the average charge under the APR DRG 

assigned to the patient ($130,750) is 

more than double the average charge 

under the CMS DRG assigned to the 

patient ($59,519). 

b. CS DRGs for Use in the IPPS 

APR DRGs were developed to 

encompass all-payer patient 

populations. As a result, we found that, 

for the Medicare population, some of 

the APR DRGs have very low volume. 

MedPAC noted that the larger number of 

DRGs under a severity-weighted system 

might mean that CMS would be faced 

with establishing weights in many 

categories that have few cases and, thus, 

potentially creating unstable estimates. 

While volume is an important 

consideration in evaluating any 

potential consolidation of APR DRGs for 

use under the IPPS, we believe that 

hospital resource use and clinical 

interpretability also need to be taken 

into consideration. For example, any 

consolidation of severity of illness 

subclasses within a base DRG should be 

restricted to contiguous severity of 

illness subclasses. Thus, it would not be 

reasonable clinically to combine 

severity of illness subclasses 1 and 4 

solely because both consist of lowvolume cases. We analyzed 

consolidating APR DRGs by either 

combining the base DRGs or the severity 

of illness subclasses within a base DRG. 

For consolidation across base APR 

DRGs, we considered patient volume, 

similarity of hospital charges across all 

four severity of illness subclasses and 


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clinical similarity of the base APR 

DRGs. For consolidations of severity of 

illness subclasses within a base DRG, 

we considered patient volume and the 

similarity of hospital charges between 

severity of illness subclasses. In 

considering how to consolidate severity 

of illness subclasses, we believed it was 

important to use uniform criteria across 

all DRGs to avoid creating confusing 

and difficult to interpret results. That is, 

we were concerned about 

inconsistencies in the number of 

severity levels across different DRGs. 

The objective to simultaneously take 

into consideration patient volume and 

average charges often produced conflict. 

Table D below contains the overall 

patient volume and average charge by 

APR DRG severity of illness subclass. 

While severity of illness subclass 4 

(extreme) has the lowest patient volume 

of 5.80 percent, we found that the 

dramatically different average charges 

between severity of illness subclass 3 

(major) and subclass 4 (extreme) 

patients of approximately $32,426 and 

$81,952, respectively, would make it 

difficult to consolidate severity of 

illness subclass 3 and 4 patients. 

Conversely, we found that, while the 

average charge difference between 

severity of illness subclass 1 (minor) 

and 2 (moderate) patients was much 

smaller, of approximately $17,649 and 

$20,021, respectively, the majority of 

patient volume (68.08 percent) is in 

these two subclasses. Thus, low patient 

volume and small average charge 

differences rarely coincided. 

TABLE D.—OVERALL AVERAGE CHARGES AND PATIENT VOLUME BY APR DRG SEVERITY OF ILLNESS SUBCLASS

All cases 

APR DRG 

Severity of 

illness 

Subclass 1 

APR DRG 

Severity of 

illness 

Subclass 2 

APR DRG 

Severity of 

illness 

Subclass 3 

APR DRG 

Severity of 

illness 

Subclass 4 

Number of Cases ....................................................... 11,142,651 21.47% 46.61% 26.12% 5.80% 

Average Charges ....................................................... $26,342 $17,649 $20,021 $32,426 $81,952 

There were also few opportunities to 

consolidate base DRGs. For base DRGs 

in which there was a clinical basis for 

considering a consolidation, there were 

usually significant differences in 

average charges for one or more of the 

severity of illness subclasses. APR DRGs 

already represented a considerable 

consolidation of base DRGs (314) 

compared to CMS DRGs (367). Thus, we 

expected that further base DRG 

consolidation would be difficult. 

We reviewed the patient volume and 

average charges across APR DRGs and 

found that medical cases assigned 

severity of illness subclass 4 within an 

MDC have similar average charges. We 

observed the same pattern in average 

charges across severity of illness 

subclass 4 surgical patients within an 

MDC. The data suggest that, in cases 

with a severity of illness of subclass 4, 

the severity of the cases had more 

impact on hospital resource use than the 

reason for admission (that is, the base 

APR DRG within an MDC). Thus, we 

believe that, within each MDC, the 

severity of illness subclass 4 medical 

and surgical patients, respectively, 

could be consolidated into a single 

group. 

In some MDCs, it was not possible to 

consolidate into a single medical and a 

single surgical severity of illness 

subclass 4 group. In these MDCs, more 

than one group was necessary. For 

instance, Table E below contains the 

patient volume and average charges for 

severity of illness subclass 4 cases in 

MDC 11 (Diseases and Disorders of the 

Kidney and Urinary Tract). Taking into 

consideration volume and average 

charges, except for APR DRG 440 

(Kidney Transplant), surgical cases 

assigned severity of illness subclass 4 in 

MDC 11 could be consolidated into a 

single group having 5,492 patients and 

an average charge of $107,258. However, 

we decided not to include kidney 

transplant patients in this severity of 

illness subclass 4 due to their very high 

average charges (approximately 

$203,732 or more than $100,000 greater 

than other patients in MDC 11 having a 

severity of illness subclass 4). Average 

charges within the consolidated severity 

of illness subclass 4 surgical DRG in 

MDC 11 show some variation but are 

much higher than the corresponding 

average charges for the severity of 

illness subgroup 3 patients of $48,863. 

Thus, our analysis suggests that the data 

support maintaining three severity of 

illness levels for each base DRG in MDC 

11; a separate severity of illness subclass 

4 for all patients other than those having 

kidney transplant; and a separate DRG 

for kidney transplants. 

TABLE E.—SUMMARY STATISTICS FOR SURGICAL CASES WITH SEVERITY OF ILLNESS SUBCLASS 4 IN MDC 11 

APR DRG Number of 

cases 

Average 

length of 

stay 

Average 

total 

charges 

440 (Kidney Transplant) ........................................................................................................................ 378 18.0 $203,732 

441 (Major Bladder Procedures) ........................................................................................................... 528 21.5 128,729 

442 (Kidney & Urinary Tract Procedure for Malignancy) ...................................................................... 833 16.6 101,501 

443 (Kidney & Urinary Tract Procedure for Non-Malignancy) .............................................................. 966 18.4 103,905 

444 (Renal Dialysis Access Device Procedure Only—Severity of Illness Subclass 4) ....................... 935 18.3 104,249 

445 (Other Bladder Procedures) ........................................................................................................... 186 15.2 80,197 

446 (Urethral & Transurethral Procedure—Severity of Illness Subclass 4) ......................................... 492 13.4 73,110 

447 (Other Kidney, Urinary Tract & Related Procedures) .................................................................... 1,552 19.3 121,011 

The consolidation of severity of 

illness subclass 4 APR DRG into fewer 

groups was done for all MDCs except 

MDC 15 (Newborn and Other Neonates 

With Conditions Originating in the 

Perinatal Period), MDC 19 (Mental 

Diseases and Disorders), and MDC 20 

(Alcohol/Drug Use and Alcohol/Drug 

Induced Organic Mental Disorders). In 

the 22 MDCs in which the severity of 

illness subclass 4 consolidation was 

applied, the number of separate severity 


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of illness subclass 4 groups was reduced 

from 262 to 69. 

For MDC 14 (Pregnancy, Childbirth, 

and Puerperium), the base APR DRGs 

were consolidated from 12 to 6. Severity 

of illness subclass 1 through 3 were 

retained, and severity of illness subclass 

4 was consolidated into a single APR 

DRG, except for cesarean section and 

vaginal deliveries, which were 

maintained as separate APR DRGs. This 

consolidation reduced the total number 

of obstetric APR DRGs from 48 to 22. 

The Medicare patient volume in MDC 

15 was very low, allowing for a more 

aggressive consolidation. For MDC 15, 

we consolidated 28 base APR DRGs into 

7 base CS DRGs. For each of the 7 

consolidated base MDC 15 DRGs, we 

combined severity of illness subclasses 

1 and 2 into one DRG and severity of 

illness subclass 3 and 4 into another 

DRG. This consolidation reduced the 

total number of MDC 15 DRGs from 112 

in the APR DRG system to 14 CS DRGs. 

In MDC 19, we consolidated 12 base 

DRGs into 4 base DRGs. We retained the 

4 severity of illness subclasses in MDC 

19 for each of the 4 base DRGs. In MDC 

20, the base APR DRG for patients who 

left against medical advice has severity 

of illness subclass 1 and 2 consolidated 

and severity of illness subclass 3 and 4 

consolidated. The remaining 4 base 

DRGs were consolidated into 1 base 

DRG with 4 severity of illness 

subclasses. 

We did not consolidate any of the preMDC subclass 4 APR DRGs such as 

Heart Transplant. As explained earlier, 

pre-MDC DRGs are DRGs to which cases 

are directly assigned on the basis of 

ICD–9–CM procedure codes. These 

DRGs are for liver and/or intestinal 

transplants, heart and/or lung 

transplants, bone marrow transplants, 

pancreas transplants, and 

tracheotomies. For the pre-MDC DRGs, 

except for Bone Marrow Transplant, we 

consolidated severity of illness 

subclasses 1 and 2 into one DRG. In 

addition, the three base APR DRGs for 

Human Immunodeficiency Virus (HIV) 

with multiple or major HIV-related 

conditions had severity of illness 

subclasses 1 and 2 consolidated. 

In total, we reduced 1,258 APR DRGs 

to 861 CS DRGs. In Appendix C of this 

proposed rule, we present the 861 

unique combinations of CS DRGs. 

Table F below includes a description 

of the consolidations that we did within 

each individual MDC and includes 

information about the total number of 

DRGs that were eliminated from the 

APR DRGs to develop the CS DRGs. 

BILLING CODE 4120–01–P 


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Appendix D of the FY 2007 IPPS 

proposed rule (71 FR 24433) showed the 

crosswalk of each CS DRG to its 

respective APR DRG. We numbered the 

DRGs sequentially and incorporated the 

severity of illness subclass into the DRG 


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description. However, within the range 

of sequential numbers used for an MDC, 

we retained some unused numbers to 

allow for future DRG expansion. By 

using a three-digit number for the CS 

DRGs, we also avoid the need for 

reprogramming of computer systems 

that would be necessary to 

accommodate a change from the current 

three-digit DRG number to separate 

fields for the base CS DRG number and 

the severity of illness subclass. 

Severity DRGs represent a significant 

change from our current DRG system. In 

addition to changing the way claims are 

grouped, severity DRGs introduce other 

issues requiring additional analysis, 

including possible increases in reported 

case-mix and changes to the outlier 

threshold. Our analysis of these issues 

is outlined further in the next section. 

Comment: A number of commenters 

suggested further refinements that need 

to be made to the CS DRGs to account 

for complexity as well as severity. 

Commenters recommended that CMS 

create a ‘‘task force’’ to analyze 

situations in which the complexity of 

the patients is not always appropriately 

recognized by the proposed CS DRGs. 

One commenter stated that the severity 

system is flawed because it does not 

capture resource utilization or the 

utility of technologies that would be 

more appropriate for beneficiaries. 

The commenters also provided 

examples of base DRG assignments 

under the current CMS DRGs that are 

different than those under the CS DRG. 

For instance, one commenter indicated 

that high dose interleukin-2 (HD IL2) is 

used to treat otherwise terminal cancer 

patients with metastatic renal cell 

cancer and melanoma. HD IL2 can 

evoke an immune response that 

eradicates the tumor and provides a 

potential opportunity for recovery. In 

the FY 2004 IPPS final rule, CMS 

created a new procedure code for HD 

IL2 therapy and assigned these patients 

to DRG 492. The commenter reported 

improved access to HD IL2 therapy as a 

result of these changes. However, the 

commenter was concerned that these 

patients could potentially be assigned to 

a number of different DRGs under the 

CS DRGs with a weighted average 

reduction in the relative weight of 58 

percent. The commenter suggested 

revising the CS DRG to take into account 

the complexity associated with 

providing HD IL2 therapy. Other 

commenters noted: 

• Some patients in need of 

ventricular assist devices (VAD) are 

currently paid in the same group as 

heart transplant patients using the CMS 

DRGs. Other heart assist devices are 

assigned to DRG 525 (Other Heart Assist 

Implant). These patients will be paid in 

the same group as implantable cardiac 

defibrillator patients under the CS 

DRGs. The commenters noted that it is 

possible that payment for these kinds of 

cases could decline by more than 70 

percent under the proposed rule. The 

commenter believed that the assignment 

under the CS DRGs will not recognize 

higher resources associated with 

treating VAD patients relative to those 

in need of implantable cardiac 

defibrillators. 

• Bare metal and drug-eluting 

coronary stents would be assigned to the 

same CS DRG eliminating the 

distinction currently made for these two 

different kinds of stents in the CMS 

DRGs. The commenters noted that CMS 

created separate DRGs for drug eluting 

and bare metal stents to recognize the 

higher costs of drug eluting stents. 

• Defibrillator device replacement 

cases are currently assigned to DRG 551 

(Permanent Cardiac Pacemaker Implant 

With Major Cardiovascular Diagnoses or 

AICD Lead or Generator). The 

commenters were concerned that these 

cases would be assigned to the DRGs for 

Permanent Cardiac Pacemaker Implant 

With & W/O AMI, Heart Failure or 

Shock and the cases would revert back 

to classification based on presence or 

absence of heart failure, AMI, or shock, 

rather than an MCV. 

• Patients receiving tPA thrombolytic 

therapy for stroke are currently assigned 

to DRG 559 (Acute Ischemic Stroke 

With Use of a Thrombolytic Agent). 

CMS revised the DRGs in FY 2006 to 

provide a separate DRG for stroke 

patients being treated with a reperfusion 

agent. According to the commenter, 

these patients will be paid in the same 

group with all stroke cases under CS 

DRGs undoing the change that CMS 

made in FY 2006 according to the 

commenter. 

• In FY 2006, CMS created separate 

DRGs for the revision of hip or knee 

replacement (DRG 545, Revision of Hip 

or Knee Replacement) to distinguish the 

higher resources associated with 

revisions from original replacements. 

Under CS DRGs, these cases would be 

assigned to the same group as the 

original replacement (bilateral or single) 

of the specific joint. The commenters 

were concerned that CMS’ proposal to 

adopt cCS DRGs will undo a proposal 

that it adopted just 1 year ago. 

• Combined anterior/posterior spinal 

fusion cases are currently assigned to 

DRG 496 (Combined Anterior/Posterior 

Spinal Fusion). This procedure requires 

two separate incisions and turning the 

patient over during surgery. The 

commenter expressed concern that 

under the CS DRG system, these cases 

would be paid in the same group as all 

spinal fusions and the new DRGs would 

not recognize higher costs associated 

with treating these patients. 

• The APR DRG and CS DRG systems 

do not have DRGs for lung transplants 

alone or combined kidney/pancreas 

transplants. The commenter suggested 

that there should be separate DRGs for 

these transplants in addition to liver/ 

intestinal transplants. The commenter 

indicated that lung transplants alone 

have lower costs and should not be in 

the same DRG as combined transplants. 

Response: In the vast majority of 

clinical situations, severity of illness 

and treatment complexity are directly 

related and are therefore addressed in 

the CS DRGs. As discussed in the 

proposed rule, there are a number of 

clinical situations, primarily related to 

the use of specific technologies, in 

which low severity patients receive care 

with high treatment complexity and 

cost. We acknowledge that further 

refinements are needed to the proposed 

CS DRG system before it will be ready 

for adoption. In the FY 2007 IPPS 

proposed rule, we noted a number of 

concerns we had with adopting the CS 

DRGs in FY 2007 (71 FR 24027). Among 

them was our concern that we might 

need additional time to refine the CS 

DRGs to better account for complexity 

as well as severity. The commenters 

have brought some important issues to 

our attention that we believe should be 

carefully considered before we adopt 

the CS DRGs. We will consider these 

issues if we were to make further 

modifications to the CS DRGs and 

propose adopting them for FY 2008. 

However, as we indicate elsewhere in 

this final rule, we have engaged a 

contractor to assist us with completing 

an evaluation of alternative DRG 

systems that may better recognize 

severity than the current CMS DRGs and 

meet other criteria that would make 

them suitable to adopt for purposes of 

payment under the IPPS. We expect to 

complete this evaluation of alternative 

DRG systems quickly this fall as part of 

moving forward on adopting a revised 

DRG system that better recognizes 

severity in the IPPS rulemaking for FY 

2008. It is possible that some of the 

alternatives that we evaluate for better 

recognizing severity in the DRGs will be 

based on the current CMS DRGs. If we 

were to develop a clinical severity 

concept that uses the current CMS DRGs 

as the starting point, it is possible that 

the issues raised by the commenters will 

no longer be a concern. If, however, we 

were to propose adopting the CS DRGs 

for FY 2008, we would consider the 

issues raised by the commenters as we 

make further refinements to this DRG 


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6Medicare Payment Advisory Commission. 

March, 2005. Report to the Congress, PhysicianOwned Specialty Hospitals, page 76. 

7 Ibid, page 41. 

system so it accounts for complexity as 

well as severity as a proxy for relative 

resource use. 

Comment: One commenter suggested 

a way of accounting for therapeutic 

complexity when assigning a patient 

under the CS DRGs. The commenter 

indicated that the patient should be 

assigned to a severity of illness subclass 

based on whether they received a 

separately identifiable technology that 

provides a clinical benefit and results in 

significantly higher case costs 

independent of severity level relative to 

the base DRG. The commenter also 

recommended that complexity levels be 

superimposed on the proposed severity 

of illness levels, such that either 

severity or complexity, or a combination 

of the two, would increase the 

classification of a case. The 

classifications would be defined as 

severity of illness or complexity (1–4). 

Response: We will further consider 

how to incorporate complexity into the 

assignment of a patient to a severity of 

illness subclass under either the CS 

DRGs if we propose to adopt them in FY 

2008 or the alternative DRG system that 

we will consider once we complete our 

evaluation of potential DRG systems. It 

may be possible to assign a case to a 

severity of illness subclass under either 

the CS DRGs, the alternative system we 

plan to evaluate or even underrefined 

CMS DRGs by using the procedures or 

services that are provided to the patient 

as a measure of resource use (that is, 

complexity). We agree that the use of a 

separately identifiable procedure or 

technology may be useful in 

determining the assignment of a patient 

to a specific subclass of a base DRG 

much like what occurs today under the 

CMS DRGs when assigning patients 

with placement of a bare metal or drugeluting stent to separate DRGs. 

Comment: Some commenters were 

concerned that CMS did not propose to 

adopt the already widely used APR 

DRGs endorsed by MedPAC, but rather 

proposed to adopt CMS’-developed CS 

DRGs. Some commenters stated that the 

CMS analysis that resulted in the CS 

DRGs is skewed because Medicare uses 

a truncated list of diagnosis and 

procedure codes. The commenter noted 

that CMS does not use comparable data 

to what 3M uses for the complete APR 

DRGs. Another commenter stated that 

the APR DRGs are the most advanced 

DRG classification system available 

yielding the most clinically 

homogenous groupings and the greatest 

predictive power. This commenter 

believed that it provides a sound basis 

for developing CS DRGs. 

Response: MedPAC did not endorse 

using the APR DRGs.6 However, 

MedPAC’s analysis that led to their 

recommendation to refine the current 

DRGs to more fully account for 

difference in severity of illness among 

patients was based on the APR DRGs. 

Even though MedPAC’s analysis was 

based on the APR DRGs, it recognized 

that CMS would have to consider a 

number of different factors when 

making decisions in the design of a DRG 

system. For instance, MedPAC noted 

that the large number of DRGs might 

mean that CMS would be faced with 

establishing weights in many categories 

that have few cases and thus potentially 

creating unstable estimates. To avoid 

creating refined DRGs with unstable 

relative weights, MedPAC 

recommended that the Secretary should 

be selective in adopting fine clinical 

distinctions similar to those reflected in 

the APR DRGs. Refining the DRGs will 

require carefully weighing the benefits 

of more accurate and economic 

distinctions against the potential for 

instability in relative weights based on 

a small number of cases.7 We do not 

believe that MedPAC expected that we 

would adopt the APR DRGs without any 

changes. 

Comment: Some commenters stated 

concerns with merging of dissimilar 

patient groups in the CS DRG system. 

Combining clinically dissimilar groups 

across the severity dimension has the 

potential to render the groups far less 

clinically meaningful. It is anticipated 

that such groups would have to be 

restructured frequently as treatment 

patterns change for primarily very ill 

patients. Some commenters stated that it 

seems that more categories may have 

been consolidated than necessary, 

giving up clinical and statistical 

homogeneity unnecessarily. It was 

noted that this is especially important if 

the CS DRGs are envisioned as part of 

the basis for evolving efforts towards 

value-based purchasing where such 

measures as post-admission 

complications and readmissions need to 

be evaluated on a risk-adjusted basis. 

An alternative approach was suggested 

to keep the patient groups separate from 

a classification perspective, but merge 

from a payment analysis perspective. 

Response: As discussed above, the CS 

DRGs are based on the APR DRG 

system. The APR DRG system is 

comprised of 314 base DRGs, which are 

divided into four severity of illness 

subclasses. We believe that the APR 

DRG greatly improve recognition of 

resource use and clinical similarity of 

patients. However, in our analysis of the 

APR DRG system, we observed that 

cases assigned severity of illness 

subclass 4 within an MDC have similar 

average charges. Furthermore, our 

clinical consultants frequently 

considered the severity of illness 

subclass 4 patients across DRGs within 

an MDC to have a closer clinical 

resemblance than to lower severity 

patients in their respective DRGs 

because, in severely ill patients, 

comorbidities have a greater impact on 

severity than the reason for admisssion. 

Treatment patterns will evolve for these 

multiple comorbidities leading to 

severity level 4 (sepsis, shock, acute 

renal failure, among others). However, 

to the extent that these multiple 

comorbidities will change (for example, 

better treatment of septic shock so that 

this occurs less frequently) they should 

do so equally across all patients within 

an MDC. With respect to the comment 

about maintaining more DRG groups for 

purposes other than payment under the 

IPPS, we proposed to adopt the CS 

DRGs only for Medicare inpatient 

hospital payment. We chose to 

consolidate the APR DRGs to increase 

administrative simplicity, minimize the 

impact on existing claim processing 

systems, and avoid having multiple 

DRGs with low case volumes and 

similar weights. The commenter’s 

suggestion would essentially result in 

many more DRGs having exactly the 

same weight. Therefore, we do not see 

a need to adopt the commenter’s 

suggestion. However, a hospital or any 

other entity can use an alternative 

patient classification system for the 

other purposes suggested in the 

comment. 

Comment: Some commenters stated 

that the CS DRGs are problematic 

because they were not designed to 

accommodate non-Medicare 

populations. The commenters indicated 

that many hospitals use DRGs for 

quality and other outcome 

measurements and that the proposed CS 

DRGs may not be clinically appropriate 

for these purposes. 

In addition, another commenter stated 

that private health insurance company 

contracts use the CMS DRG relative 

weights as the payment basis for 

inpatient services delivered to members 

under private health insurance plans. 

The commenter stated that because 

these contracts are typically negotiated 

based on a fairly static assumption of 

CMS DRGs (including classification and 

weights), the proposed redistribution 

will disrupt virtually every contract 

because of the varying services 


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consumed by members covered under 

private health insurance. The 

commenter urged CMS to provide a 

greater lead time in implementing 

changes to the DRG system and relative 

weight methodology to allow health 

insurers more time to model the impact 

of the methodological changes to their 

hospital contracts. 

Response: We acknowledge that 

Medicare DRGs are sometimes used by 

non-Medicare payers for their own 

purposes. However, CMS’ primary focus 

of updates to the Medicare DRG 

classification system is on changes 

relating to payment for services 

furnished to Medicare beneficiaries, not 

the obstetric, pediatric, or neonatal 

population. Cases involving these 

patients are found far less frequently 

among Medicare beneficiaries than in 

the general population. In fact, we 

applied consolidations to the APR DRGs 

to develop the CS DRGs to recognize 

that the APR DRGs were developed to 

accommodate all patient populations 

and there would be many DRGs with 

few Medicare cases or insufficient 

differences in the relative weights to 

warrant us maintaining a separate DRG. 

We encourage other payers that use 

Medicare’s DRG system for payment to 

make appropriate modifications for 

patient populations that are found 

infrequently among Medicare 

beneficiaries such as neonates and 

children. Again, as we stated above, a 

hospital or any other entity can use an 

alternative patient classification system 

for purposes other than Medicare 

payment. 

In response to the commenter’s 

concern with regard to the impact on 

private health insurance plans, we are 

improving our relative weight 

methodology to make Medicare 

payments more accurate. We utilize 

Medicare specific data to calculate the 

relative weights designed to pay 

Medicare costs. We have a fiduciary 

responsibility to administer the trust 

fund in order to provide quality care for 

our beneficiaries and that, not private 

payer contracts, is our foremost concern. 

However, as we noted earlier in this 

section, we are postponing the 

implementation of the HSRV 

methodology while we study its impact 

on charge compression. Instead, we are 

using a more similar approach to 

calculating the IPPS relative weights 

that is used in the OPPS. That is, rather 

than using a hospital-specific relative 

weighting methodology, we are 

standardizing charges to remove 

relevant payment factor adjustments 

and then adjusting those charges to 

costs using national cost center CCRs. 

In addition, we are adopting a 3-year 

transition of the relative weights. We 

believe this transition may also mitigate 

any potential impacts to private payer 

contracts from the changes to the DRG 

relative weights. During the first year of 

the transition, the relative weights will 

be based on a blend of 33 percent of the 

cost-based weights and 67 percent of the 

charge weights. In the second year of the 

transition, the relative weights will be 

based on a blend of 33 percent of the 

charge weights and 67 percent of the 

cost-based weights. In the third year of 

the transition, the relative weights will 

be based on 100 percent of the costbased weights. 

Comment: One commenter suggested 

that CMS seek further refinements to the 

DRGs for mental services. The 

commenter suggested that these DRGs 

have been underpaid for many years. 

Response: We will consider whether 

the psychiatric DRGs need further 

refinements as we proceed to refine the 

DRG system to better recognize severity 

for FY 2008. We note that the 

application of cost-based weights will 

increase Medicare’s payments for the 

psychiatric DRGs in FY 2007. 

Comment: Some commenters inquired 

how other prospective payment systems 

such as the IPF PPS and LTCH PPS that 

rely upon the IPPS DRG classifications 

would be affected by the changes to 

adopt CS DRGs. 

Response: We did not propose any 

changes to the DRG classifications 

systems used under the IPF PPS or the 

LTCH PPS in the IPPS proposed rule. 

However, we acknowledge that these 

PPSs use the IPPS DRG classifications to 

make payment determinations. 

Furthermore, we note that the 

refinements we are adopting to the 

current CMS DRG system to better 

recognize severity (which are discussed 

in detail in section II.C.7. of this final 

rule) will be applicable under the IPF 

PPS and LTCH PPS, just as past annual 

updates to the IPPS DRG 

classifications). We will need to 

consider whether corresponding 

changes need to be made to these other 

payment systems once final decisions 

are made about how DRG classification 

will occur under the IPPS in the future. 

Payment rate and policy changes to the 

IPF PPS and LTCH PPS went into effect 

for RY 2007 on July 1, 2006. These PPSs 

are using the Version 23 IPPS GROUPER 

for the first 3 months of RY 2007 (July 

2006 through September 2006). 

Consistent with the IPPS, the IPF PPS 

will use Version 24 of the IPPS 

GROUPER, effective October 1, 2006. No 

further changes will be made to the IPF 

PPS until next July. Under the LTCH 

PPS, changes to the LTC–DRGs were 

proposed for FY 2007, based on the 

proposed Version 24 IPPS GROUPER 

(71 FR 24049 through 24068), and 

changes to the LTC–DRGs that will be 

effective October 1, 2006, based on the 

finalized Version 24 IPPS GROUPER 

(presented in this final rule) are 

discussed in section II.F. of the 

preamble of this final rule. Any changes 

to the DRG classification systems for 

these prospective payment systems 

would be undertaken through notice 

and comment rulemaking in their 

respective proposed rules. 

Comment: One commenter stated that 

it was not clear how the judgment was 

made for the MDC 11 severity subclass 

4 example shown that these average 

charge values were sufficiently similar 

to consolidate. The commenter 

suggested that CMS provide further 

information about the criteria and 

considerations it used to judge 

categories as low volume and 

potentially unstable and to judge the 

mean charges (or costs) as sufficiently 

similar to warrant consolidation. One 

commenter expressed concern about the 

consolidations related to obstetrics and 

psychiatric care services. 

Response: As discussed above, the CS 

DRGs are based on APR DRGs that are 

divided into severity subclasses 2 

through 4 subclasses which greatly 

increase the resource and clinical 

similarity of the patients. Furthermore, 

as discussed above, our clinical 

consultants frequently considered the 

level 4 severity patients across DRGs 

within an MDC to have a closer clinical 

resemblance than to lower severity 

patients in their respective DRGs. In 

consolidating the severity level 4 

patients in an MDC, volume was a 

primary consideration along with the 

extent of clinical difference. For 

example, in MDC 11 severity level 4, 

kidney transplants were kept in a 

separate group and not consolidated 

with the other MDC 11 surgical DRGs 

because of the clinical distinctiveness of 

patients having a major organ 

transplant. 

Comment: One commenter expressed 

concern that patients may need to suffer 

adverse consequences in order for the 

case to be assigned to a higher severity 

level. The commenter believed that the 

severity grouping should reflect 

complexity and patient benefit as well 

and should allow for an increased 

severity/complexity level even without 

adverse patient consequences. 

Response: The current DRG system 

assigns a CC status to most patients with 

a complication or adverse event that 

occurs after admission. Although in the 

CS DRGs post admission complications 

can result in an increase in a patient’s 


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severity level, patients are primarily 

assigned to the higher severity levels 

(levels 3 and 4) based on the presence 

of multiple serious comorbidities in 

multiple organ systems rather than a 

single adverse event. Thus, unlike the 

current DRGs in which a single post 

admission complication can place the 

patient in a higher paying DRG, the CS 

DRGs in general require multiple 

significant problems to be present in 

order for a higher severity level to be 

assigned. In general, these patients will 

be more costly to treat. The system does 

not reward ‘‘adverse’’ consequences as 

suggested by the commenter but instead 

recognizes severity of illness will also 

be associated, at least in part, with 

resource use. 

Patients are increasingly admitted to 

the hospital at high severity of illness. 

Adverse consequences can and do occur 

within the hospital. However, some of 

those consequences are unavoidable 

(particularly for patients who are 

admitted at a high severity of illness). 

Section 5001(c) of Pub. L. 109–171 

requires that, beginning in FY 2009, we 

select diagnosis codes associated with at 

least two conditions that result in 

assignment of a higher weighted DRG 

and that reasonably could be prevented 

through the application of evidencebased guidelines. Beginning with 

discharges in FY 2009, section 5001(c) 

requires that we not assign cases to 

higher weighted DRGs based on the 

presence of these preventable 

conditions. Section 5001(c) also 

mandates that, for discharges on or after 

October 1, 2007, we require a hospital 

to include the secondary diagnosis of a 

patient at admission as part of the 

information required to be reported by 

a hospital for payment purposes. We 

believe that the concerns of the 

commenter will be addressed when we 

implement section 5001(c) of Pub. L. 

109–171. 

Comment: A number of comments 

supported CMS’ goal of improving 

payment accuracy. However, the 

commenters stated that the need for and 

best approach to changing the patient 

classification system has not been 

objectively demonstrated. One 

commenter provided a sophisticated 

statistical analysis that it asserted 

confirms MedPAC’s conclusion that 

changes are needed to improve payment 

accuracy. However, this commenter 

suggested the greatest improvement in 

cost-margin consistency resulted from 

switching the basis for the DRG weights 

from charges to cost and neither the 

HSRVcc methodology nor the CS DRGs 

improved payment accuracy. Other 

commenters indicated that more careful 

analysis is needed, along with greater 

access to the details of the CS DRG 

methodology. The commenters 

identified the following concerns: 

• Validation. The commenters 

indicated that it is unclear whether 

there is a need for a new patient 

classification system. The commenters 

stated that the implication of moving 

from a resource-based system to a 

severity-based payment system must be 

more fully explored and understood. 

They indicated that CMS provided no 

analysis that shows that the proposed 

changes result in an improved hospital 

payment system compared to the 

existing DRG system or APR DRGs. 

• Budget neutrality adjustment. The 

commenter indicated that the proposed 

rule did not address an adjustment for 

improved documentation and coding or 

even a methodology for determining 

one. The commenter suggested that 

CMS not apply an adjustment for more 

comprehensive documentation and 

coding that increases perceived but not 

real case mix until there is evidence that 

one is needed. The commenter 

requested that CMS monitor actual 

changes in coding and documentation 

practices associated with 

implementation of inpatient payment 

reforms to determine if any base 

payment adjustments are needed rather 

than adjust payments in anticipation of 

such changes. 

• Availability of the GROUPER. Many 

commenters stated that the proprietary 

nature and lack of transparency of the 

proposed CS DRG GROUPER are 

concerns. The current DRG GROUPER 

logic has been in the public domain 

since the inception of IPPS. Without the 

new GROUPER logic, the commenters 

believed that it is virtually impossible 

for anyone to thoroughly analyze the 

system and comment. The commenters 

urged that CMS make any new 

classification system widely available to 

the public on the same terms as the 

current DRG system. Some commenters 

stated that CMS should provide the 

GROUPER for the CS DRGs and open a 

new public comment period. Several 

commenters were concerned about the 

cost of the GROUPER if the CS DRGs 

were implemented. 

• Too few diagnoses and procedures 

considered. The commenters are 

concerned that the current CMS 

GROUPER does not use all diagnosis 

and procedures that affect a patient’s 

severity of illness and/or the resources 

utilized. The commenters believed that 

the number of secondary diagnoses may 

be an important factor in determining 

differences in patient characteristics. 

Response: With respect to the 

comment about the need for a new 

patient classification system, the 

proposed rule noted that we modeled 

the CS DRGs and observed a 12-percent 

increase in the explanatory power (or Rsquare statistic) of the DRG system to 

explain hospital charges. That is, we 

found more uniformity among hospital 

total charges within the CS DRGs than 

we did with Medicare’s current DRG 

system (71 FR 24027). Thus, we believe 

that there is clear evidence that 

improvements can be made to the 

current DRG system that will reduce 

heterogeneity among patients within a 

given DRG. While this statistic indicates 

that the current CMS DRG system can be 

refined to improve payment accuracy, 

we agree that it does not necessarily 

mean we should adopt the system we 

proposed. As suggested by the 

commenters, there are a number of other 

evaluation criteria that we need to 

consider before deciding whether to 

adopt the CS DRGs or a potential 

alternative. We describe these criteria in 

more detail below. With respect to the 

comments about a budget neutrality 

adjustment to account for potential 

improvements in documentation and 

coding, we discuss the comments and 

our responses on this issue more fully 

in the next section of this final rule. The 

comment about the availability of the 

GROUPER is related to a number of 

detailed comments we received about 

the potential for Medicare to adopt a 

proprietary DRG system. We have 

provided a more detailed description of 

these comments and our responses 

below. With respect to the comment 

about fully utilizing all of the diagnosis 

and procedure codes submitted on the 

claim, we note that CMS does not 

process codes submitted electronically 

on the 837i electronic format beyond the 

first 9 diagnosis codes and the first 6 

procedure codes. While HIPAA requires 

CMS to accept up to 25 ICD–9–CM 

diagnosis and procedure codes on the 

HIPAA 837i electronic format, it does 

not require that CMS process that many 

diagnosis and procedure codes. As 

suggested by the commenters, there may 

be value in retaining additional data on 

patient conditions that would result 

from expanding Medicare’s data system 

so it can accommodate additional 

diagnosis and procedure codes. We will 

consider this issue while we 

contemplate refinements to our DRG 

system to better recognize patient 

severity. However, extensive lead time 

is required to allow for modifications to 

our internal and contractors’ electronic 

systems in order to process and store 

this additional information. We are 

unable to move forward with this 

recommendation without carefully 

evaluating implementation issues. One 


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issue that we expect to consider in 

deciding whether to adopt such a major 

systems change is how frequently 

information beyond the ninth diagnosis 

code and sixth procedure code affects 

DRG assignment. Given the cost of an 

infrastructure change to accommodate 

this request, we want to be certain that 

there are sufficient benefits to justify the 

costs. Again, we will continue to 

carefully evaluate this request to expand 

the process capacity of our systems. 

Comment: Some commenters stated 

that the CS DRG grouping methodology 

based on average charges is inconsistent 

with the proposed changes to adopt cost 

relative weights. The commenters 

recommended using the HSRVcc 

methodology to determine cost-based 

weights for consolidating the APR DRGs 

into CS DRGs. 

Response: As explained above, we are 

not adopting the HSRVcc methodology 

for FY 2007 because of our concerns 

about the interaction of charge 

compression with the hospital-specific 

portion of the cost weight methodology. 

Instead, we are setting relative weights 

based on the estimated cost of the DRGs 

where cost is determined by applying 

the national average CCRs to the 

standardized charges for each DRG in 

each of the 13 cost centers. In general, 

when we consider whether to further 

distinguish types of cases within a DRG 

in order to create a new DRG or to 

reassign these cases to a different DRG, 

we are comparing cases that are 

clinically similar. Therefore, it is 

possible or even likely that these cases 

will be using the same mix of routine 

and ancillary services and the results of 

the analysis will be similar whether the 

cases are compared based on average 

costs or charges. That is, the cases will 

be using services that have comparable 

charge markups over costs and the 

analysis will produce the same 

conclusion whether the comparison 

between cases is based on costs or 

charges. The major differences between 

cost and charge weights will occur 

when comparing across clinically 

dissimilar services that use a different 

mix of routine and ancillary services 

with variable markups. For this reason, 

we believe that we can continue to do 

our initial evaluation of potential DRG 

changes using average charges. Given 

the complexity associated with 

developing cost-based weights, we 

believe our preliminary analysis for 

evaluating whether to make a DRG 

change should use charges as a proxy 

for costs. However, we will consider the 

commenters’ suggestion and, to the 

extent feasible, consider whether it is 

possible to evaluate potential DRG 

changes using costs as well as charges. 

Comment: Numerous comments 

expressed concerns about the use of a 

proprietary DRG classification system. 

The commenters indicated that the 

current DRG GROUPER logic has been 

in the public domain since the 

inception of the IPPS. Many 

commenters noted that the source code, 

logic and documentation for the current 

DRG system can be purchased through 

the National Technical Information 

Service. The commenters stressed the 

importance of maintaining transparency 

within the DRG system (that is, any new 

DRG system should be available to the 

public on the same terms as the current 

one). The commenters stated that any 

methodology used for the Medicare 

GROUPER must not be based on a 

proprietary system. One commenter 

questioned how future DRG refinements 

would be made if the underlying system 

is owned by 3M. 

A number of commenters were 

concerned that it was not possible to 

thoroughly analyze the proposed CS 

DRGs and provide comments without 

the GROUPER logic. Other commenters 

stated that limited information on the 

proposed CS DRGs hampered their 

ability to conduct modeling of the new 

system. Some commenters raised 

serious concerns allowing CMS to 

assign the CS DRG without hospitals 

having the ability to group the case 

themselves. According to the 

commenters, without the CS DRG 

information, revenue and patient 

receivables cannot be recorded 

accurately. The commenters stated that 

hospitals must have the ability to 

accurately estimate payments in 

evaluating strategic initiatives, business 

plans, budgets, marketing, staffing, and 

other critical decisions. Commenters 

noted that CMS provided a link to a web 

tool on the 3M Web site that allowed 

hospitals to conduct their own analyses 

of the impact of moving to CS DRGs. 

However, these commenters stated that 

the reality was that if a hospital does not 

have its own APR DRG GROUPER 

software, it can only obtain CS DRG 

information one case at a time by 

entering specific diagnostic and 

procedure codes. 

Several commenters stated that if CS 

DRGs are adopted and the GROUPER 

remains proprietary, they would be 

limited in their ability to educate and 

assist hospitals in use of the new 

system. One commenter indicated that 

the current 3M product is proprietary 

and not available in the public domain 

for hospitals or their software vendors 

who develop and support their patient 

account billing and case management 

software. The commenter also stated 

that it does not have any access to the 

underlying codes, conditions and edits 

utilized by 3M with its product and as 

a result could not accurately comment 

on the interaction between severity and 

complexity associated with individual 

claims in contrast to resource 

consumption. The commenter stated 

that, although hospitals are not required 

to have a GROUPER, hospitals that hold 

compliance as a top priority rely on a 

grouper/encoder to ensure that claims 

meet all edits prior to submission. 

Several commenters stated that a 

single company’s monopoly over the 

DRG system would be costly to 

hospitals. The commenters indicated 

that it would be more difficult to obtain 

the system to integrate it into hospitals’

existing systems. The commenters 

reported that Maryland hospitals report 

a GROUPER price of $20,000 per 

hospital with the ultimate price varying 

based on criteria such as whether it is 

used on a mainframe or personal 

computer. Another commenter 

expressed concerns that only 3M would 

be providing access to the GROUPER. 

The commenter stated that with over 

4,000 hospitals requiring a new severityadjusted DRG GROUPER, it is not 

feasible or reasonable to expect that one 

vendor could service all the hospitals 

nationally in the few months between 

the posting of the final IPPS rule and an 

October 1, 2006 implementation. The 

commenter stated that having 3M 

maintain control of the GROUPER 

software limits access by other software 

vendors to begin reprogramming of the 

many computer systems that would 

need to be loaded with the CS DRGs that 

is currently incompatible with the CMS 

DRGs. The commenter stated that there 

will need to be sufficient time between 

making the GROUPER available and 

implementation so that hospitals can 

test their systems, and study the impact 

on their facilities. 

Another commenter stated that it 

offered software that hospitals and 

health plans utilize in managing the 

billing, coding, and payment for 

inpatient hospital services under the 

DRGs. The development of software 

related to Medicare’s DRG system by 

private companies is possible only 

because the current DRG methodology is 

available in the public domain. The 

commenter also noted that the public 

can obtain full access to the details 

underlying the CMS DRG system by 

purchasing information and software 

from the National Technical Information 

Service for a nominal charge in a timely 

manner well in advance of the 

implementation of changes. The 

commenter noted the information was 

available to all of the public 

simultaneously and no company 


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currently has a competitive advantage in 

producing DRG products. The 

commenter added that CMS currently 

engages in an open and comprehensive 

discussion about the structure of the 

DRG methodology through a variety of 

mechanisms including notices 

published in the Federal Register. CMS 

releases sufficient detail about its 

methodology in electronic formats to 

enable providers, health plans, and 

vendors to develop and validate their 

own computer programs. The 

commenter expressed concern that 

unfettered access to the underpinnings 

of the DRG system would not continue 

to be available under the CMS proposal 

to adopt CS DRGs. The commenter 

suggested the following criteria that a 

new DRG system should meet in order 

to be adopted by Medicare: 

• Software distribution comparable to 

what is currently made available, which 

includes: 

• GROUPER source code which 

produces all pertinent return 

information; 

• All underlying tables that drive the 

GROUPER with documentation; 

• A complete set of test cases to 

validate the functioning of the software; 

• Complete system and user 

documentation; 

• Contact people who can and will 

respond to questions in a timely 

fashion; 

• The right to redistribute the 

methodology to business partners and 

consultants; 

• The right to translate source code to 

other technology environments and to 

integrate it into other systems; 

• Pre-releases of software and 

documentation well in advance of 

planned implementations; and 

• An open inclusive process for 

considering future enhancements. 

The commenter indicated that the 

agency must also ensure that whatever 

refinement methodology is adopted is 

open to public discussion and scrutiny, 

now and on an ongoing basis. The 

commenter stated that transparency is 

critical to advancing affordability in our 

health care system. 

Response: With respect to making 

information available for the public to 

analyze the proposed DRGs, we were 

cognizant of this issue and attempted to 

provide as much information as possible 

that would allow the public an 

opportunity to comment meaningfully 

on the proposed CS DRGs. We provided 

the following data files on the CMS Web 

site at no cost to the public to assist with 

understanding our proposed rule: 

• Provider Specific File. 

• Impact file for IPPS FY 2007 

Proposed Rule. 

• CCRs and Weighting Factors. 

• DRG Relative Weights. 

• CS DRG HSRVcc relative weights. 

• CAH List for FY 2007 Proposed 

Rule. 

In addition to this information, we 

made available for purchase both the FY 

2004 and FY 2005 MedPAR data that 

were used in simulating the policies in 

the IPPS proposed rule. We also 

discussed the proposed rule in at least 

two national teleconferences that were 

open to the public. One of these calls 

was a Special Hospital Open Door call 

that was scheduled for 1 and 1⁄2 hours 

and was completely devoted to 

explaining the IPPS proposed rule and 

answering questions from the public. 

There were over 1,100 calls into this 

national teleconference. Finally, we 

were able to provide access to a Web 

tool on 3M’s Web site that would allow 

an end user to build case examples 

using the proposed CS DRGs. While the 

commenters are correct that these case 

examples could only be analyzed one at 

a time, the tool did provide a detailed 

explanation of how the severity of 

illness was assigned and the 

demographic and diagnostic 

information that went into that 

determination. Further, other 

information about the CS DRGs and 

APR DRGs were available at that Web 

site, including access to the APR DRG 

definitions manual. 

We acknowledge the many comments 

suggesting that the logic of Medicare’s 

DRG system should continue to remain 

in the public domain as it has since the 

inception of PPS. We also acknowledge 

the commenters’ concern about the 

impact of moving to a proprietary 

system and the potential for limiting 

public access to the underlying 

GROUPER logic relative to the current 

CMS DRGs. We note that the issues 

associated with using a proprietary DRG 

system were well illustrated in a public 

comment that we received from the 

Maryland Health Services Cost Review 

Commission (HSCRC). Maryland 

adopted the APR DRGs in June 2004. 

The commenter noted that ‘‘despite the 

advance notice, a number of hospitals 

had not acquired the APR DRG 

GROUPER until near the time for full 

implementation to begin. In addition to 

acquiring the GROUPER, hospitals had 

to deal with issues of integrating the 

GROUPER with other hospital systems, 

which was at times difficult with 

proprietary systems.’’ The commenter 

further noted that Maryland has 47 

acute care hospitals and ‘‘moving the 

nation’s entire hospital industry to a 

new system in a short period is likely 

to be much more difficult.’’ The 

commenter indicated that ‘‘CMS has the 

opportunity to avoid some of the 

transition issues the HSCRC faced by 

placing the CS DRG logic in the public 

domain or by requiring open licensing 

of the GROUPER at reasonable rates.’’

The commenter noted that consultants 

and vendors to hospitals have struggled 

to obtain access to the GROUPER as 

they advised their clients. 

The public comments and Maryland’s 

experience with APR DRGs have led to 

many commenters recommending that 

Medicare should adopt a new DRG 

system that is in the public domain. As 

we evaluate alternative severity 

classification systems, we will use 

public access to the system as an 

important element in evaluating 

whether each system can be adopted by 

Medicare. We will continue to strive to 

promote transparency in our decision 

making as well as in future payment and 

classification systems, as we have done 

in the past. 

Comment: A number of commenters 

suggested that a more straightforward 

approach to achieving the same or 

similar objective would be for CMS to 

refine the current DRG classification 

system by retaining the current base 

DRGs (eliminating the current paired 

DRGs with and without CC) and adding 

3–4 levels of severity, rather than using 

APR DRGs. This option would preserve 

the many policy decisions that CMS has 

made over the last 20 years that are 

already incorporated into the DRG 

system and yet adjust hospital payments 

to reflect the cost of care based on 

patient needs and conditions. Other 

commenters suggested designating 

certain DRGs as device-dependent to 

ensure that device costs are 

appropriately reflected in the claims file 

data. Some commenters suggested that 

CMS retain the current DRG system but 

revise the CC list as an alternative 

approach to better recognizing severity 

of illness in the DRG system. 

Several commenters stated that CMS 

did not conduct an objective study of 

the CS DRGs although alternatives for 

the APR DRG system are readily 

available. These commenters asked 

whether CMS considered adopting an 

alternative DRG system that could also 

better recognize severity. 

Two commenters proposed alternative 

severity of illness systems to the APR 

DRG system. One commenter suggested 

that we use the Refined DRG (RDRG) 

severity of illness system which is 

supported by Health Systems 

Consultants, Inc, that contains 1,274 

groups with 350 base DRGs. The 

commenter explained that each of the 

medical base DRGs is divided into three 

severity classes and each of the surgical 

base DRGs is divided into four severity 


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8Edwards, Nancy et al., ‘‘Refinement of Medicare 

Diagnosis Related Groups to Incorporate a Measure 

of Severity,’’Health Care Financing Review, Winter 

1994, pages 45–64. 

classes. In addition, there are neonate 

groups based on birth weight, seven 

DRGs that do not have severity classes 

and an early death group in each MDC 

created to remove low outliers 

according to the commenter. The 

commenter noted that the research for 

the RDRG system was undertaken 

between 1986 and 1989 under a Health 

Care Financing Administration (now 

CMS) cooperative agreement. The 

commenter indicated that the RDRG 

system has been updated annually using 

the current CMS complications and 

comorbidities list since 1989. Solucient, 

LLC has also used the previous HCFA 

DRG severity work to develop a risk 

adjusted DRG system which they refer 

to as Refined Diagnosis Related Group 

(R–DRG). Solucient also reports that 

they have updated their system 

annually with ICD–9–CM code changes. 

Another commenter noted that HSS/ 

Ingenix has developed an all-payer 

severity-adjusted DRG system (APS–

DRGs) which contains 1,130 case-mix 

cells with 376 consolidated DRGs plus 

2 error categories. The commenter 

indicated that, outside of MDC 15, all 

consolidated DRGs are divided 

uniformly into three severity levels. The 

commenter also indicated that the 

number of severity levels within MDC 

15 depends upon the consolidated DRG 

in the APS–DRG system. 

One commenter stated that based on 

their analysis none of the off-the-shelf 

Version 23 DRG systems is the best 

alternative. Rather, it was recommended 

that a hybrid system be created which 

would combine the best features of each 

system. The commenter stated that the 

proposed CS DRG system or the current 

CMS DRG system would be the 

preferred systems to modify. One 

commenter stated that the use of 

objective, physiologic data on admission 

to enhance claims data significantly 

improves the accuracy of any severity 

stratification. The commenter suggested 

that CMS conduct one or more 

demonstration projects studying claims 

data enhanced with objective, timestamped electronically captured 

laboratory results as an alternative 

approach for severity adjustment for 

payment and quality assessment 

purposes. 

Response: The approach suggested in 

the comments to incorporating severity 

measures into the current CMS DRG 

system may be a viable option that we 

will evaluate in the coming year. With 

respect to the comment that we 

undertake demonstration projects to 

study alternative ways of better 

recognizing severity in the DRG system, 

we are concerned that such an endeavor 

could not be completed in time for FY 

2008 implementation. We believe it is 

very important to make improvements 

to the DRG system to better recognize 

severity rapidly and there are a number 

of different ways that improvements in 

payment accuracy can be achieved 

without undertaking a lengthy 

demonstration project. As suggested by 

the commenters, much research has 

already been completed on alternative 

DRG systems. We believe it is likely that 

at least one of these systems (or 

potentially a system that we develop 

ourselves based on our own prior 

research) will be suitable to achieve our 

goal of improvements in payment 

accuracy by FY2008. We are currently 

in the process of engaging a research 

contractor to evaluate the 3M Severity of 

Illness DRG products along with the 

other DRG severity systems that have 

come to our attention during the 

comment process. 

As indicated above, we will use 

public access to the system as an 

important element in evaluating 

whether each system can be adopted by 

Medicare. With respect to the CS DRGs 

and potentially the other systems 

described in the public comments, there 

may be licensing issues. We proposed to 

use the CS DRGs beginning in FY 2008. 

While they were developed under a 

contract with the Federal government, 

the CS DRGs are essentially a variant of 

the APR DRGs that are copyrighted by 

3M. The APS–DRGs are a proprietary 

product owned by HSS/Ingenix, a 

division of United Health Care. 

However, HSS/Ingenix has indicated 

that, should we decide to adopt their 

product, it would make its DRG system 

available to the public under the same 

terms as the current CMS DRGs (that is, 

the source code, logic and 

documentation can be purchased 

through the National Technical 

Information Service). The RDRG system 

is supported by Health Systems 

Consultants. 

There are other issues of note with 

respect to the DRG systems mentioned 

in the comments and Medicare’s efforts 

to adopt a DRG system that better 

recognizes severity. In the late 1980’s, 

CMS (then HCFA) funded a Yale 

University contract for the development 

of refined severity DRGs. The severity 

DRGs developed under this contract 

formed the basis for most of the severity 

DRG systems available today, including 

the Ingenix APS–DRGs, the 3M APR 

DRGs, the Health Systems Consultants 

RDRGs and the Australian government’s 

AR–DRGs. In the mid-1990’s, CMS (then 

HCFA) also adapted the Yale system 

and developed a potential severity DRG 

system, which was described in the 

Health Care Financing Review.8

Although the APR DRGs have departed 

from the Yale approach to a greater 

extent than have the other systems, both 

the 3M product and the APS–DRGs 

were derived from the 1989 Yale 

severity system that is in the public 

domain. Given that the Yale system is 

in the public domain and CMS 

considered adopting a severity DRG 

system based on it in the mid 1990’s, we 

will also consider updating our prior 

work part of our initiative to identify 

and implement a severity DRG system 

for use by Medicare in FY 2008. 

Consistent with the sentiment expressed 

in the public comments, this option 

would have the advantage of using the 

current DRGs as a starting point and 

retaining the benefit of the many DRG 

decisions we have made in recent years. 

The DRG system we considered in the 

mid-1990’s used a base DRG with 3 

levels of severity depending upon 

whether the patient had no CC, a CC, or 

a major CC. During this past winter, 

CMS began a comprehensive review of 

over 13,000 diagnosis codes to 

determine whether they should be 

classified as CCs when present as a 

secondary diagnosis. Under this option, 

we could continue this review of the CC 

list, classifying them into one of the 

three categories described above in 

conjunction with updating the severity 

DRG system that we considered in mid1990’s. 

c. Changes to CMI From a New DRG 

System 

After the 1983 implementation of the 

IPPS DRG classification system, CMS 

observed unanticipated growth in 

inpatient hospital case-mix (the average 

relative weight of all inpatient hospital 

cases) that is used as proxy 

measurement for severity of illness. 

There are three factors that determine 

changes in a hospital’s CMI: 

(1) Admitting and treating a more 

resource intensive patient-mix (due, for 

example, to technical changes that allow 

treatment of previously untreatable 

conditions and/or an aging population); 

(2) Providing services (such as higher 

cost surgical treatments, medical 

devices, and imaging services) on an 

inpatient basis that previously were 

more commonly furnished in an 

outpatient setting; and 

(3) Changes in documentation (more 

complete medical records) and coding 

practice (more accurate and complete 

coding of the information contained in 

the medical record). 


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9Carter, Grace M. and Ginsburg, Paul: The 

Medicare Case Mix Index Increase, Medical Practice 

Changes, Aging and DRG Creep, Rand, 1985. 

10Medicare Payment Advisory Commission: 

Report to Congress on Physician-Owned Specialty 

Hospitals, March 2005, p. 42. 

Changes in CMI as a result of 

improved documentation and coding do 

not represent real increases in 

underlying resource demands. For the 

implementation of the IPPS in 1983, 

improved documentation and coding 

were found to be the primary cause in 

the underprojection of CMI increases, 

accounting for as much as 2 percent in 

the annual rate of CMI growth observed 

post-PPS.9

We believe that adoption of CS DRGs 

would create a risk of increased 

aggregate levels of payment as a result 

of increased documentation and coding. 

MedPAC notes that ‘‘refinements in 

DRG definitions have sometimes led to 

substantial unwarranted increases in 

payments to hospitals, reflecting more 

complete reporting of patients’

diagnoses and procedures.’’ MedPAC 

further notes that ‘‘refinements to the 

DRG definitions and weights would 

substantially strengthen providers’

incentives to accurately report patients’

comorbidities and complications.’’ To 

address this issue, MedPAC 

recommended that the Secretary 

‘‘project the likely effect of reporting 

improvements on total payments and 

make an offsetting adjustment to the 

national average base payment 

amounts.’’ 10

The Secretary has broad discretion 

under section 1886(d)(3)(A)(vi) of the 

Act to adjust the standardized amount 

so as to eliminate the effect of changes 

in coding or classification of discharges 

that do not reflect real changes in casemix. While we modeled the changes to 

the DRG system and relative weights for 

the proposed rule to ensure budget 

neutrality, we are concerned that the 

large increase in the number of DRGs 

will provide opportunities for hospitals 

to do more accurate documentation and 

coding of information contained in the 

medical record. Coding that has no 

effect on payment under the current 

DRG system may result in a case being 

assigned to a higher paid DRG under a 

system that better recognizes severity. 

Thus, more accurate and complete 

documentation and coding may occur 

under a DRG system that better 

recognizes severity because it will result 

in higher payments than the current 

CMS DRGs. In the FY2007 IPPS 

proposed rule, we solicited comments 

on this issue. 

Comment: One commenter suggested 

that CMS should delay implementation 

of the proposed changes to the DRG 

system until it conducts nationwide 

coding and documentation education, 

particularly to physicians. The 

commenter also suggested that CMS 

should find a method to provide 

physicians who practice in hospitals 

with web-based documentation training 

and incentives document correctly. 

Response: The proposed CS DRG 

system is based on the reporting of 

current ICD–9–CM diagnosis and 

procedure codes. The proposed changes 

do not require any changes for hospitals 

or physicians in how they code or 

document information in the medical 

record. For this reason, we do not 

believe there is a need for any changes 

to education and training that occurs 

with respect to documentation and 

coding. 

Comment: Several commenters 

expressed concern that the proposed 

rule did not provide any type of analysis 

to justify or support the need for an 

adjustment to the IPPS rates for 

anticipated changes in case mix from a 

new DRG system. These commenters 

noted that CMS did not provide a 

specific adjustment amount in the 

proposed rule. The commenters stated 

their view that it is the responsibility of 

CMS to provide adequate notice and the 

opportunity for meaningful public 

comments in response to such a specific 

proposal before any adjustment can be 

applied. One commenter recognized 

that CMS is authorized to make 

adjustments for changes in coding that 

are likely to occur. However, absent 

strong evidence, they urged CMS to 

avoid making negative adjustments to 

the standardized amount for anticipated 

increases in case mix. Another 

commenter provided two suggestions to 

CMS. The first suggestion was for CMS 

to share its thought process on how the 

standardized amount would be adjusted 

and allow the public an opportunity to 

provide comments on this basic set of 

criteria. The second suggestion was that 

CMS should make a commitment to 

adjust future base payment levels if it is 

determined that the initial adjustment 

projections are inaccurate. Another 

commenter stated that any adjustment 

to the standardized amount in an 

attempt to account for increased 

documentation and coding is 

unnecessary and unwarranted. The 

commenter asserted that it is virtually 

impossible to objectively distinguish 

real changes in case mix from those that 

occur due to improved coding and 

documentation. This commenter stated 

claims are coded using the official 

coding guidelines that are the same 

regardless of the DRG system being 

used. Another commenter requested 

that CMS not overestimate the growth in 

CMI as a result of improved coding. 

This commenter asserted there are many 

needs for accurate data collection in a 

hospital setting and coders do not stop 

reviewing a medical record after 

locating the first CC that assigns the 

patient to a higher weighted DRG. The 

commenter maintained that several 

hospitals ask coders to assign codes to 

many of the non-invasive procedures 

that do not affect DRG assignment. This 

same commenter also stated they 

believe the increase in CMI will not be 

as significant as CMS anticipates. 

One commenter representing the State 

of Maryland shared the state’s 

experience with case mix index changes 

after adoption of the APR DRG system. 

The commenter stated correct coding 

resulting in maximum reimbursement 

under the CMS DRGs could understate 

a hospital’s case mix under the APR 

DRGs. Facilities that have tried to 

improve their coding productivity by 

seeking to maximize reimbursement 

under Medicare may not obtain an 

accurate representation of its patient’s 

severity of illness under APR DRGs. 

According to the commenter, hospitals 

have a financial incentive to improve 

their clinical documentation and to 

code more completely when APR DRGs 

(or CS DRGs which are based on APR 

DRGs) are used for reimbursement. 

The commenter also indicated that 

case mix growth exceeded four percent 

for the State’s hospitals on average, as 

they began to prepare for the full 

transition to APR DRGs. Case mix 

growth in this current fiscal year is 

about the same. As such, the State has 

established a policy for FY 2006, 

limiting the amount of case mix growth 

experienced for each hospital until the 

coding patterns become stable. In 

addition, an appeals process for 

hospitals with services that generate 

rising case mix growth due to 

complexity has also been established. 

Response: We appreciate the 

commenters’ concerns and feedback 

regarding potential adjustments to the 

national standardized amount to 

account for improvements in 

documentation and coding that may 

cause the case-mix index to increase 

absent real case-mix growth. The 

commenters are correct that we did not 

propose a specific adjustment for 

improved documentation and coding. 

As stated in the proposed rule, we were 

soliciting comments on the possibility 

of changes in the case mix index as a 

result of the increase in the number of 

DRGs within the proposed CS DRGs. We 

will continue to analyze this issue as we 

evaluate alternative DRG systems that 

may better recognize severity of illness 

for implementation in FY 2008. We 


bajohnson on PROD1PC67 with RULES2
47914 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

11Redmon, Patrick, D., Comment Letter to CMS 

on the FY 2007 IPPS Proposed Rule, June 12, 2006. 

12MedPAC, p. 42. 

acknowledge the commenters’ request to 

provide an opportunity for public 

comment before CMS adopts a specific 

adjustment to the standardized amounts 

for improved documentation and 

coding. As stated earlier, we intend to 

propose further changes to better 

recognize severity in the DRG system for 

FY 2008. If we decide to make an 

adjustment to the standardized amount 

to account for improvements in 

documentation and coding, we will 

provide the specific level adjustment 

and the data and analysis underlying it 

in a proposed rule that will allow for an 

opportunity for public comment. 

We disagree with the commenters that 

suggested there is no need for an 

adjustment to the IPPS standardized 

amounts to account for improvements in 

documentation that increase case mix 

and, therefore, payments. As presented 

above and in the proposed rule, 

Medicare’s experience since the original 

inception of the IPPS and long-standing 

research provide substantiation that 

improvements in documentation and 

coding that increase case-mix and 

payment will occur when the 

opportunity arises through the 

expansion of the DRG system. Further, 

the comment representing the State of 

Maryland made clear that when CS 

DRGs ‘‘are used for reimbursement, 

hospitals have the financial incentive to 

improve their clinical documentation 

and to code administrative records more 

completely.’’ 11 MedPAC also noted that 

‘‘adopting our recommended 

refinements to the DRG definitions and 

weights would substantially strengthen 

providers’ incentives to accurately 

report patients’ comorbidities and 

complications.’’ 12

Comment: One commenter stated that, 

in its experience, a change to the 

severity of illness grouping logic will 

result in an increase to the rate of 

change in case-mix. Because any effect 

will not be revenue neutral, the 

commenter questioned if and how CMS 

intends to address the change in casemix, for example, regulating the change 

or setting a cap for hospitals. The 

commenter indicated that case-mix 

could rapidly decline as well as rapidly 

increase at the hospital-specific level 

and asked if CMS had a mechanism to 

address that issue, as well. The 

commenter also recommended that 

hospitals with improved case mix due 

to improved coding accuracy and 

internal documentation should be 

entitled to the full CMI benefit. 

Response: We appreciate the 

commenter’s concern and agree that the 

severity of illness grouping logic will 

affect case-mix. Also, we have known 

since the development of a PPS for 

capital payments that changes in casemix affect capital payments to certain 

hospitals as much, or more than, 

operating payments. However, we do 

not know, at this point, the extent and 

direction of the impact to case-mix that 

the severity of illness grouping logic 

would have, or how rapidly the changes 

to case-mix would occur. When a 

decision is made regarding 

implementing the severity logic, we will 

be carefully scrutinizing the data and a 

myriad of variables to ascertain its effect 

and whether or not adjustments or 

interventions are necessary. 

4. Effect of CS DRGs on the Outlier 

Threshold 

In its March 2005 Report to Congress 

on Physician-Owned Specialty 

Hospitals, MedPAC recommended that 

Congress amend the law to give the 

Secretary authority to adjust the DRG 

relative weights to account for the 

differences in the prevalence of highcost outlier cases. MedPAC 

recommended DRG-specific outlier 

thresholds that would be financed by 

each DRG rather than through an acrossthe-board adjustment to the 

standardized amounts. Furthermore, in 

comments that MedPAC submitted 

during the comment period for the FY 

2006 IPPS proposed rule, MedPAC 

stated its belief that the current policy 

makes DRGs with a high prevalence of 

outliers profitable for two reasons: 1) 

These DRGs receive more in outlier 

payments than the 5.1 percent that is 

removed from the national standardized 

amount; and 2) the relative weight 

calculation results in these DRGs being 

overvalued because of the high 

standardized charges of outlier cases. 

MedPAC also noted that, under its 

recommendations, outlier thresholds in 

each DRG would reduce the distortion 

in the relative weights that comes from 

including the outlier cases in the 

calculation of the weight and would 

correct the differences in profitability 

that stem from using a uniform outlier 

offset for all cases. MedPAC added that 

its recommendation would help make 

relative profitability more uniform 

across all DRGs. 

In the FY 2006 IPPS final rule (70 FR 

47481), we responded to MedPAC’s 

recommendation on outliers by noting 

that a change in policy to replace the 5.1 

percent offset to the standardized 

amount would require a change in law. 

However, because the Secretary has 

broad discretion to consider all factors 

that change the relative use of hospital 

resources in the calculation of the DRG 

relative weights, we stated we would 

consider changes that would reduce or 

eliminate the effect of high-cost outliers 

on the DRG relative weights. At this 

time, we have not completed a detailed 

analysis of MedPAC’s outlier 

recommendation because we do not 

have the authority to adopt such a 

change under current law. Instead, we 

have focused our resources on analyzing 

MedPAC’s recommendations with 

respect to adopting severity DRGs and 

calculating cost-based HSRV weights 

that can be adopted without a change in 

law. While we intend to study 

MedPAC’s recommendation in more 

detail at a future date, we note that 

changes to the DRG system that better 

recognize severity would have 

important implications for the outlier 

threshold. In the proposed rule, we 

analyzed how the outlier threshold 

would be affected by adopting the CS 

DRGs. 

Using FY 2004 Medicare charge data, 

3M Health Information Systems 

simulated the effect of adopting CS 

DRGs in conjunction with HSRVcc 

weights (described) on the FY 2006 

outlier threshold using the same 

estimation parameters used by CMS in 

the FY 2006 final rule (that is, the 

charge inflation factor of 14.94 percent) 

(70 FR 47494). Under these 

assumptions, 3M Health Information 

Systems estimated that the outlier 

threshold would be reduced from 

$23,600 under the current system to 

$18,758 under the CS DRGs with 

HSRVcc weights. By increasing the 

number of DRGs to better recognize 

severity, the DRG system itself would 

provide better recognition for cases that 

are currently paid as outliers. That is, 

many cases that are high-cost outlier 

cases under the current DRG system 

would be paid using a severity of illness 

subclass 3 or 4 under the CS DRGs and 

could potentially be paid as nonoutlier 

cases. 

Comment: Some commenters noted 

that there was only a limited discussion 

of the CS DRGs’ effect on the outlier 

threshold and no information about 

application of the postacute care 

transfer payment policy. Some 

commenters inquired how policy areas 

such as outliers and new technology 

will be affected by the proposed DRG 

changes. 

Response: We will consider further 

the application of the postacute care 

transfer payment policy as we make 

changes to the DRG system. With 

respect to outliers, we discussed this 

issue in the proposed rule. We noted 

that better recognition of severity in the 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 47915 

DRG system will result in some cases 

that are currently paid as outliers 

becoming nonoutliers. Under current 

law, we are required to establish an 

estimated outlier threshold so that 

between 5 and 6 percent of estimated 

IPPS payments are made as outlier 

payments. Our longstanding policy has 

been to set the outlier threshold so that 

estimated outlier payments equal 5.1 

percent of estimated IPPS payments. If 

we were to continue this longstanding 

policy, we would expect DRG 

refinements that better recognize 

severity to lead to a reduction in the 

outlier threshold. In the proposed rule, 

using the same data and assumptions 

used for the FY 2006 final rule, we 

estimated that adoption of the CS DRGs 

would reduce the outlier threshold from 

$23,600 to $18,758. 

Comment: One commenter 

recommended that CMS continue to 

provide the additional payment for 

blood clotting factor administered to 

hemophiliac inpatients in the future 

even if severity-adjusted DRGs are 

implemented. 

Response: Section 1886(a)(4) of the 

Act excludes the costs of administering 

blood clotting factors to inpatients with 

hemophilia from the definition of 

‘‘operating costs of inpatient hospital 

services.’’ Therefore, under the statute, 

payment for blood clotting factor 

provided to hemophiliac inpatients is 

not included in Medicare’s IPPS 

payment and is paid separately. For this 

reason, we will continue to apply 

Medicare’s policy of paying separately 

for blood clotting factor provided to 

hemophiliac inpatients. 

5. Impact of Refinement of DRG System 

on Payments 

In the FY 2007 IPPS proposed rule (71 

FR 24020), using the FY 2004 MedPAR 

claims data, we simulated the payment 

impacts of moving to the CS DRG 

GROUPER and the alternative HSRVcc 

method for developing HSRV weights. 

These payment simulations did not 

make any adjustments for changes in 

coding or case-mix. For purposes of this 

analysis, estimated payments were held 

budget neutral to estimated FY 2006 

payments because we have a statutory 

requirement to make any changes to the 

weights or GROUPER budget neutral. 

Based on the results of this impact 

analysis, in the FY 2007 IPPS proposed 

rule, we proposed to adopt both the 

HSRVcc weighting methodology for FY 

2007 and the CS DRGs for FY 2008. 

Later in the proposed rule (71 FR 24028) 

and in the Appendix A—Regulatory 

Impact Analysis (71 FR 24404), we 

modeled the effect of only adopting 

HSRVcc relative weights using the FY 

2005 MedPAR claims data applying the 

traditional statutory budget neutrality 

requirements. 

For reasons described in more detail 

above, we are adopting cost-based 

weights in this final rule. However, we 

are not adopting our proposal to 

standardize charges on MedPAR claims 

using HSRVs until we further research 

issues related to charge compression. 

Further, as described in more detail 

above, we are modifying our proposed 

plan to adopt the CS DRG system for FY 

2008. Rather, we will evaluate the CS 

DRGs along with the other DRG severity 

systems that have come to our attention 

during the comment process and 

consider updating the work we did to 

develop a severity DRG system in the 

mid-1990’s before adopting a system 

that better recognizes severity for FY 

2008. 

In the proposed rule, we presented 

the impact of the proposed changes on 

specific high volume DRGs. For 

comparison purposes, in the following 

table we are showing the percent 

changes in weight for these DRGs 

presented in the proposed rule and the 

percent changes in weights for these 

DRGs under the policies we are 

finalizing in this rule: 

DRG Title 

Proposed 

rule 

(percent) 

Final rule (w/o 

transition) 

(percent) 

Final rule (with 

transition) 

(percent) 

14 ... INTRACRANIAL HEMORRHAGE OR CEREBRAL INFARCTION ................................. 3.8 1.8 0.6 

75 ... MAJOR CHEST PROCEDURES .................................................................................... 1.4 0.0 0.0 

76 ... OTHER RESP SYSTEM O.R. PROCEDURES W CC ................................................... ¥3.4 ¥1.7 ¥0.6 

79 ... RESPIRATORY INFECTIONS & INFLAMMATIONS AGE >17 W CC ........................... 7.6 2.0 0.7 

87 ... PULMONARY EDEMA & RESPIRATORY FAILURE ..................................................... 10.9 0.0 0.0 

88 ... CHRONIC OBSTRUCTIVE PULMONARY DISEASE ..................................................... 8.3 1.8 0.6 

89 ... SIMPLE PNEUMONIA & PLEURISY AGE >17 W CC ................................................... 9.7 2.1 0.7 

104 CARDIAC VALVE & OTH MAJOR CARDIOTHORACIC PROC W CARD CATH ......... ¥11.0 ¥3.1 ¥1.0 

105 CARDIAC VALVE & OTH MAJOR CARDIOTHORACIC PROC W/O CARD CATH ...... ¥7.2 ¥2.3 ¥0.8 

110 MAJOR CARDIOVASCULAR PROCEDURES W CC .................................................... ¥5.4 ¥3.3 ¥1.1 

113 AMPUTATION FOR CIRC SYSTEM DISORDERS EXCEPT UPPER LIMB & TOE ..... 5.0 3.4 1.1 

121 CIRCULATORY DISORDERS W AMI & MAJOR COMP, DISCHARGED ALIVE .......... 4.7 0.7 0.2 

124 CIRCULATORY DISORDERS EXCEPT AMI, W CARD CATH & COMPLEX DIAG ..... ¥19.7 ¥9.3 ¥3.1 

125 CIRCULATORY DISORDERS EXCEPT AMI, W CARD CATH W/O COMPLEX DIAG ¥28.9 ¥14.6 ¥4.9 

127 HEART FAILURE & SHOCK ........................................................................................... 2.8 3.7 1.2 

138 CARDIAC ARRHYTHMIA & CONDUCTION DISORDERS W CC ................................. 2.7 2.5 0.8 

143 CHEST PAIN ................................................................................................................... ¥10.5 ¥6.2 ¥2.1 

144 OTHER CIRCULATORY SYSTEM DIAGNOSES W CC ................................................ 4.2 2.2 0.7 

174 G.I. HEMORRHAGE W CC ............................................................................................. 11.2 2.9 1.0 

182 ESOPHAGITIS, GASTROENT & MISC DIGEST DISORDERS AGE >17 W CC .......... 5.6 ¥1.1 ¥0.4 

188 OTHER DIGESTIVE SYSTEM DIAGNOSES AGE >17 W CC ...................................... 5.7 1.0 0.3 

210 HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT AGE >17 W CC ................... 3.8 2.2 0.7 

277 CELLULITIS AGE >17 W CC .......................................................................................... 15.2 9.1 3.0 

296 NUTRITIONAL & MISC METABOLIC DISORDERS AGE >17 W CC ............................ 10.6 5.3 1.8 

316 RENAL FAILURE ............................................................................................................. 8.3 3.7 1.2 

320 KIDNEY & URINARY TRACT INFECTIONS AGE >17 W CC ....................................... 10.9 5.3 1.8 

493 LAPAROSCOPIC CHOLECYSTECTOMY W/O C.D.E. W CC ....................................... ¥4.0 ¥4.6 ¥1.5 

497 SPINAL FUSION EXCEPT CERVICAL W CC ................................................................ ¥13.4 0.5 0.2 

515 CARDIAC DEFIBRILLATOR IMPLANT W/O CARDIAC CATH ...................................... ¥20.6 0.3 0.1 

541 ECMO OR TRACH W MV 96+HRS OR PDX EXC FACE, MOUTH & NECK W MAJ 

O.R..

3.6 ¥2.9 ¥1.0 

542 TRACH W MV 96+HRS OR PDX EXC FACE, MOUTH & NECK W/O MAJ O.R. ........ 8.4 ¥0.8 ¥0.3 

544 MAJOR JOINT REPLACEMENT OR REATTACHMENT OF LOWER EXTREMITY ..... ¥3.7 2.6 0.9 

545 REVISION OF HIP OR KNEE REPLACEMENT ............................................................. ¥5.8 1.8 0.6 


bajohnson on PROD1PC67 with RULES2
47916 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

DRG Title 

Proposed 

rule 

(percent) 

Final rule (w/o 

transition) 

(percent) 

Final rule (with 

transition) 

(percent) 

547 CORONARY BYPASS W CARDIAC CATH W MAJOR CV DX ..................................... ¥8.9 ¥5.5 ¥1.8 

548 CORONARY BYPASS W CARDIAC CATH W/O MAJOR CV DX ................................. ¥11.9 ¥6.2 ¥2.1 

550 CORONARY BYPASS W/O CARDIAC CATH W/O MAJOR CV DX ............................. ¥5.8 ¥3.8 ¥1.3 

551 PERMANENT CARDIAC PACEMAKER IMPL W MAJ CV DX OR AICD LEAD OR 

GNRTR.

¥13.0 1.3 0.4 

552 OTHER PERMANENT CARDIAC PACEMAKER IMPLANT W/O MAJOR CV DX ........ ¥15.0 1.0 0.3 

553 OTHER VASCULAR PROCEDURES W CC W MAJOR CV DX ................................... ¥5.8 ¥0.5 ¥0.2 

554 OTHER VASCULAR PROCEDURES W CC W/O MAJOR CV DX ................................ ¥6.5 ¥1.4 ¥0.5 

556 PERCUTANEOUS CARDIOVASC PROC W NON-DRUG-ELUTING STENT W/O MAJ 

CV DX.

¥34.9 ¥16.2 ¥5.4 

557 PERCUTANEOUS CARDIOVASCULAR PROC W DRUG-ELUTING STENT W 

MAJOR CV DX.

¥25.5 ¥10.4 ¥3.5 

558 PERCUTANEOUS CARDIOVASCULAR PROC W DRUG-ELUTING STENT W/O 

MAJ CV DX.

¥34.5 ¥13.8 ¥4.6 

We received a number of comments, 

which we discuss below, expressing 

concern over the magnitude of the 

changes we proposed to the relative 

weight methodology and the effects on 

the DRG weights. As shown in this table 

above, the impact of the transitional cost 

based weights computed without using 

the HSRVcc method of standardization 

is significantly less than the impacts 

projected in the proposed rule. As a 

further demonstration of the manner in 

which our final policy mitigates the 

impacts of the proposed rule, we are 

presenting the following two tables 

showing the number of DRGs 

experiencing percent gains and losses in 

their relative weights in the proposed 

and final rules. We also are showing the 

number of providers experiencing 

percent gains and losses in case mix due 

to the proposed and final changes. As 

shown in the tables, the more extreme 

percent changes are greatly reduced 

with our final policies. 

COMPARISON OF THE NUMBER OF DRGS EXPERIENCING PERCENT GAINS/LOSSES IN RELATIVE WEIGHTS IN THE

PROPOSED RULE RELATIVE TO THE FINAL RULE TRANSITION

Percent change in DRG weight Proposed rule Final rule 

(with transition) 

More than ¥10% ..................................................................................................................................... 32 0 

Between ¥5 and ¥10% ......................................................................................................................... 42 1 

Between ¥1 and ¥5% ........................................................................................................................... 49 78 

Between ¥1 and +1% ............................................................................................................................ 42 308 

Between 1% and 5% ............................................................................................................................... 111 130 

Between 5% and 10% ............................................................................................................................. 97 12 

More than +10% ...................................................................................................................................... 153 7 

COMPARISON OF THE NUMBER OF HOSPITALS EXPERIENCING PERCENT GAINS/LOSSES IN CASE-MIX INDEX IN THE

PROPOSED RULE RELATIVE TO THE FINAL RULE TRANSITION

Percent change in case-mix index Proposed rule Final rule 

(with transition) 

More than ¥10% ..................................................................................................................................... 40 0 

Between ¥5 and ¥10% ......................................................................................................................... 103 0 

Between ¥1 and ¥5% ........................................................................................................................... 597 30 

Between ¥1 and +1% ............................................................................................................................ 416 2,067 

Between 1% and 5% ............................................................................................................................... 1493 1,450 

Between 5% and 10% ............................................................................................................................. 794 28 

More than +10% ...................................................................................................................................... 79 20 

For additional comparison purposes 

between the proposed and final rule 

relative weights and DRG changes, the 

following table shows the estimated 

payment impacts on case mix change by 

hospital group that we projected for the 

proposed rule and also shows the 

estimated payment impacts that we are 

finalizing in this rule. 

Proposed rule 

Column 1 

Severity 

changes in 

DRGs 

Severity DRG 

changes & 

cost weights 

(with transition) 

All hospitals .................................................................................................................................. 0.0 0.0 0.0 

By Geographic Location: 

Urban hospitals ........................................................................................................................ ¥0.3 0.0 0.0 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 47917 

Proposed rule 

Column 1 

Severity 

changes in 

DRGs 

Severity DRG 

changes & 

cost weights 

(with transition) 

Large urban areas (populations over 1 million) ....................................................................... 0.1 0.0 0.1 

Other urban areas (populations of 1 million or fewer) ............................................................. ¥0.9 0.0 ¥0.2 

Rural hospitals ......................................................................................................................... 2.7 ¥0.1 0.2 

Bed Size (Urban): 

0–99 beds ................................................................................................................................ 0.5 0.3 0.1 

100–199 beds .......................................................................................................................... 1.8 0.0 0.3 

200–299 beds .......................................................................................................................... 0.0 ¥0.1 ¥0.1 

300–499 beds .......................................................................................................................... ¥1.1 0.0 0.1 

500 or more beds ..................................................................................................................... ¥1.5 0.0 ¥0.2 

Bed Size (Rural): 

0–49 beds ................................................................................................................................ 5.5 ¥0.1 0.3 

50–99 beds .............................................................................................................................. 4.3 ¥0.2 0.3 

100–149 beds .......................................................................................................................... 2.8 –0.2 0.2 

150–199 beds .......................................................................................................................... 1.0 0.1 0.1 

200 or more beds ..................................................................................................................... ¥0.2 ¥0.2 ¥0.2 

Urban by Region: 

New England ............................................................................................................................ 0.3 0.3 0.1 

Middle Atlantic .......................................................................................................................... 0.1 0.0 0.2 

South Atlantic ........................................................................................................................... ¥0.7 ¥0.1 ¥0.2 

East North Central ................................................................................................................... ¥0.4 0.0 0.0 

East South Central ................................................................................................................... ¥0.8 ¥0.2 ¥0.3 

West North Central .................................................................................................................. ¥1.4 0.1 ¥0.2 

West South Central .................................................................................................................. ¥0.7 0.0 ¥0.1 

Mountain ................................................................................................................................... ¥1.4 0.2 ¥0.1 

Pacific ....................................................................................................................................... 0.6 ¥0.1 0.2 

Puerto Rico .............................................................................................................................. 3.3 ¥0.4 0.1 

Rural by Region: 

New England ............................................................................................................................ 1.8 0.1 0.5 

Middle Atlantic .......................................................................................................................... 2.8 0.0 0.4 

South Atlantic ........................................................................................................................... 3.4 ¥0.3 0.2 

East North Central ................................................................................................................... 1.9 ¥0.1 0.1 

East South Central ................................................................................................................... 2.9 0.0 0.0 

West North Central .................................................................................................................. 1.7 ¥0.1 0.1 

West South Central .................................................................................................................. 3.5 ¥0.2 0.1 

Mountain ................................................................................................................................... 2.4 ¥0.1 0.2 

Pacific ....................................................................................................................................... 3.5 ¥0.4 0.3 

By Payment Classification: 

Urban hospitals ........................................................................................................................ ¥0.3 0.0 0.0 

Large urban areas (populations over 1 million) ....................................................................... 0.1 0.0 0.1 

Other urban areas (populations of 1 million or fewer) ............................................................. ¥0.9 0.0 ¥0.2 

Rural areas ............................................................................................................................... 2.6 ¥0.1 0.2 

Teaching Status: 

Non–teaching ........................................................................................................................... 1.1 0.0 0.2 

Fewer than 100 Residents ....................................................................................................... ¥0.8 ¥0.1 ¥0.1 

100 or more Residents ............................................................................................................ ¥0.8 0.0 ¥0.2 

Urban DSH: 

Non–DSH ................................................................................................................................. ¥1.1 0.1 0.0 

100 or more beds ..................................................................................................................... ¥0.2 ¥0.1 0.0 

Less than 100 beds ................................................................................................................. 3.5 0.1 0.4 

Rural DSH: 

SCH .......................................................................................................................................... 4.2 —0.2 0.2 

RRC .......................................................................................................................................... 1.3 ¥0.1 0.0 

Other Rural: ..............................................................................................................................

100 or more beds ..................................................................................................................... 4.2 0.1 0.3 

Less than 100 beds ................................................................................................................. 5.5 ¥0.1 0.2 

Urban teaching and DSH: 

Both teaching and DSH ........................................................................................................... ¥0.6 0.0 ¥0.1 

Teaching and no DSH ............................................................................................................. ¥1.7 0.1 ¥0.1 

No teaching and DSH .............................................................................................................. 1.1 0.0 0.2 

No teaching and no DSH ......................................................................................................... ¥1.0 0.1 0.0 

Rural Hospital Types: 

RRC .......................................................................................................................................... 4.8 0.1 0.3 

SCH .......................................................................................................................................... 0.9 0.0 0.0 

MDH ......................................................................................................................................... 3.9 ¥0.3 0.2 

SCH and RRC .......................................................................................................................... 5.1 ¥0.1 0.4 

MDH and RRC ......................................................................................................................... 1.0 ¥0.3 0.0 

Type of Ownership: 

Voluntary .................................................................................................................................. ¥0.3 0.0 0.0 

Proprietary ................................................................................................................................ 0.2 0.0 0.1 

Government .............................................................................................................................. 1.3 0.0 0.0 


bajohnson on PROD1PC67 with RULES2
47918 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

Proposed rule 

Column 1 

Severity 

changes in 

DRGs 

Severity DRG 

changes & 

cost weights 

(with transition) 

Medicare Utilization as a Percent of Inpatient Days: 

0–25 ......................................................................................................................................... 2.7 0.2 0.3 

25–50 ....................................................................................................................................... ¥0.5 0.0 0.0 

50–65 ....................................................................................................................................... 0.3 ¥0.1 0.0 

Over 65 .................................................................................................................................... 0.3 0.0 ¥0.1 

Hospitals Reclassified by the Medicare Geographic Classification Review Board: 

FY 2005 Reclassifications:.

Urban Hospitals Reclassified by the Medicare Geographic Classification Review Board: 

First Half FY 2007 Reclassifications .................................................................................... ¥0.5 0.1 0.0 

Urban Nonreclassified, First Half FY 2007 .............................................................................. ¥0.3 0.0 0.0 

All Urban Hospitals Reclassified Second Half FY 2007 .......................................................... ¥0.3 0.0 0.0 

Urban Nonreclassified Hospitals Second Half FY 2007 .......................................................... ¥0.3 0.0 0.0 

All Rural Hospitals Reclassified Second Half FY 2007 ........................................................... 1.6 ¥0.1 0.1 

Rural Nonreclassified Hospitals Second Half FY 2007 ........................................................... 4.5 ¥0.1 0.3 

All Section 401 Reclassified Hospitals .................................................................................... 2.9 ¥0.1 0.2 

Other Reclassified Hospitals (Section 1886(d)(8)(B)) ............................................................. 4.6 ¥0.2 0.4 

Section 508 Hospitals .............................................................................................................. ¥0.5 ¥0.1 0.0 

Cardic Specialty Hospitals ........................................................................................................... ¥11.2 0.0 ¥2.3 

We are discussing specific comments 

and responses relevant to our impact 

analysis below. The changes that we are 

adopting in this final rule are illustrated 

in our regulatory impact analysis. 

Comment: Some commenters 

expressed concern that the proposed 

rule discusses the impact of moving to 

CS DRGs using FY 2004 inpatient 

claims rather than FY 2005 claims to 

estimate impact. Some commenters 

stated that using 2 separate years of 

claims data to show the impact of major 

changes made it impossible to assess the 

overall impact of the changes with any 

reasonable level of confidence. 

Response: Because of the long lead 

time to develop the methodology and 

our proposed rule, we used the FY 2004 

MedPAR data to calculate HSRVcc 

weights and model the CS DRGs for 

purposes of the analysis shown on pages 

24007–24011, 24020–24026 of the FY 

2007 IPPS proposed rule (71 FR24007–

24011, 24020–24026). At the time we 

were developing provisions of the 

proposed rule, FY 2005 MedPAR data 

were unavailable to us. Given the public 

interest in prompt publication of the 

rule, we decided not to replicate all of 

the analysis that we provided in section 

II.C. of the proposed rule based on the 

FY 2004 data once the new FY 2005 

data became available to us. We 

believed delaying publication of the 

proposed rule to revise our analysis so 

all of the payment impacts were shown 

based on FY 2005 data was not in the 

public interest. Once we developed the 

methodology and the analysis for the 

proposed rule, we calculated the 

relative weights using the HSRVcc 

methodology that we were proposing to 

adopt for FY 2007 using the FY 2005 

MedPAR. We modeled the HSRVcc 

relative weights using the FY 2005 

MedPAR because we would be using 

these data to calculate actual relative 

weights that would be used to 

determine FY 2007 hospital payments. 

We believed it was important to model 

our FY 2007 proposal as closely to how 

payments would be determined to 

provide the most meaningful 

opportunity for public comment. For 

purposes of providing the payment 

impacts shown on pages 24028–24030 

and the Appendix A—Regulatory 

Impact Analysis (71 FR24404) and the 

methodological description shown on 

pages 24044–24049 of the proposed 

rule, we used FY 2005 MedPAR data. 

We disagree with the commenters that 

providing separate analyses using 2 

years of data makes it more difficult to 

understand and assess the payment 

impacts. Rather, we believe that 

providing these analyses makes it easier 

to understand how relative weights will 

change solely as a result of updating the 

data. 

Comment: MedPAC was pleased that 

CMS proposed three of MedPAC’s four 

recommended changes to the IPPS 

system. However, the MedPAC 

expressed concern the proposal not to 

implement the severity changes until FY 

2008. They stated that it is important to 

correct for differences in patients’

severity concurrently with the 

corrections for charging distortions. 

MedPAC believed that all of the 

proposed policy changes to the IPPS 

should happen concurrently. MedPAC 

stated that failure to adopt all of the 

changes would leave some payment 

distortions in place, thereby continuing 

to favor some kinds of patients over 

others. According to MedPAC, adopting 

all of the policies would create the most 

accurate payments and prevent 

hospitals from facing unjustified shifts 

in their payments that may occur under 

partial adoption of the payment reforms. 

MedPAC stated that concerns about 

giving hospitals time to adapt to the 

changes may be better managed by 

implementing all changes in FY 2007 

and then giving hospitals a transition 

period. Another commenter asked that 

CMS implement both of these proposed 

changes in FY 2007 for the following 

reasons: 

• MedPAC’s analysis revealed 

significant inaccuracy in the current 

payment system and recommended 

implementation of both the new 

severity-refined DRGs and a revised 

method for the weights at the same time. 

• It is inequitable to remove the 

subsidy provided by the overpayments 

for cardiac and orthopedic surgery prior 

to correcting the underpayments for the 

most severely ill patients. 

• It is not reasonable to ask that some 

hospitals experience financial losses 

from implementing the new weights this 

year if implementing severity would 

offset some or all of these losses. To 

stagger implementation will cause 

providers to experience unnecessary 

payment fluctuation between FY 2007 

and FY 2008. 

The commenter further added that a 

delay is not beneficial to taxpayers as 

hospitals will have more time to upcode and increase their Medicare 

payments. Many commenters agreed 

with MedPAC that the cost weights and 

severity-adjusted DRGs should be 

implemented simultaneously. However, 

these commenters suggested 

implementation no sooner than FY 2008 

to limit sharp fluctuations in payments 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 47919 

to hospitals from year to year. Many 

commenters opposed a two-step 

implementation, whereby CMS would 

implement cost-based weights in one 

year and a new DRG system to better 

account for patient severity in a 

subsequent year. They noted that each 

of these two major reforms significantly 

redistributes payments, often in offsetting directions. They stated that large 

swings in payments between the two 

reforms would create unnecessary 

volatility and have a profound impact 

on hospitals’ ability to plan effectively, 

especially for necessary major medical 

equipment purchases and other capital 

expenditures. Therefore, they 

recommended that CMS implement 

both cost-based weights and severityadjusted DRGs concurrently. While 

some commenters urged CMS to 

implement both payment reforms 

concurrently in FY 2007, other 

commenters advised delaying until at 

least FY 2008 to allow enough time to 

improve the proposed methodologies 

and underlying cost data to ensure 

accuracy of payments. Some 

commenters stated that the cost-based 

weights methodology should be 

implemented after the severity adjusted 

DRG methodology. 

Response: Although we are not 

adopting the CS DRGs this year, we 

agree that it is important to smooth the 

transition for our current DRG system to 

a more accurate payment system. As 

indicated above, we have decided to 

adopt traditional cost-based weights for 

FY 2007 without the HSRV part of the 

methodology and we are making 

refinements that will create 20 new 

CMS DRGs, modify 32 others across 13 

different clinical areas involving 

1,666,476 cases that would improve the 

CMS DRG system’s recognition of 

severity of illness for FY 2007. We 

believe it is appropriate to take steps 

toward transitioning the IPPS to a 

severity based DRG system for FY 2007 

by applying some of the severity logic 

from our proposal to the CMS DRGs 

where appropriate. By revising the CMS 

DRGs, we are offering hospitals an 

interim step toward severity DRGs. 

Hospitals would be able to take 

advantage of the improved recognition 

of severity within the context of the 

more familiar CMS DRGs. This interim 

step affords us the opportunity to adopt 

some of the more basic components of 

a severity DRG system, such as specific 

splits in DRGs that lead to groups with 

greater resource utilization. 

Comment: Some commenters were 

concerned that CMS has not taken into 

account all of MedPAC’s 

recommendations for reforming the 

IPPS. 

Response: We believe the commenters 

were expressing concern that we did not 

analyze MedPAC’s recommendation to 

adjust the relative weights to account for 

differences in the prevalence of outlier 

cases. As explained above, we placed 

most of our attention and resources on 

the recommendations related to 

refinement of the current DRGs to more 

fully account for differences in severity 

of illness among patients as we do not 

have the statutory authority to make the 

specific changes to our outlier policy 

that MedPAC recommended. While we 

have not made MedPAC’s 

recommendation regarding outliers a 

central focus of our analysis, we do 

intend to examine this issue in more 

detail over the next year. 

Comment: One commenter stated that 

the annual impact of the changes to the 

proposed CS DRG system will reduce 

payments for its institution by an 

additional $2.7 million per year. The 

commenter suggested that community, 

not for profit hospitals be exempt from 

these proposed changes as this is not the 

group of hospitals that were the 

intended target of these changes. One 

commenter stated that the efforts to 

address issues identified in the MedPAC 

report should begin and end with the 

specialty hospital subset and should not 

occur in conjunction with payment 

systems at large for all other hospital 

facilities. 

A few commenters urged CMS to 

further analyze and evaluate the impact 

of the proposed HSRVcc methodology 

on access to Centers of Excellence. They 

noted that the proposed changes are 

particularly significant for large volume 

hospitals and may have a negative 

impact on the Centers of Excellence. 

Any negative impact to these Centers 

could impede beneficiary access to high 

quality services. Several commenters 

stated that although CMS’ intent may 

have been to eliminate reimbursement 

incentives for specialty hospitals to 

select the most profitable cases, the 

proposed methodology appears to 

negatively affect all hospitals serving 

the most prevalent diagnoses 

(cardiology, orthopedic joint 

replacement, and neurosurgery) within 

the Medicare population. The 

commenters stated that efforts to 

address issues identified in the MedPAC 

report should be limited to specialty 

hospitals. The payment systems at large 

that affect all other hospital facilities 

should not be changed. These 

commenters suggested that CMS address 

the reimbursement incentives of 

specialty hospitals by implementing a 

separate payment system for specialty 

hospitals, rather than implement a 

proposed policy that could negatively 

impact all hospitals. Several 

commenters suggested implementing 

the proposal only for specialty hospitals 

while deferring the proposed payment 

reforms for full-service hospitals to 

afford more time to study the 

implications of the HSRVcc as a method 

of general applicability. Another 

commenter stated that care for Medicare 

beneficiaries in rural areas will be 

adversely affected by the proposed 

adoption of HSRVcc weights because of 

the dramatic impact on specialized 

services provided by rural referral 

centers that are not available at other 

smaller hospitals in rural communities. 

The commenter suggested that the 

future viability of these specialized 

services may be at risk. Therefore, the 

commenter recommended that CMS 

recognize the unique impact of the 

proposed changes on rural referral 

centers by excluding these hospitals 

from the change. 

Response: Payments under a 

prospective payment system are 

predicated on averages. Therefore, we 

do not believe it would be appropriate 

to exclude certain hospital groups from 

implementation of the changes we are 

adopting to use cost-based weights or 

better recognize severity in the DRG 

system. While these changes are 

expected to reduce incentives for 

hospitals to ‘‘cherry pick’’ or treat only 

the most profitable patients, the 

objective of these proposed revisions is 

to improve the accuracy of payments, 

leading to better incentives for hospital 

quality and efficiency and ensure that 

payment rates relate more closely to 

patient resource needs. Even though few 

hospitals will have a large increase or 

decrease in overall Medicare payments, 

there may be a significant increase or 

decrease in payment for individual 

cases within a hospital. Under certain 

circumstances, the current DRG system 

benefits hospitals that focus on treating 

less severely ill patients. Adjusting 

payment for the severity of the patient 

will remove the incentives to 

systematically choose one patient over 

another. Currently, the DRGs overpay 

for some types of cases and underpay 

for others because the relative weight 

system is based on charges and the DRG 

system does not sufficiently distinguish 

more or less resource intensive patients 

based on severity of illness. The changes 

we are making to account for costs in 

the DRG relative weights and improve 

recognition of severity within the DRG 

system will significantly increase 

payment accuracy at both the patient 

and hospital level. 

For these reasons, we believe these 

changes should apply to all hospitals 

paid using the IPPS, regardless of 


bajohnson on PROD1PC67 with RULES2
47920 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

whether a hospital is a specialty 

hospital or a rural referral center. We 

have made significant changes to our 

proposal and the impacts shown in this 

final rule may be very different for an 

individual hospital than those we 

showed in the proposed rule. The 

impact on any specific hospital will 

depend on the types of cases it treats. 

Comment: Several commenters stated 

that in order to analyze and comment, 

a crosswalk between the current DRGs 

and the severity DRGs should be made 

available. 

Response: As indicated earlier, we 

provided a number of resources during 

the comment period to assist 

commenters in analyzing our proposal. 

We provided a number of data files 

listed earlier on the CMS Web site at no 

cost to the public. In addition to this 

information, we made available for 

purchase both the FY 2004 and FY 2005 

MedPAR data that were used in 

simulating the policies in the FY 2007 

IPPS proposed rule. We also provided 

access to a Web tool on 3M’s Web site 

that would allow an end user to build 

case examples using the proposed CS 

DRGs. 

Comment: One commenter stated that 

the best estimates on a hospital specific 

basis, of the incremental effects on 

payment of CMS’ changes to the DRG 

system should be published in the FY 

2007 IPPS final rule. The commenter 

also suggested that CMS release impact 

files by hospitals far in advance of any 

implementation. 

Response: Information to determine 

hospital-specific impacts is available on 

the CMS Web site at: http://www.cms.

hhs.gov/AcuteInpatientPPS/FFD/ 

list.asp#TopOfPage. Click on: ‘‘Acute 

Inpatient—Files for Download http:// 

www.cms.hhs.gov/AcuteInpatientPPS/ 

FFD/list.asp.’’ For the proposed rule 

impact file, click on ‘‘Impact file for 

IPPS FY 2007 Proposed Rule http:// 

www.cms.hhs.gov/AcuteInpatientPPS/ 

FFD/itemdetail.asp?filter

Type=none&filterByDID=-99&

sortByDID=2>&sortOrder=ascending&

itemID=CMS061736.’’ Similar 

information for the final rule will also 

be available on the CMS Web site 

shortly after the publication of this final 

rule. We note that some level of 

familiarity with data concepts and 

Medicare payment variables will be 

necessary for hospitals to use these files 

and simulate a payment analysis for 

their own facility. Using the latest data 

available at the time this final rule was 

prepared, we estimated impacts by 

category of hospital, and the tables 

displaying these impacts are published 

in the impact section of this final rule. 

Space limitations preclude us from 

being able to provide hospital-level 

impacts. In addition, to the extent that 

adjustments for providers such as the 

IME adjustment, DSH adjustment, and/ 

or operating and capital CCRs may be 

updated for FY 2007 subsequent to the 

publication of this final rule, the actual 

impacts on individual providers may 

differ slightly from those we estimated. 

We believe that by providing the 

payment variables and other 

information electronically on the CMS 

Web site, hospitals have the flexibility 

to simulate and develop their own 

impact analyses that may be better 

suited to their needs than any analysis 

CMS would do at the hospital level. 

Comment: Some commenters stated 

that CMS needs to extend the comment 

period to allow hospitals additional 

time to evaluate the effects of these 

proposed changes. 

Response: One of the reasons that we 

proposed adopting the CS DRGs for FY 

2008 was to give hospitals more than 

the 60-day public comment period and 

the additional 60-day delay between the 

publication of the final rule and 

implementation on October 1, 2006, to 

fully understand and plan for the 

change to the CS DRG system. As 

indicated earlier, we are not adopting 

CS DRGs for FY 2007. Therefore, we do 

not see a need to extend the 60-day 

public comment period. Although we 

are not extending the 60-day public 

comment period, we will involve 

hospitals and other stakeholders in our 

plans for moving to a severity DRG 

system for FY 2008. We are interested 

in public input on the types of criteria 

that we should consider and how to 

evaluate improved payment accuracy as 

we consider changes to the DRG system 

to better recognize severity of illness. 

Comment: Some commenters 

encouraged CMS to review the cost/ 

benefit of implementing the cost-based 

weight methodology and a severityadjusted DRG system in conjunction 

with changes to the CMS UB04 claim 

form and the adoption of ICD–10–CM. 

The commenters suggested that 

implementing these changes 

simultaneously could help alleviate the 

additional cost of multiple system 

upgrades both for the hospital and the 

fiscal intermediaries. Some commenters 

stated that CMS should conduct a single 

independent study to determine the 

impact that implementation of this 

methodology will have on coding and 

billing productivity or hospital cash 

flow. Some commenters stated that 

implementing the significant DRG 

changes proposed by CMS is only a 

temporary solution until a more refined 

DRG system can be adopted with more 

specific clinical classification systems 

such as ICD–10–CM and ICD–10–PCS 

that will be capable of fully recognizing 

a patient’s severity of illness and the 

services provided to treat that condition. 

Response: We believe that it is 

important to improve the payment 

accuracy in the hospital IPPS by 

implementing these changes when 

appropriate. The IPPS payment reforms 

that we have proposed do not require 

information system changes for 

hospitals similar to those that will be 

required for adoption of ICD–10 or a 

new HIPAA compliant transaction 

system. The relative weights are merely 

one component in a payment formula 

for calculating Medicare’s IPPS payment 

rate. Although there will be increases 

and decreases in the relative weights 

that are used in the payment formula for 

different DRGs, this payment change 

does not require hospitals to make any 

computer system changes. Similarly, the 

changes to adopt a severity DRG system 

will also not necessarily require 

hospitals to make any upgrades to their 

computer systems. The proposed DRG 

system or any alternative that we 

consider would use the same ICD–9–CM 

diagnosis and procedures codes as the 

current CMS DRGs. Although it seems 

likely that hospitals will want to acquire 

the DRG system that Medicare will use, 

we do not expect that substituting one 

DRG GROUPER for another should be 

burdensome and require upgrades to 

hospital information systems. With 

regard to the comment that a more 

refined DRG system can only be adopted 

with more specific classification 

systems such as ICD–10–CM and ICD–

10–PCS, the Secretary is evaluating 

whether we should adopt ICD–10. 

Comment: One commenter supported 

the decision to use the CS DRGs, noting 

that use of a 3-digit DRG number would 

avoid the undue health programming 

costs that move limited financial 

resources away from initiatives focused 

on improving quality care and access to 

health care. However, the commenter 

also indicated that the number of digits 

in the DRG number should not be a 

factor in choosing the best severity 

classification system. 

Response: We appreciate the 

commenter’s support for our proposal as 

well as the comment that the DRG 

classification system used by Medicare 

should not be dependent upon the 

number of digits in the DRG number. 

We will consider any information 

system infrastructure issues as we 

evaluate alternative DRG systems. 

Comment: Several commenters stated 

that the reasons CMS gave in the 

proposed rule for not implementing CS 

DRGs for FY 2007 are valid. The 

commenters stated that they are all the 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 47921 

more valid because hospitals now 

would have less time to prepare if CMS 

were to implement its proposed severity 

adjusted DRGs this October 1. 

Response: We agree. The proposed 

change to adopt CS DRGs represents a 

major change to how hospitals are paid 

for Medicare inpatient services. We will 

not be implementing the CS DRGs for 

FY 2007. However, we do plan to 

evaluate potential alternative DRG 

systems that better recognize severity 

than the current CMS DRGs for FY 2008. 

Comment: One commenter suggested 

that the CS DRG system’s reliance on 

3M’s proprietary APR DRG grouping 

logic and software may not be in 

compliance with Pub. L. 104–113, the 

National Technology Transfer and 

Advancement Act of 1995. The 

commenter recommended that we 

participate in the formation of expert 

committees with a proven consensus 

standards body to develop a 

standardized DRG classification and 

severity-adjustment system for the IPPS. 

Response: We appreciate the 

commenter’s support for the use of a 

consensus standards body to develop a 

severity-adjusted DRG system. The 

National Technology Transfer and 

Advancement Act of 1995 directs 

Federal agencies to use voluntary 

consensus standards in lieu of 

government-unique standards, except 

where inconsistent with law or 

otherwise impractical. As we move 

toward implementing a severityadjusted DRG system, we will carefully 

consider whether it would be 

appropriate to involve a voluntary 

consensus standards body in the 

process. 

Comment: Some commenters stated a 

transition (blended) period with stop 

loss protections should be provided 

over a period of one to three years. 

Other commenters suggested a longer 

transition period given the magnitude of 

payment distribution across DRGs and 

hospitals. The commenters believe that 

the transition approach would be 

consistent with many other major 

changes that have been implemented 

gradually over the years, including the 

capital prospective payment system. 

The commenters suggested that a 

minimum of 1 year should be allowed 

for the development of software systems 

to handle these changes. 

Response: We agree that these 

changes should be implemented over a 

transitional period. As we indicated 

earlier, we are revising the current DRG 

system to better recognize severity 

(which is discussed in detail in section 

II.C.7. of the preamble of this final rule) 

and are also adopting cost-based 

weights for FY 2007. We are providing 

for a transition period of 3 years with 

the relative weights becoming an 

increasing blend of costs weights as the 

transition proceeds. We also believe that 

the 20 new DRGs we are adopting for 

2007 will improve the transition from 

our current system to a more 

sophisticated severity DRG system in FY 

2008. 

Comment: One commenter noted that 

MedPAC recommended excluding 

statistical and high cost outliers from 

the computation of the DRG weights in 

order that the weights reflect the average 

cost of the inlier case only. MedPAC 

further recommended shifting the 

financing of the outlier pool from all 

cases to cases in the DRGs with the 

highest prevalence of outliers. The 

commenter noted that outlier cases 

occur most frequently in high-weighted 

DRGs. Therefore, MedPAC’s proposal of 

accounting for the high prevalence of 

outliers in the DRGs would compound 

the weight compression caused by the 

HSRV methodology. The commenter 

believed that each proposal by MedPAC 

(to exclude statistical and high cost 

outliers from the computation of the 

DRGs) would exacerbate payment 

inaccuracies, and the two proposals 

combined would be deleterious. The 

commenter stated that it would further 

analyze MedPAC’s proposal to test their 

theory empirically. 

Another commenter was also 

concerned about MedPAC’s 

recommendation to adjust the DRGs to 

account for the prevalence of high-cost 

cases. The commenter explained that 

reducing the relative weights to finance 

the outlier pool will adversely affect 

payment for hospitals specializing in 

the most complex patients. Hospitals 

may be discouraged from developing the 

capacity to treat high cost outliers and 

responding to the needs of their 

community according to the commenter. 

Meanwhile, the commenter suggested 

that hospitals that have the capacity to 

treat the highest cost and most complex 

cases may abandon such an 

infrastructure because it will be too 

costly to maintain. 

One commenter supported MedPAC’s 

proposal and believed that 

implementing MedPAC’s proposal 

would support the goal of achieving 

payment accuracy. The commenter 

explained that the current system 

provides double reward for DRGs with 

a high prevalence of outliers. The 

commenter recommended that CMS 

seek legislative authority to implement 

MedPAC’s proposal of DRG specific 

outlier thresholds. 

Another commenter was supportive of 

MedPAC’s recommendation and noted 

that MedPAC stated in a letter to CMS 

that ‘‘failure to adopt any of (MedPAC’s) 

recommendations would leave some 

payment distortions in place, thereby 

continuing to favor some patients over 

others.’’ Therefore, the commenter 

recommended that CMS implement all 

of MedPAC’s recommendations 

simultaneously when Congress has 

granted CMS authority to adopt 

MedPAC’s outlier recommendation. 

One commenter was concerned that 

CMS provided only ‘‘minimal’’ analysis 

of the effect of the DRG refinements on 

the outlier threshold. Noting that the 5.1 

percent set aside for outlier payments 

could be significantly reduced with the 

adoption of severity DRG refinements, 

the commenter believed that 

implementation of severity DRGs is 

premature until the Secretary 

determines whether statutory changes 

are needed to determine the percentage 

of total IPPS payments that should be 

made as outliers. 

One commenter recommended that, 

even though CMS does not have the 

authority to change the outlier policy, it 

should review creating DRG-specific or 

day outliers under a severity DRG 

system. Another commenter 

recommended that CMS reduce 

payments for outliers and eventually 

eliminate them upon implementing 

severity DRGs. 

Response: We thank the commenters 

for taking the time to comment on 

MedPAC’s recommendation. As noted 

above, we do not have the statutory 

authority to implement MedPAC’s 

recommendation, and, therefore, we 

placed most of our attention and 

resources on the recommendations 

related to refinement of the current 

DRGs to more fully capture differences 

in severity of illness among patients. 

However, we intend to examine 

MedPAC’s recommendation regarding 

outliers in more detail in the future and 

will consider the comments we received 

on the FY 2007 IPPS proposed rule. 

6. Conclusions 

As we describe in more detail below, 

we believe that adopting cost-based 

weights and making improvements to 

the DRG system to better recognize 

severity has the potential to result in 

significant improvements to Medicare’s 

IPPS payments. This final rule 

implements a cost weight methodology 

effective for FY 2007. Further, we are 

creating 20 new CMS DRGs and 

modifying 32 others across 13 different 

clinical areas involving 1,666,476 cases 

that would improve the CMS DRG 

system’s recognition of severity of 

illness for FY 2007. Further, as 

suggested by MedPAC and others, we 

are adopting these changes over a 


bajohnson on PROD1PC67 with RULES2
47922 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

13 Ibid, p. 26. 

transition period while we plan further 

improvements to the IPPS for FY 2008. 

In developing our proposed and final 

policies, we considered a range of 

alternatives outlined below, and we 

solicited comments on both the 

proposal and the alternatives. We asked 

commenters to consider both the CS 

DRGs and alternative severity 

adjustment methods for accounting for 

severity more comprehensively in the 

DRG payment system. For example, 

under one alternative in the proposed 

rule, we would implement the CS DRGs 

in FY 2007 along with the HSRVcc 

weighting methodology. In this event, as 

discussed above, to maintain budget 

neutrality, we would also implement in 

FY 2007 an adjustment to the 

standardized amounts to eliminate the 

effect of changes in coding or 

classification of discharges that do not 

reflect real changes in case-mix. 

Although we did receive comments in 

support of this idea, many commenters 

requested that we not adopt the CS 

DRGs and the HSRVcc weights for FY 

2007. Many of these commenters 

suggested delaying implementation of 

both proposals until at least FY 2008. 

Under another alternative, we would 

have adopted and implemented CS 

DRGs in FY 2008. Although we did 

receive comments in support of this 

idea, we also received many comments 

raising important concerns about 

licensing and proprietary issues 

potentially associated with use of the CS 

DRGs. The commenters asked us not to 

adopt the CS DRGs unless we could 

make them available on the same terms 

as the current CMS DRGs. Yet other 

commenters objected to our proposed 

implementation of the CS DRGs unless 

we evaluated alternatives and better 

justified why there is a need to adopt a 

revised DRG system. Under yet another 

alternative, we would consider partially 

implementing the CS DRGs in FY 2007 

and complete implementation in FY 

2008. However, we noted that there 

were practical difficulties associated 

with partial implementation of CS DRGs 

because cases in a single DRG under the 

current CMS DRG system may group to 

multiple DRGs and MDCs under the CS 

DRG system. Conversely, cases that 

group to multiple MDCs and DRGs 

under the current system may group to 

a single MDC and DRG under the 

current CS DRG system. We did not 

receive any comments supporting the 

idea of partial adoption of the CS DRGs. 

In the FY 2007 IPPS proposed rule, 

we discussed in some detail an 

alternative to partially adopting CS 

DRGs that would apply a clinical 

severity concept to an expanded set of 

DRGs in FY 2007. For example, we have 

received correspondence that raised the 

concern that hospitals may have 

incentives under the current DRG 

system to avoid severely ill, resourceintensive back and spine surgical cases 

(as discussed in section II.D.3.b. of the 

proposed rule; the correspondence 

specifically requested that we apply a 

clinical severity concept to DRG 546). In 

the proposed rule, we noted that other 

surgical DRGs may not accurately 

recognize case severity. Because of the 

frequency of DRG use and the potential 

for risk selection, we pointed out that 

certain DRGs may be particularly 

important in creating a financial 

incentive for hospitals to select a less 

severely ill patient whose case would be 

assigned to the same DRG as a more 

severely ill patient. 

Therefore, while we proposed to 

adopt the CS DRGs in FY 2008, we were 

considering whether to make more 

limited changes to the current DRG 

system to better recognize severity of 

illness in FY 2007. In the FY 2006 IPPS 

final rule (70 FR 47474 through 47478), 

we took steps to better recognize 

severity of illness among cardiovascular 

patients. For all DRGs except cardiac 

DRGs, we currently distinguish between 

more and less complex cases based on 

the presence or absence of a CC. 

However, the diagnoses that we 

designate as CCs are the same across all 

base DRGs. Because the CC list is not 

dependent on the patient’s underlying 

condition, CCs may not accurately 

recognize severity in a given case. The 

changes we made in FY 2006 to the 

cardiac DRGs significantly improved 

recognition of severity between patients 

by distinguishing between more and 

less severe cases based on the presence 

or absence of a MCV. In the proposed 

rule, we indicated that we were 

considering whether a similar approach 

applied to other DRGs would improve 

payment. 

Much like the approach we took last 

year to identify MCV conditions that 

represented higher severity in 

cardiovascular patients, in the proposed 

rule, we indicated that we planned to 

examine which conditions identified 

more severely ill cases in selected MDCs 

and DRGs. We solicited comments as to 

whether it would be appropriate to 

adopt these types of limited changes in 

FY 2007 as an intermediate step to 

adopting CS DRGs in FY 2008. There 

were a number of comments that 

suggested we should make 

improvements to our current DRG 

system rather than adopting the CS 

DRGs. A number of comments 

expressed support for using the current 

DRG system as the starting point for 

revising the DRG system to better 

recognize severity to avoid losing the 

many positive changes that have been 

made over the years to the CMS DRGs. 

We also encouraged commenters to send 

us suggestions regarding potential 

changes that could be made to the 

current DRG system to better recognize 

severity of illness. As indicated below, 

some commenters did provide us with 

specific suggestions for how we could 

revise the current DRGs. 

In the FY 2007 IPPS proposed rule, 

we also discussed an additional 

alternative under which we would 

implement the CS DRGs in FY 2007 and 

the HSRVcc methodology in FY 2008. 

We did receive one comment supporting 

this idea. However, as we have 

discussed elsewhere, we believe that we 

should not adopt CS DRGs in FY 2007, 

but rather evaluate severity DRG 

systems for adoption in FY 2008. 

With respect to the relative weight 

calculations, we believe that adopting 

HSRVcc weights has the potential to 

significantly improve payment equity 

between DRGs. As MedPAC notes, a 

‘‘survey of hospitals’ charging practices 

suggests that hospitals use diverse 

strategies for setting service charges and 

raising them over time.’’ MedPAC found 

that data from the Medicare cost reports 

indicate that hospital markups for 

ancillary services (for example, 

operating room, radiology, and 

laboratory) are generally higher than for 

routine services (for example, intensive 

care unit and room and board).13 Thus, 

MedPAC has concluded that the relative 

weights for DRGs that use more 

ancillary services may be too high 

compared to other DRGs where the 

routine costs account for a higher 

proportion of hospital costs. Although 

we agree with MedPAC’s conclusion, 

the public comments raised important 

issues about the effect of charge 

compression on the relative weights 

using the HSRVcc methodology. These 

commenters argued that the HSRV 

calculation exacerbates the effect of 

charge compression or the practice of 

hospitals applying higher percentage 

markups on lower cost items and lower 

percentage markups on higher cost 

items. As we indicated above, we have 

engaged a contractor to assist us with 

studying whether charge compression is 

an actual phenomenon and how it 

affects the HSRV methodology. As part 

of this analysis, we will study an 

adjustment for charge compression 

suggested in the public comments and 

will consider adopting HSRV weights in 

the future. Nevertheless, in the interim, 

we believe it is important to adopt a 

methodology for calculation of DRG 


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Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 47923 

14 Ibid, p. 29. 

15 Ibid, p. 37. 

16 Ibid, p.37. 

relative weights that takes costs into 

account. We have revised the CCRs that 

we used to develop cost-based weights 

based on the public comments. 

Although they do not show the same 

differentials indicated in the proposed 

rule, they continue to support 

MedPAC’s conclusion that a system 

based on charges pays too much for 

some types of cases and pays too little 

for others. As indicated above, we 

summarized hospital-level cost and 

charge information to 2 routine and 11 

ancillary departmental cost centers and 

found that national average routine cost 

center CCRs ranged from 50 percent 

(intensive care unit days) to 56 percent 

(routine days), while ancillary cost 

center CCRs ranged from 16 percent 

(anesthesiology) to 46 percent (labor and 

delivery room). 

MedPAC also found that relative 

profitability ratios were higher among 

cardiovascular surgical DRGs than the 

medical DRGs.14 We believe the relative 

profitability of the surgical 

cardiovascular DRGs has been an 

important factor in the development of 

specialty heart hospitals. Our payment 

impact analysis indicates that this issue 

will be addressed by adopting costbased weights. Moving from the current 

system of charge-based weights to costbased weights increases payment in the 

medical DRGs relative to the surgical 

DRGs. We expected this result, given 

that routine costs will generally account 

for a higher proportion of total costs in 

the medical DRGs than in the surgical 

DRGs. In the proposed rule, we 

estimated that all of our combined 

changes would, on average, increase the 

medical DRG weights by approximately 

7.3 percent while reducing the surgical 

DRG weights by approximately 6.9 

percent. Implementing the cost-based 

weights without utilizing the HSRV 

standardization method under the 3- 

year transition period where the weights 

for FY 2007 will be based on 33 percent 

of the cost-based weight and 67 percent 

of the charge weight will lessen the 

effects of redistribution between 

medical and surgical DRGs. In this final 

rule, we estimate that the increase in the 

average medical DRG weight will be 0.9 

percent and that the decrease in the 

average surgical DRG weight will be 1.2 

percent. The pattern of increasing 

medical weights and decreasing surgical 

weights still holds true. However, by 

adopting the cost based weights in a 

transition period, we are mitigating the 

larger swings in payments that our 

proposed policies adopted in full would 

have caused. 

Although adopting HSRVcc weights 

would result in the most significant 

improvement in hospital payment-tocost ratios among the changes to the 

IPPS recommended by MedPAC,15 we 

have concerns about implementing this 

methodology until we can further study 

whether the relative weights might be 

affected by charge compression. For this 

reason, we are adopting cost-based 

weights without HSRV for FY 2007. 

However, we will consider applying the 

HSRV methodology in subsequent years 

if our analysis of charge compression 

suggests the issue is not a concern or, 

if appropriate, we can apply an 

adjustment that would account for its 

effects. 

Based on our analysis, we concur 

with MedPAC that the CS DRGs would 

account more completely for differences 

in severity of illness and associated 

costs among hospitals. MedPAC 

observed some modest improvements in 

hospitals’ payment-to-cost ratios from 

adopting APR DRGs.16 We modeled the 

CS DRGs discussed above and observed 

a 12-percent increase in the explanatory 

power (or R-square statistic) of the DRG 

system to explain total hospital charges. 

That is, we found more uniformity 

among hospital total charges within the 

CS DRG system than we did with 

Medicare’s current DRG system. While 

we believe the CS DRG system that we 

described above has the potential to 

improve the IPPS, we have the 

following concerns about adopting it for 

FY 2007: 

• Further adjustments are needed to 

the proposed DRG system. In the 

proposed rule, we indicated that further 

adjustments need to be made to the 

proposed CS DRGs to account for 

situations where less severely ill 

patients may be more resource-intensive 

because they need expensive medical 

technology. The CS DRGs assign a 

patient to a DRG based on severity of 

illness but do not recognize increased 

complexity due to the types of services/ 

technology provided. In addition, the 

CS DRGs do not incorporate many of the 

changes to the base DRG assignments 

that have been made over the years to 

the CMS DRGs. There was significant 

interest in the public comments in 

either revising the CS DRGs to reflect 

these changes or use the CMS DRGs at 

the starting point to better recognize 

severity. The public comments provided 

a number of examples where we need to 

consider whether further changes are 

needed to the CS DRGs before they are 

ready for implementation. 

• Use of a proprietary DRG system. 

The commenters raised valid points 

about adopting a proprietary DRG 

system, including concerns about the 

availability, price and transparency of 

logic of the APR DRGs that are currently 

in use in Maryland. The CS DRGs are a 

variant of the APR DRG system. As we 

evaluate alternative severity 

classification systems, we will use 

public access to the system as an 

important element in evaluating 

whether each system can be adopted for 

Medicare. We will continue to strive to 

promote transparency in our 

decisionmaking as well as in future 

payment and classification systems as 

we have done in the past. 

• No alternatives have been 

evaluated. We have not evaluated 

alternative DRG systems that could also 

better recognize severity. We have 

received comments suggesting that 

alternative DRG systems can better 

recognize severity than the CS DRGs. It 

appears that all of the DRG systems that 

were raised in the public comments as 

potential alternatives to the CS DRGs are 

proprietary systems. However, it is 

possible that we could use one of these 

systems if it were made available in the 

public domain on the same terms as the 

current CMS DRGs. Further, as 

discussed above, CMS (then HCFA) did 

work on developing a severity DRG 

system in the mid-1990’s. It is possible 

that we could update this work and 

adopt a system that better recognizes 

severity based on the current CMS DRGs 

for FY 2008 that does not raise the 

licensing issues that are involved with 

using prioprietary systems. 

Therefore, for the reasons indicated 

above, we are not adopting the CS DRGs 

for FY 2007. However, we are creating 

20 new CMS DRGs and modifying 32 

others across 13 different clinical areas 

involving 1,666,476 cases that would 

improve the CMS DRG system’s 

recognition of severity of illness for FY 

2007. Furthermore, as discussed earlier, 

we have engaged a contractor to assist 

us with evaluating alternative DRG 

systems that were raised as potential 

alternatives to the 3M Severity of Illness 

DRG products in the public comments. 

Finally, we will consider the review that 

we have undertaken of the 13,000 codes 

on the CC list 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 to adopt severity 

DRGs. Again, we expect to complete this 

work in time for proposing changes to 

the DRG system to better recognize 

severity of illness by FY 2008. 


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47924 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

7. Severity Refinements to CMS DRGs 

In response to the FY 2007 IPPS 

proposed rule, we received a number of 

public comments that supported the 

refinement of the current CMS DRGs so 

that they better capture severity. Several 

commenters supported the expanded 

use of a clinical severity concept similar 

to the approach used in FY 2006 to 

refine the cardiac DRGs. One 

commenter urged CMS to expand the set 

of DRGs to which this clinical severity 

concept would apply, including the 

DRGs that capture the implanting of 

defibrillators. Another commenter 

expressed support for additional 

modifications to the current DRGs to 

better capture severity and complexity 

of patients. Another commenter 

recommended that CMS start with the 

current DRG system and provide 

overlays for severity, complexity and 

patient benefit. One commenter 

suggested that CMS develop severity 

levels within all of the existing DRGs (or 

pairs of DRGs, in the cases where CC or 

MCV splits now exist), or identify 

specific DRGs that may be most 

appropriate for severity adjustments. 

Several commenters recommended 

specific adjustments to better capture 

severity for septicemia, headache, and 

mechanical ventilation patients. (The 

DRG recommendations are discussed 

below under the specific DRG topic.) 

We recognize the importance of 

having a classification system that 

recognizes cases that utilize greater 

resources and have higher levels of 

severity of illness. While we discussed 

moving to a new DRG system such as 

the CS DRGs for FY 2007, we stated that 

we were also interested in improving 

the current DRGs so that they better 

capture patients with greater severity of 

illness as early as FY 2007. We solicited 

comments in the proposed rule on 

whether it would be appropriate in FY 

2007 to apply a clinical severity concept 

to an expanded set of DRGs, similar to 

the approach we used in FY 2006 to 

refine cardiac DRGs based on the 

presence or absence of an MCV. 

We believe it is appropriate to move 

in a direction toward a DRG system that 

better recognizes severity. Our strategy 

involves following recommendations 

received as part of public comments and 

implementing some of the severity logic 

in the proposed CS DRGs in the CMS 

DRGs where appropriate. By doing so, 

we would be taking an interim step 

toward better recognizing severity in the 

DRG system. Hospitals would be able to 

take advantage of a portion of improved 

severity logic in the proposed CS DRGs 

within the context of the more familiar 

CMS DRGs. This interim step would 

also afford hospitals a more detailed 

understanding of some of the basic 

types of DRG logic used in the proposed 

CS DRG system. Obviously, we were not 

able to adopt some of the more 

sophisticated logic involved in the 18 

steps included in the proposed CS DRG 

system. However, we were able to adopt 

some of the more basic components 

such as specific splits in DRGs that lead 

to groups with greater resource 

utilization. 

We began our process of adopting 

some of the severity logic within the 

proposed CS DRGs by first comparing 

the current CMS DRGs to the base DRGs 

in the proposed CS DRGs to identify 

areas where improvements could be 

made to better account for severity of 

illness and resource utilization. We 

used two general approaches to evaluate 

potential DRG changes. First, we 

analyzed where the assignment of a case 

to a DRG differed under the CMS DRGs 

and the proposed base CS DRGs. 

Second, we analyzed whether there was 

a list of ‘‘major conditions’’ that could 

be used to revise any DRGs to better 

recognize severity, similar to the 

changes to the cardiovascular DRGs 

involving MCVs we established in last 

year’s final rule. We used the diagnoses 

listed as ‘‘major’’ or ‘‘extreme’’ under 

the proposed CS DRGs for this review. 

The changes described below will result 

in better recognition of severity in the 

current DRG system and, like the 

changes we made last year to reform the 

cardiovascular DRGs based on MCVs, 

represent an excellent next step in 

refining the Medicare inpatient hospital 

payment system so our payments are 

better targeted to specific patients based 

on their costs of care. 

We began our review by focusing on 

the cardiac and orthopedic DRGs 

because of our concerns that cardiac, 

orthopedic, and surgical hospitals have 

taken advantage of opportunities in the 

DRG system to specialize in the least 

complex and most profitable inpatient 

cases. However, with respect to 

orthopedic and surgical specialty 

hospitals, we considered that they have 

very small inpatient volume and the 

issues that are leading to their creation 

are generally unrelated to profit 

opportunities in the IPPS. Although we 

did review the orthopedic DRGs, we 

generally did not find opportunities 

within the current DRG system to make 

further refinements for severity of 

illness. We were also unable to find a 

strong basis to subdivide further most of 

the cardiovascular DRGs. In last year’s 

IPPS rule, we already made significant 

changes to the DRG system to better 

account for severity of illness in the 

DRGs frequently performed by cardiac 

hospitals. As mentioned earlier, this 

DRG change involved splitting some 

cardiac DRGs based on the presence or 

absence of an MCV. We then conducted 

a comparison of the base DRGs in the 

CMS DRG system and proposed CS 

DRGs. We analyzed data to identify 

specific CMS DRGs with wide ranges in 

charges that had been subdivided or in 

other ways modified under the 

proposed CS DRGs. As stated earlier, 

this process did not allow CMS to use 

the more sophisticated logic involved in 

the proposed CS DRGs to differentiate 

groups with greater severity. However, 

we were able to identify a group of 

DRGs that could be created to better 

align our payments based on severity of 

illness. We used our own analysis along 

with specific recommendations received 

during the comment period to develop 

further severity refinements to the 

current DRGs. 

We identified 20 new CMS DRGs 

involving 13 different clinical areas that 

would improve the CMS DRG system’s 

recognition of severity of illness. Twelve 

of the new DRGs are medical and 8 are 

surgical. The 20 new DRGs are 

constructed through a combination of 

approaches used in the proposed CS 

DRGs to refine the base DRGs such as: 

• Subdividing existing DRGs through 

the use of diagnosis codes. 

• Subdividing DRGs based on 

specific surgical procedures. 

• Selecting cases with specific 

diagnosis and/or procedure codes and 

assigning them to a new DRG which 

better accounts for their resource use 

and severity. 

We also modified 32 DRGs to better 

capture differences in severity. The new 

and revised DRGs were selected from 40 

current DRGs which contain 1,666,476 

cases and represent a number of body 

systems. In creating these 20 new DRGs, 

we are deleting 8 existing DRGs and 

modifying 32 existing DRGs. The 

specific DRG changes are described 

below: 

a. MDC 1 (Diseases and Disorders of the 

Nervous System) 

(1) Nervous System Infection Except 

Viral Meningitis 

Under our current DRG system, all 

nervous system infections except viral 

meningitis are assigned to CMS DRG 20 

(Nervous System Infection Except Viral 

Meningitis). By combining all nervous 

system infections except viral 

meningitis into one DRG, we are 

grouping together patients with wide 

ranges of severity. Under our proposed 

CS DRGs, there are separate DRGs that 

distinguish bacterial infection and 

tuberculosis from other infections of the 


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Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 47925 

nervous system. The CS DRGs divided 

these cases in order to better recognize 

severity. The codes which describe 

bacterial infection and tuberculosis are 

listed below. 

We then divided the cases within 

CMS DRG 20 based on the presence or 

absence of bacterial infections and 

tuberculosis of the nervous system. Our 

medical advisors support dividing these 

cases in this manner to better recognize 

severity of illness. The data indicated 

that these are two distinctly different 

groups with significant differences in 

severity. The bacterial and tuberculosis 

infection group had average charges of 

$47,034 compared to the $36,507 

average charges for cases with other 

types of infection of the nervous system. 

Clearly these charge data support the 

fact that the bacterial and tuberculous 

infection group has a significantly 

greater degree of severity. The chart 

below illustrates these data: 

DRG Number of 

cases 

Average 

length of stay 

Average 

charges 

CMS DRG 20 ............................................................................................................................... 6,130 9.88 $42,191.76 

DRG 20 with Bacterial & TB Infections of Nervous System ....................................................... 3,310 10.1 47,034.42 

DRG 20 w/o Bacterial & TB Infections of Nervous System ........................................................ 2,820 9.54 36,507.64 

The data support the creation of two 

separate DRGs for these two groups of 

patients. Therefore, we are deleting DRG 

20 and creating the following two new 

DRGs: 

• DRG 560 (Bacterial & Tuberculosis 

Infections of Nervous System). 

• DRG 561 (Non-Bacterial Infections 

of Nervous System Except Viral 

Meningitis). 

The ICD–9–CM diagnosis codes 

assigned to each new DRG are as 

follows. 

The new DRG 560 will have principal 

diagnosis codes listed in the following 

table. 

Diagnosis 

code DRG 560 diagnosis code titles 

003.21 ...... Salmonella meningitis. 

013.00 ...... Tuberculous meningitis, unspecified examination. 

013.01 ...... Tuberculous meningitis, bacteriological or histological examination not done. 

013.02 ...... Tuberculous meningitis, bacteriological or histological examination results unknown (at present). 

013.03 ...... Tuberculous meningitis, tubercle bacilli found (in sputum) by microscopy. 

013.04 ...... Tuberculous meningitis, tubercle bacilli not found (in sputum) by microscopy, but found by bacterial culture. 

013.05 ...... Tuberculous meningitis, tubercle bacilli not found by bacteriological examination, but tuberculosis confirmed histologically. 

013.06 ...... Tuberculous meningitis, tubercle bacilli not found by bacteriological or histological examination, but tuberculosis confirmed by other 

methods (inoculation of animals). 

013.10 ...... Tuberculoma of meninges, unspecified examination. 

013.11 ...... Tuberculoma of meninges, bacteriological or histological examination not done. 

013.12 ...... Tuberculoma of meninges, bacteriological or histological examination results unknown (at present). 

013.13 ...... Tuberculoma of meninges, tubercle bacilli found (in sputum) by microscopy. 

013.14 ...... Tuberculoma of meninges, tubercle bacilli not found (in sputum) by microscopy, but found by bacterial culture. 

013.15 ...... Tuberculoma of meninges, tubercle bacilli not found by bacteriological examination, but tuberculosis confirmed histologically. 

013.16 ...... Tuberculoma of meninges, tubercle bacilli not found by bacteriological or histological examination, but tuberculosis confirmed by 

other methods (inoculation of animals). 

013.20 ...... Tuberculoma of brain, unspecified examination. 

013.21 ...... Tuberculoma of brain, bacteriological or histological examination not done. 

013.22 ...... Tuberculoma of brain, bacteriological or histological examination results unknown (at present). 

013.23 ...... Tuberculoma of brain, tubercle bacilli found (in sputum) by microscopy. 

013.24 ...... Tuberculoma of brain, tubercle bacilli not found (in sputum) by microscopy, but found by bacterial culture. 

013.25 ...... Tuberculoma of brain, tubercle bacilli not found by bacteriological examination, but tuberculosis confirmed histologically. 

013.26 ...... Tuberculoma of brain, tubercle bacilli not found by bacteriological or histological examination, but tuberculosis confirmed by other 

methods (inoculation of animals). 

013.30 ...... Tuberculous abscess of brain, unspecified examination. 

013.31 ...... Tuberculous abscess of brain, bacteriological or histological examination not done. 

013.32 ...... Tuberculous abscess of brain, bacteriological or histological examination results unknown (at present). 

013.33 ...... Tuberculous abscess of brain, tubercle bacilli found (in sputum) by microscopy. 

013.34 ...... Tuberculous abscess of brain, tubercle bacilli not found (in sputum) by microscopy, but found by bacterial culture.

013.35 ...... Tuberculous abscess of brain, tubercle bacilli not found by bacteriological examination, but tuberculosis confirmed histologically. 

013.36 ...... Tuberculous abscess of brain, tubercle bacilli not found by bacteriological or histological examination, but tuberculosis confirmed by 

other methods (inoculation of animals). 

013.40 ...... Tuberculoma of spinal cord, unspecified examination. 

013.41 ...... Tuberculoma of spinal cord, bacteriological or histological examination not done. 

013.42 ...... Tuberculoma of spinal cord, bacteriological or histological examination results unknown (at present). 

013.43 ...... Tuberculoma of spinal cord, tubercle bacilli found (in sputum) by microscopy. 

013.44 ...... Tuberculoma of spinal cord, tubercle bacilli not found (in sputum) by microscopy, but found by bacterial culture. 

013.45 ...... Tuberculoma of spinal cord, tubercle bacilli not found by bacteriological examination, but tuberculosis confirmed histologically. 

013.46 ...... Tuberculoma of spinal cord, tubercle bacilli not found by bacteriological or histological examination, but tuberculosis confirmed by 

other methods (inoculation of animals). 

013.50 ...... Tuberculous abscess of spinal cord, unspecified examination. 

013.51 ...... Tuberculous abscess of spinal cord, bacteriological or histological examination not done. 

013.52 ...... Tuberculous abscess of spinal cord, bacteriological or histological examination results unknown (at present). 

013.53 ...... Tuberculous abscess of spinal cord, tubercle bacilli found (in sputum) by microscopy. 

013.54 ...... Tuberculous abscess of spinal cord, tubercle bacilli not found (in sputum) by microscopy, but found by bacterial culture. 


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47926 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

Diagnosis 

code DRG 560 diagnosis code titles 

013.55 ...... Tuberculous abscess of spinal cord, tubercle bacilli not found by bacteriological examination, but tuberculosis confirmed histologically. 

013.56 ...... Tuberculous abscess of spinal cord, tubercle bacilli not found by bacteriological or histological examination, but tuberculosis confirmed by other methods (inoculation of animals). 

013.60 ...... Tuberculous encephalitis or myelitis, unspecified examination. 

013.61 ...... Tuberculous encephalitis or myelitis, bacteriological or histological examination not done. 

013.62 ...... Tuberculous encephalitis or myelitis, bacteriological or histological examination results unknown (at present). 

013.63 ...... Tuberculous encephalitis or myelitis, tubercle bacilli found (in sputum) by microscopy. 

013.64 ...... Tuberculous encephalitis or myelitis, tubercle bacilli not found (in sputum) by microscopy, but found by bacterial culture. 

013.65 ...... Tuberculous encephalitis or myelitis, tubercle bacilli not found by bacteriological examination, but tuberculosis confirmed histologically. 

013.66 ...... Tuberculous encephalitis or myelitis, tubercle bacilli not found by bacteriological or histological examination, but tuberculosis confirmed by other methods (inoculation of animals). 

013.80 ...... Other specified tuberculosis of central nervous system, unspecified examination. 

013.81 ...... Other specified tuberculosis of central nervous system, bacteriological or histological examination not done. 

013.82 ...... Other specified tuberculosis of central nervous system, bacteriological or histological examination results unknown (at present). 

013.83 ...... Other specified tuberculosis of central nervous system, tubercle bacilli found (in sputum) by microscopy. 

013.84 ...... Other specified tuberculosis of central nervous system, tubercle bacilli not found (in sputum) by microscopy, but found by bacterial 

culture. 

013.85 ...... Other specified tuberculosis of central nervous system, tubercle bacilli not found by bacteriological examination, but tuberculosis 

confirmed histologically. 

013.86 ...... Other specified tuberculosis of central nervous system, tubercle bacilli not found by bacteriological or histological examination, but 

tuberculosis confirmed by other methods (inoculation of animals). 

013.90 ...... Unspecified tuberculosis of central nervous system, unspecified examination. 

013.91 ...... Unspecified tuberculosis of central nervous system, bacteriological or histological examination not done. 

013.92 ...... Unspecified tuberculosis of central nervous system, bacteriological or histological examination results unknown (at present). 

013.93 ...... Unspecified tuberculosis of central nervous system, tubercle bacilli found (in sputum) by microscopy. 

013.94 ...... Unspecified tuberculosis of central nervous system, tubercle bacilli not found (in sputum) by microscopy, but found by bacterial culture. 

013.95 ...... Unspecified tuberculosis of central nervous system, tubercle bacilli not found by bacteriological examination, but tuberculosis confirmed histologically. 

013.96 ...... Unspecified tuberculosis of central nervous system, tubercle bacilli not found by bacteriological or histological examination, but tuberculosis confirmed by other methods (inoculation of animals). 

036.0 ........ Meningococcal meningitis. 

036.1 ........ Meningococcal encephalitis. 

098.82 ...... Gonococcal meningitis. 

320.0 ........ Hemophilus meningitis. 

320.1 ........ Pneumococcal meningitis. 

320.2 ........ Streptococcal meningitis. 

320.3 ........ Staphylococcal meningitis. 

320.7 ........ Meningitis in other bacterial diseases classified elsewhere. 

320.81 ...... Anaerobic meningitis. 

320.82 ...... Meningitis due to gram-negative bacteria, not elsewhere classified. 

320.89 ...... Meningitis due to other specified bacteria. 

320.9 ........ Meningitis due to unspecified bacterium. 

324.0 ........ Intracranial abscess. 

324.1 ........ Intraspinal abscess. 

324.9 ........ Intracranial and intraspinal abscess of unspecified site. 

357.0 ........ Acute infective polyneuritis. 

The new DRG 561 will have principal 

diagnosis codes listed in the following 

table. 

Diagnosis 

code DRG 561 diagnosis code titles 

006.5 ........ Amebic brain abscess. 

045.00 ...... Acute paralytic poliomyelitis specified as bulbar, unspecified type of poliovirus. 

045.01 ...... Acute paralytic poliomyelitis specified as bulbar, poliovirus type i. 

045.02 ...... Acute paralytic poliomyelitis specified as bulbar, poliovirus type ii. 

045.03 ...... Acute paralytic poliomyelitis specified as bulbar, poliovirus type iii. 

045.10 ...... Acute poliomyelitis with other paralysis, unspecified type of poliovirus. 

045.11 ...... Acute poliomyelitis with other paralysis, poliovirus type i. 

045.12 ...... Acute poliomyelitis with other paralysis, poliovirus type ii. 

045.13 ...... Acute poliomyelitis with other paralysis, poliovirus type iii. 

045.90 ...... Unspecified acute poliomyelitis, unspecified type poliovirus. 

045.91 ...... Unspecified acute poliomyelitis, poliovirus type i. 

045.92 ...... Unspecified acute poliomyelitis, poliovirus type ii. 

045.93 ...... Unspecified acute poliomyelitis, poliovirus type iii. 

049.8 ........ Other specified non-arthropod-borne viral diseases of central nervous system. 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 47927 

Diagnosis 

code DRG 561 diagnosis code titles 

049.9 ........ Unspecified non-arthropod-borne viral diseases of central nervous system. 

052.0 ........ Postvaricella encephalitis. 

052.2 ........ Postvaricella myelitis. 

053.14 ...... Herpes zoster myelitis. 

054.3 ........ Herpetic meningoencephalitis. 

054.74 ...... Herpes simplex myelitis. 

055.0 ........ Postmeasles encephalitis. 

056.01 ...... Encephalomyelitis due to rubella. 

056.09 ...... Rubella with other neurological complications. 

062.0 ........ Japanese encephalitis. 

062.1 ........ Western equine encephalitis. 

062.2 ........ Eastern equine encephalitis. 

062.3 ........ St. Louis encephalitis. 

062.4 ........ Australian encephalitis. 

062.5 ........ California virus encephalitis. 

062.8 ........ Other specified mosquito-borne viral encephalitis. 

062.9 ........ Mosquito-borne viral encephalitis, unspecified. 

063.0 ........ Russian spring-summer (taiga) encephalitis. 

063.1 ........ Louping ill. 

063.2 ........ Central European encephalitis. 

063.8 ........ Other specified tick-borne viral encephalitis. 

063.9 ........ Tick-borne viral encephalitis, unspecified. 

064 ........... Viral encephalitis transmitted by other and unspecified arthropods. 

066.2 ........ Venezuelan equine fever. 

071 ........... Rabies. 

072.2 ........ Mumps encephalitis. 

090.40 ...... Juvenile neurosyphilis, unspecified. 

090.41 ...... Congenital syphilitic encephalitis. 

090.42 ...... Congenital syphilitic meningitis. 

090.49 ...... Other juvenile neurosyphilis. 

091.81 ...... Acute syphilitic meningitis (secondary). 

094.2 ........ Syphilitic meningitis. 

094.3 ........ Asymptomatic neurosyphilis. 

094.81 ...... Syphilitic encephalitis. 

100.81 ...... Leptospiral meningitis (aseptic). 

100.89 ...... Other specified leptospiral infections. 

112.83 ...... Candidal meningitis. 

114.2 ........ Coccidioidal meningitis. 

115.01 ...... Histoplasma capsulatum meningitis. 

115.11 ...... Histoplasma duboisii meningitis. 

115.91 ...... Histoplasmosis meningitis, unspecified. 

130.0 ........ Meningoencephalitis due to toxoplasmosis. 

321.0 ........ Cryptococcal meningitis. 

321.1 ........ Meningitis in other fungal diseases. 

321.2 ........ Meningitis due to viruses not elsewhere classified. 

321.3 ........ Meningitis due to trypanosomiasis. 

321.4 ........ Meningitis in sarcoidosis. 

321.8 ........ Meningitis due to other nonbacterial organisms classified elsewhere. 

322.0 ........ Nonpyogenic meningitis. 

322.1 ........ Eosinophilic meningitis. 

322.2 ........ Chronic meningitis. 

322.9 ........ Meningitis, unspecified. 

323.01 ...... Encephalitis and encephalomyelitis in viral diseases classified elsewhere. 

323.02 ...... Myelitis in viral diseases classified elsewhere. 

323.1 ........ Encephalitis, myelitis, and encephalomyelitis in rickettsial diseases classified elsewhere. 

323.2 ........ Encephalitis, myelitis, and encephalomyelitis in protozoal diseases classified elsewhere. 

323.41 ...... Other encephalitis and encephalomyelitis due to infection classified elsewhere. 

323.42 ...... Other myelitis due to infection classified elsewhere. 

323.51 ...... Encephalitis and encephalomyelitis following immunization procedures. 

323.52 ...... Myelitis following immunization procedures. 

323.61 ...... Infectious acute disseminated encephalomyelitis (ADEM). 

323.62 ...... Other postinfectious encephalitis and encephalomyelitis. 

323.63 ...... Postinfectious myelitis. 

323.81 ...... Other causes of encephalitis and encephalomyelitis. 

323.82 ...... Other causes of myelitis. 

323.9 ........ Unspecified causes of encephalitis, myelitis, and encephalomyelitis. 

341.20 ...... Acute (transverse) myelitis NOS. 

341.21 ...... Acute (transverse) myelitis in conditions classified elsewhere. 

341.22 ...... Idiopathic transverse myelitis. 


bajohnson on PROD1PC67 with RULES2
47928 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

(2) Seizure and Headache 

Comment: One commenter stated that 

the current DRGs do not adequately 

capture the severity of patients with 

more severe types of headaches. The 

commenter further noted that seizures 

and headaches represent distinctly 

different levels of severity, yet they are 

grouped together in the CMS DRGs: 

• CMS DRG 24 (Seizure & Headache 

Age >17 with CC). 

• CMS DRG 25 (Seizure & Headache 

Age >17 without CC). 

• CMS DRG 26 (Seizure & Headache 

Age 0–17). 

The commenter stated that more 

severely ill patients, such as those with 

intense migraine headaches, should be 

differentiated from other patients in the 

DRG. The commenter suggested 

splitting these DRGs into two or more 

new DRGs to better capture severity. 

Alternatively, the commenter suggested 

that CMS examine how the APR DRG 

system handles these types of cases. 

Response: Under both the APR DRGs 

and our proposed CS DRGs, seizure and 

headache cases are assigned to separate 

DRGs while these cases are grouped 

together in the CMS DRGs. Both severity 

DRG systems recognize different levels 

of severity for these two groups of 

patients. Our medical advisors found 

that seizure and headache patients are 

clinically different, with seizure 

patients having a higher level of 

severity. We also analyzed data for 

patients with seizures versus those who 

are admitted with headaches and found 

that seizure cases have higher average 

charges than headaches. We did not 

have enough cases to analyze potential 

DRG changes for DRG 26. As the chart 

below shows, seizure patients age 

greater than 17 have average charges of 

$17,125 with CC and $10,540 without 

CC. Headache patients greater than 17 

years of age have average charges of 

$11,618. The data did not support 

creating a split for headache patients 

greater than 17 years with and without 

CC. The difference in average charges 

for these groups was only $2,596 

($12,591 with CC as compared to $9,995 

for those without a CC). 

DRGS 24, 25, AND 26 

DRG Number of 

cases 

Average 

length of stay 

Average 

charges 

24 ................................................................................................................................................. 60,186 4.67 $16,403.55 

25 ................................................................................................................................................. 25,816 3.13 10,419.00 

26 ................................................................................................................................................. 21 4.05 17,396.43 

SEIZURES AGE >17 WITH AND WITHOUT CC 

DRG Number of 

cases 

Average 

length of stay 

Average 

charges 

With CC ....................................................................................................................................... 50,605 4.8 $17,125.19 

Without CC .................................................................................................................................. 20,065 3.1 10,540.27 

HEADACHES > 17 

DRG Average 

length of stay 

Average 

charges 

15,332 ...................................................................................................................................................................... 3.4 $11,618.15 

HEADACHES >17 WITH AND WITHOUT CC 

DRG Number of 

cases 

Average 

length of stay 

Average 

charges 

With CC ....................................................................................................................................... 9,581 3.7 $12,591,92 

Without CC .................................................................................................................................. 5,751 2.9 9,995.85 

The data also support creating 

separate DRGs for seizure and headache 

patients greater than 17 years of age. 

The data further support an additional 

split for seizure patients based on the 

presence of a complication or 

comorbidity (CC). Seizure cases with a 

CC have $6,585 greater average charges 

compared to cases without a CC. The 

data are less compelling for creating a 

split based on the presence of a CC for 

headache cases, since the difference in 

average charges is only $2,596. 

The clinical data and our medical 

advisors support the creation of separate 

DRGs for these two groups of patients. 

Therefore, we are deleting the following 

DRGs: 

• DRG 24 (Seizure & Headache 

Age >17 with CC). 

• DRG 25 (Seizure & Headache 

Age >17 without CC). 

We are creating the following three 

new DRGs: 

• DRG 562 (Seizure Age >17 with 

CC). 

• DRG 563 (Seizure Age >17 without 

CC). 

• DRG 564 (Headaches Age >17). 

The ICD–9–CM codes and DRG logic 

for cases assigned to these new DRGs 

will be as follows. 

New DRG 562 will have the following 

principal diagnosis codes and age 

greater than 17 years with a CC. 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 47929 

Diagnosis 

code Diagnosis code title 

345.00 ...... Generalized nonconvulsive epilepsy, without mention of intractable epilepsy. 

345.01 ...... Generalized nonconvulsive epilepsy, with intractable epilepsy. 

345.10 ...... Generalized convulsive epilepsy, without mention of intractable epilepsy. 

345.11 ...... Generalized convulsive epilepsy, with intractable epilepsy. 

345.2 ........ Petit mal status, epileptic. 

345.3 ........ Grand mal status, epileptic. 

345.40 ...... Localization-related (focal) (partial) epilepsy and epileptic syndromes with complex partial seizures, without mention of intractable 

epilepsy. 

345.41 ...... Localization-related (focal) (partial) epilepsy and epileptic syndromes with complex partial seizures, with intractable epilepsy. 

345.50 ...... Localization-related (focal) (partial) epilepsy and epileptic syndromes with simple partial seizures, without mention of intractable epilepsy. 

345.51 ...... Localization-related (focal) (partial) epilepsy and epileptic syndromes with simple partial seizures, with intractable epilepsy. 

345.60 ...... Infantile spasms, without mention of intractable epilepsy. 

345.61 ...... Infantile spasms, with intractable epilepsy. 

345.70 ...... Epilepsia partialis continua, without mention of intractable epilepsy. 

345.71 ...... Epilepsia partialis continua, with intractable epilepsy. 

345.80 ...... Other forms of epilepsy and recurrent seizures, without mention of intractable epilepsy. 

345.81 ...... Other forms of epilepsy and recurrent seizures, with intractable epilepsy. 

345.90 ...... Epilepsy, unspecified, without mention of intractable epilepsy. 

345.91 ...... Epilepsy, unspecified, with intractable epilepsy. 

780.31 ...... Febrile convulsions (simple), unspecified. 

780.32 ...... Complex febrile convulsions. 

780.39 ...... Other convulsions. 

New DRG 563 will have the principal 

diagnosis codes listed above for DRG 

562, age greater than 17 years, but no 

complication/comorbidity. 

New DRG 564 will have the principal 

diagnosis codes listed as follows and an 

age greater than 17 years. 

Diagnosis 

code Diagnosis code title 

307.81 ...... Tension headache. 

310.2 ........ Postconcussion syndrome. 

346.00 ...... Classical migraine without mention of intractable migraine. 

346.01 ...... Classical migraine with intractable migraine, so stated. 

346.10 ...... Common migraine without mention of intractable migraine. 

346.11 ...... Common migraine with intractable migraine, so stated. 

346.20 ...... Variants of migraine without mention of intractable migraine. 

346.21 ...... Variants of migraine with intractable migraine, so stated. 

346.80 ...... Other forms of migraine without mention of intractable migraine. 

346.81 ...... Other forms of migraine with intractable migraine, so stated. 

346.90 ...... Migraine, unspecified without mention of intractable migraine. 

346.91 ...... Migraine, unspecified with intractable migraine, so stated. 

348.2 ........ Benign intracranial hypertension. 

349.0 ........ Reaction to spinal or lumbar puncture. 

437.4 ........ Cerebral arteritis. 

784.0 ........ Headache. 

b. MDC 4 (Diseases and Disorders of the 

Respiratory System): Respiratory System 

Diagnosis With Ventilator Support 

Medical patients who are treated with 

mechanical ventilation for respiratory 

failure are currently assigned to DRG 

475 (Respiratory System Diagnosis with 

Ventilator Support). This DRG includes 

patients who are on a mechanical 

ventilator for only a few hours as well 

as patients who are on mechanical 

ventilation for several days. The 

proposed CS DRGs divide these patients 

into two groups, those on ventilator 

support for 96 or more hours and those 

on ventilator support for less than 96 

hours. The CS DRGs recognize the 

difference in severity between these two 

groups of patients. Our medical advisors 

agree that medical patients who are 

treated with mechanical ventilation for 

respiratory failure for 96 or more hours 

in most cases are more severely ill than 

patients who are treated with 

mechanical ventilation for fewer than 96 

hours. A review of these cases illustrates 

a significant difference in average 

charges for patients on ventilator 

support for 96 or more hours which 

supports the greater severity of these 

patients. The chart below shows that 

patients on ventilator support for 96 or 

more hours have average charges of 

$83,058 compared to $38,300 for 

patients on ventilator support for less 

than 96 hours, a difference of $44,758 in 

charges. The following chart 

summarizes these data. 


bajohnson on PROD1PC67 with RULES2
47930 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

DRG 475 RESPIRATORY SYSTEM DIAGNOSIS WITH VENTILATOR SUPPORT

DRG Number of 

cases 

Average 

length of 

stay 

Average 

charges 

DRG 475 .................................................................................................................................................. 114,199 10.64 $55,873.15 

DRG 475 with Ventilator Support 96+ Hours .......................................................................................... 44,836 15.30 83,058.24 

DRG 475 with Ventilator Support <96 Hours .......................................................................................... 69,363 7.64 38,300.81 

The proposed CS DRGs do a much 

better job of identifying patients on 

ventilator support who have higher 

levels of severity and utilize 

significantly more resources. Therefore, 

we will adopt the approach used under 

the CS DRG system and split these 

patients based on whether or not the 

patients are on mechanical ventilation 

for 96 hours. We are deleting DRG 475 

and creating the following two new 

DRGs: 

• DRG 565 (Respiratory System 

Diagnosis with Ventilator Support 96+ 

Hours). 

• DRG 566 (Respiratory System 

Diagnosis with Ventilator Support < 96 

Hours). 

The DRG logic for these two new 

DRGs is as follows. 

New DRG 565 will have a respiratory 

system diagnosis and procedure code 

96.72 (Continuous mechanical 

ventilation for 96 consecutive hours or 

more). 

New DRG 566 will have a respiratory 

system diagnosis and the following 

procedure codes: 

96.70 (Continuous mechanical 

ventilation of unspecified duration). 

96.71 (Continuous mechanical 

ventilation for less than 96 consecutive 

hours). 

c. MDC 6 (Diseases and Disorders of the 

Digestive System) 

(1) Major Esophageal Disorders and 

Major Gastrointestinal and Peritoneal 

Infections 

The proposed CS DRGs assign major 

esophageal disorders to a single DRG 

because these disorders have been 

shown to have a higher level of severity 

than do other types of esophageal 

disorders. Under the current CMS DRGs 

these disorders are dispersed 

throughout 8 separate DRGs. The 

conditions included in the list of major 

esophageal disorders are described in 

the table below. The proposed CS DRGs 

also assign specific gastrointestinal and 

peritoneal infections that represent a 

high level of severity into a single DRG. 

These conditions are assigned to the 

same group of eight CMS DRGs 

mentioned above within CMS’ current 

DRGS. The conditions considered 

gastrointestinal and peritoneal 

infections are described in the table 

below. 

Our data show that the two groups of 

cases assigned to major esophageal 

disorders and to the gastrointestinal and 

peritoneal infections represent 

significantly greater severity levels and 

have higher average charges than do 

other cases in the eight CMS DRGs. The 

eight current CMS DRGs to which these 

two groups of higher severity cases as 

assigned are as follows: 

• CMS DRG 174 (G.I. Hemorrhage 

with CC). 

• CMS DRG 175 (G.I. Hemorrhage 

without CC). 

• CMS DRG 182 (Esophagitis, 

Gastroenteritis & Miscellaneous 

Digestive Disorders Age >17 with CC). 

• CMS DRG 183 (Esophagitis, 

Gastroenteritis & Miscellaneous 

Digestive Disorders Age >17 without 

CC). 

• CMS DRG 184 (Esophagitis, 

Gastroenteritis & Miscellaneous 

Digestive Disorders Age 0–17). 

• CMS DRG 188 (Digestive System 

Diagnoses Age >17 with CC). 

• CMS DRG 189 (Digestive System 

Diagnoses Age >17 without CC). 

• CMS DRG 190 (Digestive System 

Diagnoses Age 0–17). 

DRGS 174, 175, 182, 183, 184, 188, 189, AND 190 

DRG Number of 

cases 

Average 

length of 

stay 

Average 

charges 

DRG 174 .............................................................................................................................................. 249,359 4.69 $16,987.26 

DRG 174 w/o Major Esophageal Disorders or Gastrointestinal and Peritoneal Infections ................ 241,508 4.69 16,934.86 

DRG 175 .............................................................................................................................................. 28,485 2.86 9,573.73 

DRG 175 w/o Major Esophageal Disorders or Gastrointestinal and Peritoneal Infections ................ 27,816 2.87 9,934.86 

DRG 182 .............................................................................................................................................. 282,619 4.48 14,269.01 

DRG 182 w/o Major Esophageal Disorders or Gastrointestinal and Peritoneal Infections ................ 243,563 4.07 13,124.03 

DRG 183 .............................................................................................................................................. 77,582 2.89 9,933.62 

DRG 183 w/o Major Esophageal Disorders or Gastrointestinal and Peritoneal Infections ................ 74,899 2.84 9,845.81 

DRG 184 .............................................................................................................................................. 66 4.38 12,116.67 

DRG 184 w/o Major Esophageal Disorders or Gastrointestinal and Peritoneal Infections ................ 60 3.88 10,053.38 

DRG 188 .............................................................................................................................................. 88,970 5.45 18,278.19 

DRG 189 w/o Major Esophageal Disorders or Gastrointestinal and Peritoneal Infections ................ 87,210 5.43 18,194.27 

DRG 189 .............................................................................................................................................. 12,454 3.06 9,963.90 

DRG 190 w/o Major Esophageal Disorders or Gastrointestinal and Peritoneal Infections ................ 12,123 3.02 9,855.31 

DRG 190 .............................................................................................................................................. 58 5.02 14,156.52 

DRG 190 w/o Major Esophageal Disorders or Gastrointestinal and Peritoneal Infections ................ 45 5.13 14,829.47 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 47931 

MAJOR ESOPHAGEAL DISORDERS

Number of 

cases 

Average 

length of 

stay 

Average 

charges 

10,633 ........... 4.7 $18,410.30 

MAJOR GASTROINTESTINAL AND

PERITONEAL INFECTIONS

Number of 

cases 

Average 

length of 

stay 

Average 

charges 

41,736 ........... 6.9 $20,861.06 

As can be seen from the tables above, 

cases assigned to these eight DRGs 

without a major esophageal disorder or 

a major gastrointestinal disorder and 

peritoneal infection have average 

charges ranging from $9,845 to $18,194. 

The average charges for major 

esophageal disorders are $18,410, while 

average charges for major 

gastrointestinal disorders and peritoneal 

infections are $20,861. Removing these 

higher severity cases from the eight 

DRGs does not have a significant impact 

on the DRG weights for the remaining 

cases. Most of the higher severity cases 

are being removed from DRG 182. There 

were 282,619 cases in this DRG. By 

removing the two new groups of cases, 

the DRG has 243,563 cases remaining. 

The average charge for DRG 182 with 

the remaining cases decreases from 

$14,269 to $13,124. Therefore, the 

impact on the remaining cases is not 

that significant. However, reassigning 

cases with major esophageal and 

gastrointestinal disorders and peritoneal 

infections to two new DRGs has the 

effect of creating two groups which have 

higher levels of severity and use 

significantly greater resources. Our 

medical advisors agree that these two 

groups represent higher levels of 

severity and that it is appropriate to 

move these two groups of cases out of 

their existing assignments and into the 

following two new DRGs: 

• DRG 571 (Major Esophageal 

Disorders) 

• DRG 572 (Major Gastrointestinal 

Disorders and Peritoneal Infections) 

We are creating new DRG 571 with 

the following ICD–9–CM diagnosis 

codes (removing them from DRGs 174, 

175, 182, 183, 184, 188, 189, and 190): 

Diagnosis 

code Major esophageal disorders diagnosis code titles 

017.80 ...... Tuberculosis of esophagus, unspecified examination. 

017.81 ...... Tuberculosis of esophagus, bacteriological or histological examination not done. 

017.82 ...... Tuberculosis of esophagus, bacteriological or histological examination results unknown (at present). 

017.83 ...... Tuberculosis of esophagus, tubercle bacilli found (in sputum) by microscopy. 

017.84 ...... Tuberculosis of esophagus, tubercle bacilli not found (in sputum) by microscopy, but found by bacterial culture. 

017.85 ...... Tuberculosis of esophagus, tubercle bacilli not found by bacteriological examination, but tuberculosis confirmed histologically. 

017.86 ...... Tuberculosis of esophagus, tubercle bacilli not found by bacteriological or histological examination, but tuberculosis confirmed by 

other methods (inoculation of animals). 

112.84 ...... Candidal esophagitis. 

456.0 ........ Esophageal varices with bleeding. 

456.1 ........ Esophageal varices without mention of bleeding. 

456.20 ...... Esophageal varices in diseases classified elsewhere, with bleeding. 

530.4 ........ Perforation of esophagus. 

530.7 ........ Gastroesophageal laceration-hemorrhage syndrome. 

530.82 ...... Esophageal hemorrhage. 

530.84 ...... Tracheoesophageal fistula. 

750.3 ........ Congenital tracheoesophageal fistula, esophageal atresia and stenosis. 

750.4 ........ Other specified congenital anomalies of esophagus. 

862.22 ...... Injury to esophagus without mention of open wound into cavity. 

947.2 ........ Burn of esophagus. 

We are creating new DRG 572 with 

the following ICD–9–CM diagnosis 

codes (removing them from DRGs 182, 

183, 184, 188, 189, and 190): 

Diagnosis 

code Major esophageal disorders diagnosis code titles 

001.0 ........ Cholera due to vibrio cholerae. 

001.1 ........ Cholera due to vibrio cholerae el tor. 

001.9 ........ Cholera, unspecified. 

003.0 ........ Salmonella gastroenteritis. 

004.0 ........ Shigella dysenteriae. 

004.1 ........ Shigella flexneri. 

004.2 ........ Shigella boydii. 

004.3 ........ Shigella sonnei. 

004.8 ........ Other specified shigella infections. 

004.9 ........ Shigellosis, unspecified. 

005.0 ........ Staphylococcal food poisoning. 

005.2 ........ Food poisoning due to clostridium perfringens (c. welchii). 

005.3 ........ Food poisoning due to other clostridia. 

005.4 ........ Food poisoning due to vibrio parahaemolyticus. 

005.81 ...... Food poisoning due to vibrio vulnificus. 

005.89 ...... Other bacterial food poisoning. 

006.0 ........ Acute amebic dysentery without mention of abscess. 

006.1 ........ Chronic intestinal amebiasis without mention of abscess. 

006.2 ........ Amebic nondysenteric colitis. 

007.0 ........ Balantidiasis. 

007.1 ........ Giardiasis. 


bajohnson on PROD1PC67 with RULES2
47932 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

Diagnosis 

code Major esophageal disorders diagnosis code titles 

007.2 ........ Coccidiosis. 

007.3 ........ Intestinal trichomoniasis. 

007.4 ........ Cryptosporidiosis. 

007.5 ........ Cyclosporiasis. 

007.8 ........ Other specified protozoal intestinal diseases. 

007.9 ........ Unspecified protozoal intestinal disease. 

008.00 ...... Intestinal infection due to e. coli, unspecified. 

008.01 ...... Intestinal infection due to enteropathogenic e. coli. 

008.02 ...... Intestinal infection due to enterotoxigenic e. coli. 

008.03 ...... Intestinal infection due to enteroinvasive e. coli. 

008.04 ...... Intestinal infection due to enterohemorrhagic e. coli. 

008.09 ...... Intestinal infection due to other intestinal e. coli infections. 

008.1 ........ Intestinal infection due to arizona group of paracolon bacilli. 

008.2 ........ Intestinal infection due to aerobacter aerogenes. 

008.3 ........ Intestinal infection due to proteus (mirabilis) (morganii). 

008.41 ...... Intestinal infection due to staphylococcus. 

008.42 ...... Intestinal infection due to pseudomonas. 

008.43 ...... Intestinal infection due to campylobacter. 

008.44 ...... Intestinal infection due to yersinia enterocolitica. 

008.45 ...... Intestinal infection due to clostridium difficile. 

008.46 ...... Intestinal infection due to other anaerobes. 

008.47 ...... Intestinal infection due to other gram-negative bacteria. 

008.49 ...... Intestinal infection due to other organisms. 

008.5 ........ Bacterial enteritis, unspecified. 

4.00 .......... Tuberculous peritonitis, unspecified examination. 

014.01 ...... Tuberculous peritonitis, bacteriological or histological examination not done. 

014.02 ...... Tuberculous peritonitis, bacteriological or histological examination results unknown (at present). 

014.03 ...... Tuberculous peritonitis, tubercle bacilli found (in sputum) by microscopy. 

014.04 ...... Tuberculous peritonitis, tubercle bacilli not found (in sputum) by microscopy, but found by bacterial culture. 

014.05 ...... Tuberculous peritonitis, tubercle bacilli not found by bacteriological examination, but tuberculosis confirmed histologically. 

014.06 ...... Tuberculous peritonitis, tubercle bacilli not found by bacteriological or histological examination, but tuberculosis confirmed by other 

methods (inoculation of animals). 

014.80 ...... Other tuberculosis of intestines and mesenteric glands, unspecified examination. 

014.81 ...... Other tuberculosis of intestines and mesenteric glands, bacteriological or histological examination not done. 

014.82 ...... Other tuberculosis of intestines and mesenteric glands, bacteriological or histological examination results unknown (at present). 

014.83 ...... Other tuberculosis of intestines and mesenteric glands, tubercle bacilli found (in sputum) by microscopy. 

014.84 ...... Other tuberculosis of intestines and mesenteric glands, tubercle bacilli not found (in sputum) by microscopy, but found by bacterial 

culture. 

014.85 ...... Other tuberculosis of intestines and mesenteric glands, tubercle bacilli not found by bacteriological examination, but tuberculosis 

confirmed histologically. 

014.86 ...... Other tuberculosis of intestines and mesenteric glands, tubercle bacilli not found by bacteriological or histological examination, but 

tuberculosis confirmed by other methods (inoculation of animals). 

021.1 ........ Enteric tularemia. 

022.2 ........ Gastrointestinal anthrax. 

032.83 ...... Diphtheritic peritonitis. 

039.2 ........ Abdominal actinomycotic infection. 

095.2 ........ Syphilitic peritonitis. 

098.86 ...... Gonococcal peritonitis. 

123.1 ........ Cysticercosis. 

123.5 ........ Sparganosis (larval diphyllobothriasis). 

123.6 ........ Hymenolepiasis. 

123.8 ........ Other specified cestode infection. 

123.9 ........ Cestode infection, unspecified. 

126.0 ........ Ancylostomiasis due to ancylostoma duodenale. 

126.1 ........ Necatoriasis due to necator americanus. 

126.2 ........ Ancylostomiasis due to ancylostoma braziliense. 

126.3 ........ Ancylostomiasis due to ancylostoma ceylanicum. 

126.8 ........ Other specified ancylostoma. 

126.9 ........ Ancylostomiasis and necatoriasis, unspecified. 

540.0 ........ Acute appendicitis with generalized peritonitis. 

540.1 ........ Acute appendicitis with peritoneal abscess. 

567.0 ........ Peritonitis in infectious diseases classified elsewhere. 

567.1 ........ Pneumococcal peritonitis. 

567.21 ...... Peritonitis (acute) generalized. 

567.22 ...... Peritoneal abscess. 

567.23 ...... Spontaneous bacterial peritonitis. 

567.29 ...... Other suppurative peritonitis. 

567.31 ...... Psoas muscle abscess. 

567.38 ...... Other retroperitoneal abscess. 

7.39 .......... Other retroperitoneal infections. 

567.89 ...... Other specified peritonitis. 

567.9 ........ Unspecified peritonitis. 

569.5 ........ Abscess of intestine. 


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Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 47933 

(2) Principal or Secondary Diagnosis of 

Major Gastrointestinal Diagnosis 

We examined the diagnosis codes 

assigned to MDC 6 for severity using the 

proposed CS DRGs and created a list of 

diagnosis codes that are identified as 

major or extreme in the APR DRGs or 

the consolidated severity DRGs. We 

refer to this set of higher severity 

diagnosis codes as Major 

Gastrointestinal Diagnoses. The list of 

higher severity diagnosis codes 

considered to be a Major 

Gastrointestinal Diagnosis is provided 

in the table below showing new DRG 

569. 

We then examined DRGs 148 and 149 

(Major Small & Large Bowel Procedures 

with and without CC, respectively) and 

DRGs 154 through 156 (Stomach, 

Esophageal & Duodenal Procedures Age 

>17 with and without CC and Age 0–17, 

respectively) when these Major 

Gastrointestinal Diagnoses were present 

as either a principal or secondary 

diagnosis. In general, these Major 

Gastrointestinal Diagnoses represent or 

are associated with the reason for 

performing the surgical procedure in 

DRGs 148 and 149 and DRGs 154 

through 156 and are the most serious 

diagnoses that necessitate surgery. As 

the following tables illustrate, the 

presence of these Major Gastrointestinal 

Diagnoses identifies patients with a 

higher level of severity. The presence of 

these Major Gastrointestinal Diagnoses 

leads to significantly higher average 

charges for these two groups of surgical 

patients, particularly for cases currently 

assigned to DRGs 148 and 154 which are 

the surgical procedures that include the 

presence of a CC. The surgical patients 

with Major Gastrointestinal Diagnoses 

would not only be considered to have a 

greater level of severity and be more 

expensive, they would also be assigned 

to the surgical DRG that includes a CC. 

The tables below show that patients in 

DRG 148 with a Major Gastrointestinal 

Diagnosis have average charges of 

$70,001.16 compared to average charges 

of $43,809.03 when a Major 

Gastrointestinal Diagnosis is not 

present. The difference in charges for 

cases in DRG 149 was not as great. The 

difference in average charges was 

$29,103.84 for DRG 149 when a Major 

Gastrointestinal Diagnosis was present 

and $23,077.84 when it was not. The 

number of cases with a Major 

Gastrointestinal Diagnosis was 

significantly larger for DRG 148 (58,153 

cases compared to only 1,822 in DRG 

149). Similar findings occur for DRGs 

154, 155, and 156. Cases with a Major 

Gastrointestinal Diagnosis occur with 

significantly greater numbers in DRG 

154 (9,924 compared to only 357 in DRG 

155 and none in DRG 156). The average 

charges for cases with a Major 

Gastrointestinal Diagnosis were 

$84,270.92 for DRG 154, and only 

$29,193.81 for DRG 155. 

DRGS 148, 149, 154, 155, AND 156 

DRG Number of 

cases 

Average 

length of 

stay 

Average 

charges 

DRG 148 .............................................................................................................................................. 126,156 11.92 $55,882.59 

DRG 148 with PDX/SDX of Major GI Diagnoses ................................................................................ 58,153 14.24 70,001.16 

DRG 148 w/o PDX/SDX Major GI Diagnoses ..................................................................................... 68,003 9.94 43,809.03 

DRG 149 .............................................................................................................................................. 18,471 5.66 23,672.25 

DRG 149 with PDX/SDX of Major GI Diagnoses ................................................................................ 1,822 7.66 29,103.84 

DRG 149 w/o PDX/SDX Major GI Diagnoses ..................................................................................... 16,649 5.44 23,077.84 

DRG 154 .............................................................................................................................................. 25,617 12.95 66,257.17 

DRG 154 with PDX/SDX of Major GI Diagnoses ................................................................................ 9,924 15.59 84,270.92 

DRG 154 w/o PDX/SDX Major GI Diagnoses ..................................................................................... 15,693 11.28 54,865.56 

DRG 155 .............................................................................................................................................. 5,679 3.96 21,543.88 

DRG 155 with PDX/SDX of Major GI Diagnoses ................................................................................ 357 7.10 29,193.81 

DRG 155 w/o PDX/SDX Major GI Diagnoses ..................................................................................... 5,322 3.75 21,030.50 

DRG 156 .............................................................................................................................................. 4 9.25 48,015.50 

DRG 156 with PDX/SDX of Major GI Diagnoses ................................................................................ 0 0 0

DRG 156 w/o PDX/SDX Major GI Diagnoses ..................................................................................... 4 9.25 48,015.50 

Our medical advisors agree that these 

gastrointestinal surgical patients with a 

Major Gastrointestinal Diagnosis are 

more severely ill and represent patients 

with a higher level of severity. They 

support subdividing cases in DRG 148 

and 154 based on the presence of a 

Major Gastrointestinal Diagnosis to 

better capture patients with higher level 

of severity. A summary of these changes 

is provided below. 

We are deleting DRG 148 and creating 

the following two new DRGs: 

• DRG 569 (Major Small & Large 

Bowel Procedures with CC with Major 

Gastrointestinal Diagnosis) 

• DRG 570 (Major Small & Large 

Bowel Procedures with CC without 

Major Gastrointestinal Diagnosis) 

The DRG logic for new DRGs 569 and 

570 is as follows. 

New DRG 569 will have a principal 

diagnosis from MDC 6 and one of the 

following codes as either the principal 

or secondary diagnosis. This DRG will 

also have an operating room procedure 

from current DRG 148 and a 

Complication/Comorbidity (as defined 

in CMS DRG GROUPER Version 24.0). 

Diagnosis 

code Principal or secondary diagnosis—major gastrointestinal diagnosis diagnosis code title 

008.41 ...... Intestinal infection due to staphylococcus. 

008.42 ...... Intestinal infection due to pseudomonas. 

008.43 ...... Intestinal infection due to campylobacter. 

008.45 ...... Intestinal infection due to clostridium difficile. 

008.46 ...... Intestinal infection due to other anaerobes. 

008.49 ...... Intestinal infection due to other organisms. 

014.04 ...... Tuberculous peritonitis, tubercle bacilli not found (in sputum) by microscopy, but found by bacterial culture. 

098.86 ...... Gonococcal peritonitis. 


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47934 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

Diagnosis 

code Principal or secondary diagnosis—major gastrointestinal diagnosis diagnosis code title 

456.0 ........ Esophageal varices with bleeding. 

456.20 ...... Esophageal varices in diseases classified elsewhere, with bleeding. 

530.21 ...... Ulcer of esophagus with bleeding. 

530.4 ........ Perforation of esophagus. 

530.7 ........ Gastroesophageal laceration-hemorrhage syndrome. 

530.84 ...... Tracheoesophageal fistula. 

531.00 ...... Acute gastric ulcer with hemorrhage, without mention of obstruction. 

531.21 ...... Acute gastric ulcer with hemorrhage and perforation, with obstruction. 

531.40 ...... Chronic or unspecified gastric ulcer with hemorrhage, without mention of obstruction. 

531.41 ...... Chronic or unspecified gastric ulcer with hemorrhage, with obstruction. 

531.50 ...... Chronic or unspecified gastric ulcer with perforation, without mention of obstruction. 

531.60 ...... Chronic or unspecified gastric ulcer with hemorrhage and perforation, without mention of obstruction. 

531.91 ...... Gastric ulcer, unspecified as acute or chronic, without mention of hemorrhage or perforation, with obstruction. 

532.00 ...... Acute duodenal ulcer with hemorrhage, without mention of obstruction. 

532.10 ...... Acute duodenal ulcer with perforation, without mention of obstruction. 

532.11 ...... Acute duodenal ulcer with perforation, with obstruction. 

532.20 ...... Acute duodenal ulcer with hemorrhage and perforation, without mention of obstruction. 

532.31 ...... Acute duodenal ulcer without mention of hemorrhage or perforation, with obstruction. 

532.40 ...... Chronic or unspecified duodenal ulcer with hemorrhage, without mention of obstruction. 

532.41 ...... Chronic or unspecified duodenal ulcer with hemorrhage, with obstruction. 

532.50 ...... Chronic or unspecified duodenal ulcer with perforation, without mention of obstruction. 

532.60 ...... Chronic or unspecified duodenal ulcer with hemorrhage and perforation, without mention of obstruction. 

533.00 ...... Acute peptic ulcer of unspecified site with hemorrhage, without mention of obstruction. 

533.10 ...... Acute peptic ulcer of unspecified site with perforation, without mention of obstruction. 

533.21 ...... Acute peptic ulcer of unspecified site with hemorrhage and perforation, with obstruction. 

533.40 ...... Chronic or unspecified peptic ulcer of unspecified site with hemorrhage, without mention of obstruction. 

533.41 ...... Chronic or unspecified peptic ulcer of unspecified site with hemorrhage, with obstruction. 

533.50 ...... Chronic or unspecified peptic ulcer of unspecified site with perforation, without mention of obstruction. 

533.51 ...... Chronic or unspecified peptic ulcer of unspecified site with perforation, with obstruction. 

533.60 ...... Chronic or unspecified peptic ulcer of unspecified site with hemorrhage and perforation, without mention of obstruction. 

533.91 ...... Peptic ulcer of unspecified site, unspecified as acute or chronic, without mention of hemorrhage or perforation, with obstruction. 

534.00 ...... Acute gastrojejunal ulcer with hemorrhage, without mention of obstruction. 

534.40 ...... Chronic or unspecified gastrojejunal ulcer with hemorrhage, without mention of obstruction. 

534.41 ...... Chronic or unspecified gastrojejunal ulcer, with hemorrhage, with obstruction. 

534.50 ...... Chronic or unspecified gastrojejunal ulcer with perforation, without mention of obstruction. 

534.51 ...... Chronic or unspecified gastrojejunal ulcer with perforation, with obstruction. 

534.91 ...... Gastrojejunal ulcer, unspecified as acute or chronic, without mention of hemorrhage or perforation, with obstruction. 

535.01 ...... Acute gastritis with hemorrhage. 

535.11 ...... Atrophic gastritis with hemorrhage. 

535.21 ...... Gastric mucosal hypertrophy with hemorrhage. 

535.31 ...... Alcoholic gastritis with hemorrhage. 

535.41 ...... Other specified gastritis with hemorrhage. 

535.51 ...... Unspecified gastritis and gastroduodenitis with hemorrhage. 

535.61 ...... Duodenitis with hemorrhage. 

537.3 ........ Other obstruction of duodenum. 

537.83 ...... Angiodysplasia of stomach and duodenum with hemorrhage. 

540.0 ........ Acute appendicitis with generalized peritonitis. 

540.1 ........ Acute appendicitis with peritoneal abscess. 

550.00 ...... Unilateral or unspecified inguinal hernia, with gangrene. 

550.01 ...... Recurrent unilateral or unspecified inguinal hernia, with gangrene. 

550.02 ...... Bilateral inguinal hernia, with gangrene. 

551.00 ...... Unilateral or unspecified femoral hernia with gangrene. 

551.1 ........ Umbilical hernia with gangrene. 

551.20 ...... Unspecified ventral hernia with gangrene. 

551.21 ...... Incisional ventral hernia, with gangrene. 

551.29 ...... Other ventral hernia with gangrene. 

551.3 ........ Diaphragmatic hernia with gangrene. 

551.8 ........ Hernia of other specified sites, with gangrene. 

551.9 ........ Hernia of unspecified site, with gangrene. 

557.0 ........ Acute vascular insufficiency of intestine. 

557.1 ........ Chronic vascular insufficiency of intestine. 

557.9 ........ Unspecified vascular insufficiency of intestine. 

560.0 ........ Intussusception. 

560.2 ........ Volvulus. 

560.31 ...... Gallstone ileus. 

560.81 ...... Intestinal or peritoneal adhesions with obstruction (postoperative) (postinfection). 

560.89 ...... Other specified intestinal obstruction. 

560.9 ........ Unspecified intestinal obstruction. 

562.02 ...... Diverticulosis of small intestine with hemorrhage. 

562.03 ...... Diverticulitis of small intestine with hemorrhage. 

562.12 ...... Diverticulosis of colon with hemorrhage. 

562.13 ...... Diverticulitis of colon with hemorrhage. 

564.7 ........ Megacolon, other than hirschsprung’s. 


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Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 47935 

Diagnosis 

code Principal or secondary diagnosis—major gastrointestinal diagnosis diagnosis code title 

567.0 ........ Peritonitis in infectious diseases classified elsewhere. 

567.1 ........ Pneumococcal peritonitis. 

567.21 ...... Peritonitis (acute) generalized. 

567.22 ...... Peritoneal abscess. 

567.23 ...... Spontaneous bacterial peritonitis. 

567.29 ...... Other suppurative peritonitis. 

567.31 ...... Psoas muscle abscess. 

567.38 ...... Other retroperitoneal abscess. 

567.39 ...... Other retroperitoneal infections. 

567.81 ...... Choleperitonitis. 

567.9 ........ Unspecified peritonitis. 

568.81 ...... Hemoperitoneum (nontraumatic). 

569.5 ........ Abscess of intestine. 

569.83 ...... Perforation of intestine. 

569.85 ...... Angiodysplasia of intestine with hemorrhage. 

578.0 ........ Hematemesis. 

750.3 ........ Congenital tracheoesophageal fistula, esophageal atresia and stenosis. 

863.30 ...... Injury to small intestine, unspecified site, with open wound into cavity. 

863.31 ...... Injury to duodenum with open wound into cavity. 

863.39 ...... Other injury to small intestine with open wound into cavity. 

863.50 ...... Injury to colon, unspecified site, with open wound into cavity. 

863.51 ...... Injury to ascending (right) colon with open wound into cavity. 

863.52 ...... Injury to transverse colon with open wound into cavity. 

863.53 ...... Injury to descending (left) colon with open wound into cavity. 

863.54 ...... Injury to sigmoid colon with open wound into cavity. 

863.55 ...... Injury to rectum with open wound into cavity. 

863.59 ...... Other injury to colon and rectum with open wound into cavity. 

863.90 ...... Injury to gastrointestinal tract, unspecified site, with open wound into cavity. 

863.95 ...... Injury to appendix with open wound into cavity. 

863.99 ...... Injury to other and unspecified gastrointestinal sites with open wound into cavity. 

868.13 ...... Injury to peritoneum with open wound into cavity. 

947.3 ........ Burn of gastrointestinal tract. 

New DRG 570 will have an operating 

room procedure code from current CMS 

DRG 148 and a principal diagnosis from 

MDC 6, except for a principal or 

secondary diagnosis listed above in the 

Major Gastrointestinal Diagnosis list and 

will have a Complication/Comorbidity. 

We also are deleting DRG 154 and 

creating two new DRGs as follows: 

• DRG 567 (Stomach, Esophageal & 

Duodenal Procedures Age >17 with 

Complication/Comorbidity with Major 

Gastrointestinal Diagnosis) 

• DRG 568 (Stomach, Esophageal & 

Duodenal Procedures Age >17 with 

Complication/Comorbidity without 

Major Gastrointestinal Diagnosis) 

New DRG 567 will have a principal 

diagnosis from MDC 6 with either a 

principal or secondary diagnosis of a 

Major Gastrointestinal Diagnosis (see 

list of Major Gastrointestinal Diagnoses 

listed above). New DRG 567 will also 

have an operating room procedure from 

current CMS DRG 154 and a CC. New 

DRG 568 will have a principal diagnosis 

from MDC 6, except it will not have a 

principal or secondary diagnosis from 

the list of Major Gastrointestinal 

Diagnoses. It will also have an operating 

room procedure from current CMS DRG 

154 and a CC. 

d. MDC 11 (Diseases and Disorders of 

the Kidney and Urinary Tract): Major 

Bladder Procedures 

Under our proposed CS DRGs, cases 

with a major bladder procedure were 

found to have a higher level of severity 

than were cases with other types of 

bladder procedures. Therfore, cases 

with a major bladder procedure are 

assigned to a single DRG in the CS 

DRGs. The procedures classified as a 

major bladder procedure are as follows: 

MAJOR BLADDER PROCEDURES

Procedure 

code Description 

57.6 .......... Partial cystectomy. 

57.71 ........ Radical cystectomy. 

57.79 ........ Other total cystectomy. 

57.83 ........ Repair of fistula involving bladder and intestine. 

57.84 ........ Repair of other fistula of bladder. 

57.85 ........ Cystourethroplasty and plastic repair of bladder neck. 

57.86 ........ Repair of bladder exstrophy. 

57.87 ........ Reconstruction of urinary bladder. 

57.88 ........ Other anastomosis of bladder. 

57.89 ........ Other repair of bladder. 


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47936 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

The CMS DRGs assign these cases to 

one of the five following DRGs: 

• DRG 303 (Kidney, Ureter & Major 

Bladder Procedures for Neoplasm). 

• DRG 304 (Kidney, Ureter & Major 

Bladder Procedures for Non-Neoplasm 

with CC) 

• DRG 305 (Kidney, Ureter & Major 

Bladder Procedures for Non-Neoplasm 

without CC) 

• DRG 308 (Minor Bladder 

Procedures with CC) 

• DRG 309 (Minor Bladder 

Procedures without CC) 

Our medical advisors support creating 

a new DRG for major bladder 

procedures because they represent cases 

with higher levels of severity, are 

clinically different, and use greater 

resources. We examined data on cases 

containing a major bladder procedure 

and determined they represent cases 

with a higher level of severity and 

utilize significantly more resources than 

other cases within the DRGs where they 

are currently assigned. Cases with a 

major bladder procedure had average 

charges of $53,434 compared to $14,976 

to $38,119 for other cases within the 

five DRGs where the patient did not 

have a major bladder procedure. The 

tables below illustrate these data. 

DRGs Number of 

cases 

Average 

length of 

stay 

Average 

charges 

DRG 303 .............................................................................................................................................. 23,328 7.28 $37,510.79 

DRG 303 Without Major Bladder Procedures ..................................................................................... 18,909 6.33 32,867.55 

DRG 304 .............................................................................................................................................. 13,257 8.35 38,800.38 

DRG 304 Without Major Bladder Procedures ..................................................................................... 12,835 8.19 38,119.74 

DRG 305 .............................................................................................................................................. 2,827 3.10 19,528.35 

DRG 305 Without Major Bladder Procedures ..................................................................................... 2,776 3.02 19,295.59 

DRG 308 .............................................................................................................................................. 6,358 6.15 27,982.54 

DRG 308 Without Major Bladder Procedures ..................................................................................... 5,180 5.30 24,017.30 

DRG 309 .............................................................................................................................................. 3,104 1.98 15,446.61 

DRG 309 Without Major Bladder Procedures ..................................................................................... 2,820 1.72 14,976.79 

MAJOR BLADDER PROCEDURES

Number of 

cases 

Average length 

of stay 

Average 

charges 

6,354 ........ 10.8 $53,434.93 

Therefore, we are moving these 

procedures out of their current DRGs 

(DRG 303, 304, 305, 308, and 309) and 

into new DRG 573 (Major Bladder 

Procedures). A summary of these 

changes is as follows: 

We are renaming the following three 

DRGs: 

• DRG 303—‘‘ Kidney and Ureter 

Procedures for Neoplasm’’

• DRG 304—‘‘ Kidney and Ureter 

Procedures for Non-Neoplasm With CC’’

• DRG 305—‘‘ Kidney and Ureter 

Procedures for Non-Neoplasm Without 

CC’’

We are removing the following 

procedure codes from DRG 303–305, 

308, and 309 and assigning them to new 

DRG 573. New DRG 573 will contain the 

following procedure codes. 

MAJOR BLADDER PROCEDURES

Procedure 

code Description 

57.6 .......... Partial cystectomy. 

57.71 ........ Radical cystectomy. 

57.79 ........ Other total cystectomy. 

57.83 ........ Repair of fistula involving bladder and intestine. 

57.84 ........ Repair of other fistula of bladder. 

57.85 ........ Cystourethroplasty and plastic repair of bladder neck. 

57.86 ........ Repair of bladder exstrophy. 

57.87 ........ Reconstruction of urinary bladder. 

57.88 ........ Other anastomosis of bladder. 

57.89 ........ Other repair of bladder. 

e. MDC 16 (Diseases and Disorders of 

the Blood and Blood Forming Organs 

and Immunological Disorders): Major 

Hematological and Immunological 

Diagnoses 

Under our proposed CS DRGs, major 

hematological and immunological 

diagnoses were found to identify cases 

with a higher level of severity. They are 

assigned to a single DRG under the CS 

DRGs. The diagnoses considered to be 

major hematological and immunological 

diagnoses include the following 

conditions: 

Diagnosis 

code Major hematological and immunological code titles 

279.11 ...... Digeorge’s syndrome. 

279.12 ...... Wiskott-aldrich syndrome. 

279.13 ...... Nezelof’s syndrome. 

279.19 ...... Other deficiency of cell-mediated immunity. 

279.2 ........ Combined immunity deficiency. 

283.0 ........ Autoimmune hemolytic anemias. 


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Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 47937 

Diagnosis 

code Major hematological and immunological code titles 

283.10 ...... Non-autoimmune hemolytic anemia, unspecified. 

283.19 ...... Other non-autoimmune hemolytic anemias. 

283.2 ........ Hemoglobinuria due to hemolysis from external causes. 

283.9 ........ Acquired hemolytic anemia, unspecified. 

284.8 ........ Other specified aplastic anemias. 

284.9 ........ Aplastic anemia, unspecified. 

288.1 ........ Functional disorders of polymorphonuclear neutrophils. 

288.2 ........ Genetic anomalies of leukocytes. 

996.85 ...... Complications of transplanted bone marrow. 

These conditions are currently 

assigned to the following four CMS 

DRGs: 

• DRG 395 (Red Blood Cell Disorders 

Age >17) 

• DRG 396 (Red Blood Cell Disorders 

Age 0–17) 

• DRG 398 (Reticuloendothelial & 

Immunity Disorders with CC) 

• DRG 399 (Reticuloendothelial & 

Immunity Disorders without CC) 

Our medical advisors agree that major 

hematological and immunological 

disorders are found in patients with 

significantly greater levels of severity 

and are different from other conditions 

in the four DRGs where they are 

assigned. Our data analysis shows that 

major hematological and immunological 

diseases identify patients with 

significantly greater levels of severity. 

They are more resource intensive than 

other conditions assigned to these four 

DRGs. Cases with major hematological 

and immunological conditions had 

average charges of $21,276 compared to 

$11,066 to $18,791 for the other 

conditions where these cases are 

currently assigned. Most of the 

nonhematological and immunological 

cases (96,557) are assigned to DRG 395 

and have an average charge of $12,977. 

DRGS 395, 396, 398, AND 399 

DRG Number of 

cases 

Average 

length of 

stay 

Average 

charges 

DRG 395 .................................................................................................................................................. 109,874 4.28 $14,078.78 

DRG 395 Without Major Hematological Diagnosis excluding Sickle Cell Crisis & Coagulation Disorders ................................................................................................................................................... 96,557 4.10 12,977.20 

DRG 396 .................................................................................................................................................. 19 2.95 10,406.05 

DRG 396 Without Major Hematological Diagnosis excluding Sickle Cell Crisis & Coagulation Disorders ................................................................................................................................................... 17 3.06 11,066.94 

DRG 398 .................................................................................................................................................. 17,608 5.71 19,902.21 

DRG 398 Without Major Hematological Diagnosis excluding Sickle Cell Crisis & Coagulation Disorders ................................................................................................................................................... 6,381 3.28 18,791.32 

DRG 399 .................................................................................................................................................. 1,552 3.38 11,277.35 

DRG 399 Without Major Hematological Diagnosis excluding Sickle Cell Crisis & Coagulation Disorders ................................................................................................................................................... 1,011 3.28 11,207.22 

MAJOR HEMATOLOGICAL DIAGNOSIS

EXCLUDING SICKLE CELL CRISIS & 

COAGULATION DISORDERS

Number of 

cases 

Average length 

of stay 

Average 

charges 

25,087 ...... 5.6 $21,276.25 

We are creating a new CMS DRG 574 

(Major Hematologic/Immunologic 

Diagnoses Except Sickle Cell Crisis and 

Coagulation Disorders). We are 

removing the codes mentioned in the 

table above from DRGs 395, 396, 398, 

and 399 and assigning them to new DRG 

574. We also are assigning the new 

diagnosis codes indicated by an asterisk 

(*) to new DRG 574. These new codes 

also capture major hematological and 

immunological conditions and were 

created to provide more detail than the 

current codes in this section of ICD–9–

CM. The DRG assignments for these new 

codes are also shown in Table 6A of the 

Addendum to this final rule. 

Diagnosis 

code Major hematological and immunological code titles 

279.11 ...... Digeorge’s syndrome. 

279.12 ...... Wiskott-aldrich syndrome. 

279.13 ...... Nezelof’s syndrome. 

279.19 ...... Other deficiency of cell-mediated immunity. 

279.2 ........ Combined immunity deficiency. 

283.0 ........ Autoimmune hemolytic anemias. 

283.10 ...... Non-autoimmune hemolytic anemia, unspecified. 

283.19 ...... Other non-autoimmune hemolytic anemias. 

283.2 ........ Hemoglobinuria due to hemolysis from external causes. 

283.9 ........ Acquired hemolytic anemia, unspecified. 

284.01 * .... Constitutional red blood cell aplasia. 

284.09 * .... Other constitutional aplastic anemia. 

284.8 ........ Other specified aplastic anemias. 

284.9 ........ Aplastic anemia, unspecified. 

288.00 * .... Neutropenia, unspecified. 


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47938 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

Diagnosis 

code Major hematological and immunological code titles 

288.01 * .... Congenital neutropenia. 

288.02 * .... Cyclic neutropenia. 

288.03 * .... Drug induced neutropenia. 

288.04 * .... Neutropenia due to infection. 

288.09 * .... Other neutropenia. 

288.1 ........ Functional disorders of polymorphonuclear neutrophils. 

288.2 ........ Genetic anomalies of leukocytes. 

996.85 ...... Complications of transplanted bone marrow. 

f. MDC 18 (Infections and Parasitic 

Diseases (Systemic or Unspecified 

Sites)): O.R. Procedure for Patients With 

Infectious and Parasitic Diseases 

Under the APR DRG system, cases in 

DRG 415 (O.R. Procedure for Infectious 

and Parasitic Diseases) are subdivided 

based on the presence or absence of one 

of the following principal diagnosis 

codes, which we are referring to as 

Postoperative or Post-Traumatic 

Infection: 

• 958.3, Posttraumatic wound 

infection, not elsewhere classified 

• 998.51, Infected postoperative 

seroma 

• 998.59, Other postoperative 

infection 

• 999.3, Infection complicating 

medical care, not elsewhere classified 

The APR DRG system found cases 

with one of the above infection codes to 

represent a higher level of severity. Our 

medical advisors examined cases in the 

current CMS DRG system in DRG 415 

and found that the presence of one of 

these infection codes as a principal 

diagnosis led to significantly higher 

levels of severity. Charge data also 

support this conclusion. The following 

table illustrates our findings. 

DRG Redefinition of DRG 415 Number of 

cases 

Average 

length of 

stay 

Average 

charges 

415 .... O.R. Procedure for Infectious & Parasitic Diseases ............................................................ 52,458 14.03 $63,211.99 

A ........ O.R. Procedure with Principal Diagnosis Except Postoperative or Post-Traumatic Infection.33,077 15.90 74,964.28 

B ........ O.R. Procedure with Principal Diagnosis of Postoperative or Post-Traumatic Infection ..... 19,381 10.8 43,154.68 

As can be seen from the above table, 

cases in DRG 415 with a principal 

diagnosis except for postoperative or 

post-traumatic infection have average 

charges of $74,964.28. Cases with a 

principal diagnosis of postoperative or 

postπtraumatic infection have average 

charges of $43,154.68, or $31,809.60 

less. Therefore, cases without one of the 

four infection codes, 958.3, 998.51, 

998.59, and 999.3, have significantly 

higher severity levels than do cases that 

contain one of the four infection codes. 

Accordingly, we are deleting DRG 415 

and divide the cases into two new DRGs 

as follows: 

• DRG 578, Infectious and Parasitic 

Diseases with O.R. Procedure 

• DRG 579, Postoperative or Posttraumatic Infection with O.R. Procedure 

Cases will be assigned to new DRG 

578 if they were previously in DRG 415, 

but do not contain one of the following 

principal diagnosis codes: 

• 958.3, Posttraumatic wound 

infection, not elsewhere classified 

• 998.51, Infected postoperative 

seroma 

• 998.59, Other postoperative 

infection 

• 999.3, Infection complicating 

medical care, not elsewhere classified 

Cases will be assigned to DRG 579 if 

they were previously assigned to DRG 

415 and contain one of the four 

principal diagnosis codes listed above. 

g. Severe Sepsis 

Comment: As an alternative to the 

proposed CS DRGs, commenters 

recommended a new DRG to identify 

patients with severe sepsis associated 

with respiratory failure requiring 

mechanical ventilation. One commenter 

suggested using an approach to better 

recognize severity of illness that is 

similar to the change CMS implemented 

in the FYa2006 final rule for major 

cardiovascular conditions (MCVs). This 

approach involved examining the MCVs 

which could be present as either a 

principal or secondary diagnosis leading 

to greater severity of illness and 

resource consumption. Another option 

suggested by two commenters involved 

modifying DRGa416 (Septicemia Age 

>17) so that it would be split based on 

mechanical ventilation greater than 96 

hours (code 96.72). The commenter 

stated that patients on mechanical 

ventilation for greater than 96 hours 

have a greater severity of illness than do 

those who are not on mechanical 

ventilation for 96 or more hours. 

Another commenter recommended 

considering mechanical ventilation as a 

pre-MDC DRG on the basis of the 

mechanical ventilation greater than 96 

hours procedure code (96.72) to better 

recognize patients with a greater 

severity level. This commenter also 

provided an option to add systemic 

infections (038.x) as an acceptable 

principal diagnosis for DRG 475 when 

reported in conjunction with 

mechanical ventilation or tracheostomy. 

One commenter maintained that the 

clinical reason to address a new DRG for 

severe sepsis is related to proper 

recognition and treatment for this group 

of patients with a greater degree of 

severity. This commenter stated 

clinicians are getting better at 

understanding the importance of early 

recognition and treatment. As sepsis 

presents with organ dysfunction, 

treatments must be prompt or mortality 

rapidly increases according to the 

commenter. 

Response: We analyzed data for 

patients in DRG 416 and 417 who are on 

mechanical ventilation for 96 or more 

hours. The following table shows our 

findings. 


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DRGs Number of 

cases 

Average 

length of 

stay 

Average 

charges 

DRG 416 .............................................................................................................................................. 272,603 7.45 $28,344.81 

DRG 416 With Mechanical Ventilation 96 Hours (96.72) ................................................................... 10.369 15.55 94,994.49 

DRG 416 Without Mechanical Ventilation 96 + Hours ........................................................................ 262,234 7.13 25,709.42 

DRG 417 .............................................................................................................................................. 31 6.35 27,131.58 

DRG 417 With Mechanical Ventilation 96 + Hours ............................................................................. 0 0 0 

DRG 417 Without Mechanical Ventilation 96 + Hours ........................................................................ 31 6.35 27,131.58 

The data clearly show that DRG 416 

septicemia patients who are on 

mechanical ventilation for 96 or more 

hours have a significantly greater 

severity of illness level and use greater 

resources than do other patients in DRG 

416. Those patients on mechanical 

ventilation for 96 or more hours had 

average charges of $94,994 compared to 

$25,709 for other patients in DRG 416. 

We found no cases in DRG 417 with 

patients who reported mechanical 

ventilation for 96 or more hours. 

Therefore, we agree with the 

commenters that patients in DRG 416 

who are on long term mechanical 

ventilation of 96 or more hours have 

greater severity of illness and use 

significantly greater resources. These 

patients should be assigned to a separate 

DRG to better reflect their higher 

severity level. Because we have no data 

on patients in DRG 417, we are not 

modifying that DRG at this time. 

Because the data on DRG 416 are 

compelling, we are deleting DRG 416 

and splitting these cases into two new 

DRGs based on whether or not the 

patient is on mechanical ventilation for 

96 or more hours. These two new DRGs 

are as follows: 

• DRG 575 (Septicemia with 

Mechanical Ventilation 96 + Hours Age 

>17) 

• DRG 576 (Septicemia without 

Mechanical Ventilation 96 + Hours Age 

>17) 

Cases will be assigned to DRG 575 

when they have a principal diagnosis 

from current DRG 416 and code 96.72 

(Continuous mechanical ventilation for 

96 consecutive hours or more). Cases 

will be assigned to DRG 576 when they 

have a principal diagnosis from current 

DRG 416 and do not have code 96.72. 

We note that this DRG split is similar 

to the change we are making in MDC 4, 

for DRG 475 which was discussed 

earlier. The creation of these two new 

DRGs is distinct from the request to 

create a separate DRG for severe sepsis, 

which is discussed in section II.D.7. of 

this final rule. 

D. Changes to Specific DRG 

Classifications 

1. Pre-MDCs 

a. Heart Transplant or Implant of Heart 

Assist System: Addition of Procedure to 

DRG 103 

Based on public comments, we are 

assigning an additional procedure code 

to DRG 103 (Heart Transplant or 

Implant of Heart Assist System) under 

the pre-MDCs. In the FY 2006 IPPS final 

rule (70 FR 47297), we addressed 

suggestions concerning the placement of 

codes for external heart assist systems in 

DRG 103. Although we found that 

charges associated with code 37.65 

(Implant of external heart assist system) 

were more than $100,000 lower than the 

average charges for all cases in DRG 103, 

we found that there was a subgroup of 

patients who were comparable in 

resource use and length of stay to other 

cases included in DRG 103. Those 

patients received both the external heart 

assist device (code 37.65) and later had 

the device removed (code 37.64, 

Removal of heart assist system) after a 

lengthy period of rest and recovery of 

their native hearts. We note that 

commenters provided external data 

indicating that survival rates are 

improving for patients receiving more 

advanced versions of these devices. In 

addition, commenters provided 

information indicating that longer 

periods of support with the external 

heart assist device are improving 

patients’ survival chances and 

opportunity to be discharged with their 

native heart. These data show a 50- 

percent survival rate with an average 

total length of stay of 43 days for all 

AMI heart recovery patients. On 

average, a surviving patient will receive 

31 days of average support time 

followed by an additional 38 days in the 

hospital after the device is removed. 

Based on information considered from a 

later year than our MedPAR data, it is 

clear that patients weaned from the 

external heart assist system have longer 

lengths of stay and are very different 

from the average patients having this 

procedure that were in our FY 2004 

data. 

Given the newness of this procedure 

and the latest generation of this device, 

the Medicare charge data included a 

limited number of patients having the 

device implanted and removed. 

However, the Medicare charge data did 

support that patients receiving both an 

implant and removal of an external 

heart assist system in a single hospital 

stay had an average length of stay 

exceeding 50 days and average charges 

of $378,000 that are more comparable to 

patients in DRG 103 than DRG 525 

(Other Heart Assist System Implant). 

Accordingly, in FY 2006, we revised 

DRG 103 so that both implantation and 

removal of an external heart assist 

device in the same hospitalization 

would group to DRG 103. 

However, we did not consider those 

cases where an external heart assist 

system is switched during a 

hospitalization, and replaced with 

another external heart assist system, that 

is subsequently removed. The ICD–9–

CM coding structure specifies that the 

replacement of the system be coded to 

37.63 (Repair of heart assist system), 

and not to 37.65. These cases are 

assigned to DRG 525 not DRG 103 even 

though the cases are comparable in 

resources expended, length of stay, etc., 

to other patients where the device is 

implanted and explanted during the 

same hospital stay. 

Based on public comments, we 

believe that DRG 103 should be revised 

to take this situation into account. 

Therefore, we are reconfiguring DRG 

103 in the following manner: Those 

patients who have both the replacement 

of an external heart assist system (code 

37.63) and the explantation of that 

system (code 37.64) prior to the hospital 

discharge will be assigned to DRG 103. 

By making this change, Medicare will 

be making higher payments for patients 

who receive both a replacement and an 

explant of an external heart assist 

system during a single hospital stay. 

Our intent in making this change is to 

recognize the higher costs of patients 

who have a longer length of stay and are 

discharged alive with their native heart. 

Cases in which a heart transplant also 

occurs during the same hospitalization 


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episode will continue to be assigned to 

DRG 103. 

b. Pancreas Transplants 

On July 1, 1999, we issued coverage 

policy that specified that pancreas 

transplants were only covered when 

performed simultaneously with or after 

a Medicare covered kidney transplant. A 

noncoverage policy for pancreas 

transplant remained in effect for 

patients who had not experienced end 

stage renal failure secondary to diabetes. 

On July 29, 2005, we opened a national 

coverage determination (NCD) to 

determine whether pancreas transplant 

alone, that is, without a kidney 

transplant, is a reasonable and necessary 

service for Medicare beneficiaries. On 

April 26, 2006, we published the NCD 

for pancreas transplants on our Web site 

at: http://www.cms.hhs.gov/mcd/

viewncd.asp?ncd_id=260.3&_

version=3&basket=ncd%3A260%2E3% 

3A3%3APancreas+Transplants. The 

NCD specifies the limited circumstances 

where the evidence is adequate to 

conclude that pancreas transplant alone 

is reasonable and necessary for 

Medicare beneficiaries. 

Medicare coverage of pancreas 

transplants alone is limited to 

transplants in those facilities that are 

Medicare-approved for kidney 

transplantation. A listing of approved 

transplant centers can be found at: 

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

ESRDGeneralInformation/02_Data.

asp#TopOfPage. The CMS NCD 

includes several criteria for the coverage 

of pancreas transplants alone, including 

having a diagnosis of Type I diabetes. 

(We refer readers to section 260.3 of the 

Medicare National Coverage Manual for 

the entire language of the NCD.) 

Because we had issued a proposed 

NCD and a final NCD was not expected 

to be completed until late April 2006 

(after completion of the proposed rule), 

we used the FY 2007 IPPS proposed 

rule to indicate the coding changes that 

we would make to DRG 513 (Pancreas 

Transplant) in FY 2007 if Medicare’s 

final decision memorandum would have 

continued the program’s national 

noncoverage of pancreas transplants (71 

FR 24030). In addition, we also 

indicated the conforming changes that 

we would make to the MCE 

‘‘NonCovered Procedure’’ edit if 

Medicare coverage was established for 

pancreas transplants alone. That 

discussion was included in section 

II.D.6. of the preamble of the proposed 

rule (71 FR 24039), which described 

proposed changes to the MCE. 

Because the April 2006 Medicare final 

decision memorandum stated that the 

performance of pancreas transplants 

alone is reasonable and necessary for 

Medicare beneficiaries in limited 

circumstances, the logic for the 

determination of patient case 

assignment to DRG 513 in the FY 2006 

GROUPER program needs to be 

modified to remove the requirement that 

patients also have kidney disease. 

Therefore, because the NCD was 

finalized, we are modifying DRG 513 to 

consist of the following logic: List A (the 

diabetes codes) of the required principal 

or secondary diagnosis codes remains 

the same, as does the required operating 

room procedures (codes 52.80 

(Pancreatic transplant NOS), and 52.82, 

(Homotransplant of pancreas)). List B is 

removed from the logic; the following 

codes will no longer be required as a 

principal or secondary diagnosis: 

• 403.01, Hypertensive kidney 

disease, malignant, with chronic kidney 

disease 

• 403.11, Hypertensive kidney 

disease, benign, with chronic kidney 

disease 

• 403.91, Hypertensive kidney 

disease, unspecified, with chronic 

kidney disease 

• 404.02, Hypertensive heart and 

kidney disease, malignant, with chronic 

kidney disease 

• 404.03, Hypertensive heart and 

kidney disease, malignant, with heart 

failure and chronic kidney disease 

• 404.12, Hypertensive heart and 

kidney disease, benign, with chronic 

kidney disease 

• 404.13, Hypertensive heart and 

kidney disease, benign, with heart 

failure and chronic kidney disease 

• 404.92, Hypertensive heart and 

kidney disease, unspecified, with 

chronic kidney disease 

• 404.93, Hypertensive heart and 

kidney disease, unspecified, with heart 

failure and chronic kidney disease 

• 585.1, Chronic kidney disease, 

Stage I 

• 585.2, Chronic kidney disease, 

Stage II (mild) 

• 585.3, Chronic kidney disease, 

Stage III (moderate) 

• 585.4, Chronic kidney disease, 

Stage IV (severe) 

• 585.5, Chronic kidney disease, 

Stage V 

• 585.6, End stage renal disease 

• 585.9, Chronic kidney disease, 

unspecified 

• V42.0, Organ or tissue replaced by 

transplant, kidney 

• V43.89, Organ or tissue replaced by 

other means, other organ or tissue, other 

We note that DRG 513 remains in the 

pre-MDC hierarchy. 

Comment: Five commenters 

supported the proposed coding changes 

to DRG 513 and the MCE. 

Response: We appreciate the support 

of the commenters. Accordingly, as the 

NCD for pancreas transplants alone was 

approved, in this final rule, we are 

adopting the changes as described above 

to DRG 513 and the MCE logic. 

2. MDC 1 (Diseases and Disorders of the 

Nervous System) 

a. Implantation of Intracranial 

Neurostimulator System for Deep Brain 

Stimulation (DBS) 

Deep-brain stimulation (DBS) is 

designed to deliver electrical 

stimulation to the subthalamic nucleus 

or internal globus pallidus to ameliorate 

symptoms caused by abnormal 

neurotransmitter levels that lead to 

abnormal cell-to-cell electrical impulses 

in Parkinson’s disease and essential 

tremor. DBS implants for essential 

tremor are unilateral, with 

neurostimulation leads on one side of 

the brain. DBS implants for Parkinson’s 

disease are bilateral, requiring 

implantation of neurostimulation leads 

in both the left and right sides of the 

brain. 

The implantation of a full DBS system 

requires two types of procedures. First, 

surgeons implant leads containing 

electrodes into the targeted sections of 

the brain where neurostimulation 

therapy is to be delivered. Second, a 

neurostimulator pulse generator is 

implanted in the pectoral region and 

extensions from the neurostimulator 

pulse generator are then tunneled under 

the skin along the neck and connected 

with the proximal ends of the leads 

implanted in the brain. Hospitals stage 

the two procedures required for a fullsystem DBS implant. 

In FY 2005, to better account for these 

two types of procedures, we revised 

procedure code 02.93 (Implantation or 

replacement of intracranial 

neurostimulator lead(s)) for the lead 

placement and created three new 

procedures codes for the pulse 

generator: 86.94 (Insertion or 

replacement of single array 

neurostimulator pulse generator); 86.95 

(Insertion or replacement of dual array 

neurostimulator pulse generator); and 

86.96 (Insertion or replacement of other 

neurostimulator pulse generator). We 

published the new procedure codes and 

revised procedure code titles in Tables 

6B and 6F of the FY 2005 IPPS final rule 

(69 FR 49627 and 49641). 

In FY 2006, we made further 

refinements to the pulse generator codes 

to identify rechargeable pulse 

generators. We published the new 

procedure codes and revised procedure 

code titles in Tables 6B and 6F of the 

FY 2006 IPPS final rule (70 FR 47637 


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and 47639). The current list of pulse 

generators codes are: 

• 86.94 (Insertion or replacement of 

single array neurostimulator pulse 

generator, not specified as rechargeable); 

• 86.95 (Insertion or replacement of 

dual array neurostimulator pulse 

generator, not specified as rechargeable); 

• 86.96 (Insertion or replacement of 

other neurostimulator pulse generator); 

• 86.97 (Insertion or replacement of 

single array neurostimulator 

rechargeable generator); and 

• 86.98 (Insertion or replacement of 

dual array neurostimulator rechargeable 

generator). 

Kinetra is an implantable dual array 

neurostimulator pulse generator that is 

approved for a new technology add-on 

payment through FYA2006. For more 

information about the new technology 

add-on payment, please refer to section 

II.G.3.a. of this preamble. 

Medtronic, the manufacturer of 

Kinetra, argues that the new 

technology add-on payment provision is 

designed to recognize the higher costs of 

new medical innovations for the initial 

period the technology is available on the 

market, and until the associated costs 

and charges related to the technology 

are available in the MedPAR database 

and can be used to recalibrate the DRG 

weights. Medtronic also argues that, 

once a technology is no longer eligible 

for new technology add-on payments, 

the new technology add-on payment 

provision is designed to support the 

reclassification of the technology to 

other clinically coherent DRGs with 

comparable resource costs. 

With the conclusion of the new 

technology add-on payment, Medtronic 

is concerned that Kinetra will be 

inadequately paid in DRG 1 

(Craniotomy Age >17 With CC) or DRG 

2 (Craniotomy Age >17 Without CC) 

under MDC 1. Medtronic recommended 

that CMS reassign the full-system 

Kinetra implants to DRG 543 

(Craniotomy with Implant of Chemo 

Agent or Acute Complex CNS Principal 

Diagnosis) under MDC 1. To 

accommodate this recommendation, 

procedure codes 02.93 and 86.95 would 

have to be reassigned to DRG 543 and 

the title for DRG 543 would have to be 

revised to ‘‘Craniotomy with 

Implantation of Major Device or Acute 

Complex CNS Principal Diagnosis.’’

Medtronic argued that DRG 543 would 

be a ‘‘clinically-consistent DRG that 

more appropriately reflects the resource 

utilization associated with full-system 

[deep brain stimulation] procedures.’’

Medtronic also emphasized that its 

proposal would only apply to fullsystem Kinetra implants when both the 

leads and generators are implanted 

during a single inpatient stay and 

procedure codes 02.93 and 86.95 both 

appear on the claim. Medtronic believes 

the current DRG assignment is 

appropriate for partial system implants. 

Medtronic provided an analysis of FY 

2004 MedPAR data. Procedure code 

86.95 was not created until FY 2005 so 

Medtronic used procedure codes 02.93 

and 86.09 (Other incision of skin and 

subcutaneous tissue) to identify the full 

system. It identified 193 cases assigned 

to DRG 1 with average charges of 

approximately $69,155, and 532 cases 

assigned to DRG 2 with average charges 

of approximately $56,113. 

In the FY 2007 IPPS proposed rule we 

indicated that we have reviewed the 

latest data for the full-system DBS 

implants assigned to DRG 1 or DRG 2 in 

the FY 2005 MedPAR file. We identified 

cases with procedure codes 02.93 and 

86.95 for full-system dual array cases. 

We also identified cases with reported 

codes 02.93 and 86.96 for those fullsystem cases where the type of pulse 

generator was not specified. The 

following table displays our results: 

DRG Number of 

cases 

Average 

length of 

stay 

Average 

charges 

DRG 1—All Cases ............................................................................................................................... 23,037 9.61 $55,494 

DRG 1—Cases with 02.93 and 86.95 (Kinetra) ................................................................................ 51 5.18 73,020 

DRG 1—Cases with 02.93 and 86.96 (Unspecified) .......................................................................... 101 4.86 53,356 

DRG 2—All Cases ............................................................................................................................... 9,707 4.41 32,791 

DRG 2—Cases with 02.93 and 86.95 (Kinetra) ................................................................................ 146 2.40 59,414 

DRG 2—Cases with 02.93 and 86.96 (Unspecified) .......................................................................... 249 2.12 47,047 

DRG 543—All cases ............................................................................................................................ 5,192 11.71 71,138 

These data showed that 

approximately one-quarter of the fullsystem dual array neurostimulator pulse 

generator cases are assigned to DRG 1 

and approximately three-quarters of 

these cases are assigned to DRG 2. In 

both DRGs, the average length of stay 

was shorter for the full-system array 

neurostimulator pulse generator cases 

than for all other cases. However, the 

average charges for the full-system dual 

array neurostimulator pulse generator 

cases are approximately $18,000 and 

$27,000 higher than the average charges 

for DRGs 1 and 2, respectively. The 

average charges for these cases in DRG 

1 are comparable to those for DRG 543. 

However, the more commonly occurring 

cases in DRG 2 have average charges 

that are less than those in DRG 543 by 

nearly $12,000. We reviewed all of the 

procedures that will result in a case 

being assigned to DRGs 1 and 2. Unlike 

the full-system DBS implants, we 

believe for most of the cases assigned to 

these DRGs, there will be no device cost 

to the hospital. For this reason, we 

believe the higher average charges and 

lower length of stay for cases involving 

full-system dual array neurostimulator 

pulse generators are likely accounted for 

by the cost of the device. While it is 

possible that the cost of the device itself 

will make the full-system DBS implants 

more expensive than other cases in the 

DRG, the hospital’s charge markup may 

also explain the higher charges but 

lower average length of stay. As 

indicated in section II.G.3.a. of this final 

rule, the national average CCR for 

medical equipment and supplies is 

approximately 34 percent. Thus, the 

actual cost to the hospital of the case 

including the full-system dual array 

neurostimulator pulse generator may be 

much lower than the charges would 

suggest. 

With respect to whether the cost of 

the technology itself, absent a charge 

markup, makes the case more 

expensive, in the FY 2007 IPPS 

proposed rule, we stated that we 

intended to address this issue as we 

make further refinements to the DRG 

system to address severity of illness as 

discussed in section II.C. of this 

preamble. 

Comment: Several commenters 

opposed CMS’ proposed decision to 

retain the current assignment of 

implantable dual array neurostimulator 

pulse generator cases in DRGs 1 and 2. 

Several commenters stated that CMS 

should recognize the higher resources 

associated with this technology and 

reassign implantable dual array 

neurostimulator pulse generator cases to 

DRG 543. Two commenters disagreed 


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with CMS’ statements that markups 

associated with Kinetra may overstate 

the total charges of the implant 

procedure. Medtronic submitted 

information on charge compression in 

which the company contends that it 

conclusively finds the hospital charge 

markups for implantable devices are in 

fact significantly lower than for other, 

lower cost supplies and equipment. 

Medtronic and one other commenter 

argued that the total charges found in 

the FY 2005 MedPAR data associated 

with implantable dual array 

neurostimulator pulse generator 

procedures may be understated relative 

to other procedures in DRG 1, DRG 2 

and DRG 543 and that reassignment of 

this technology to DRG 543 is fully 

warranted. The commenters stated that 

the implementation of the CS DRGs 

should be deferred to at least FY 2008 

and not be a factor in CMS’ decision to 

make DRG reassignments this year. 

Response: With regard to the issue of 

charge compression, we are studying 

this issue in our effort to improve 

payment accuracy in the IPPS. The 

average charges for the 51 cases in DRG 

1 where the patient received a dual 

array neurostimulator are $17,426 or 31 

percent higher than the rest of the cases 

in DRG 1. The average charges are 

comparable to those for DRG 543 

($73,020 for dual array neurostimulator 

cases and $71,138 for DRG 543). 

The average charges for the 146 cases 

in DRG 2 are $26,623 or 81 percent 

higher than the rest of the cases in DRG 

2 and only $12,000 less than the average 

charges for DRG 543. Based on these 

data, we believe that the dual array 

neurostimulator cases will be more 

accurately paid in DRG 543 than DRGs 

1 and 2. We will be implementing this 

change to the DRG assignment for the 

full-system dual array neurostimulator 

cases for FY 2007. Implantable dual 

array neurostimulator pulse generator 

procedure cases reported with ICD–9–

CM procedure codes 02.93 and 86.95 

will be reassigned to DRG 543. We are 

changing the DRG title for DRG 543 to 

‘‘Craniotomy With Major Device 

Implant or Acute Complex CNS 

Principal Diagnosis.’’

b. Carotid Artery Stents 

Background: Stroke is the third 

leading cause of death in the United 

States and the leading cause of serious, 

long-term disability. Approximately 70 

percent of all strokes occur in people 

age 65 and older. The carotid artery, 

located in the neck, is the principal 

artery supplying the head and neck with 

blood. Accumulation of plaque in the 

carotid artery can lead to stroke either 

by decreasing the blood flow to the 

brain or by the plaque breaking free and 

lodging in the brain or other arteries 

leading to the head. The percutaneous 

transluminal angioplasty (PTA) 

procedure involves inflating a balloonlike device in the narrowed section of 

the carotid artery to reopen the vessel. 

A carotid stent is then deployed in the 

artery to prevent the vessel from closing 

or restenosing. A distal filter device 

(embolic protection device) may also be 

present, which is intended to prevent 

pieces of plaque from entering the 

bloodstream. 

Effective July 1, 2001, Medicare 

covered PTA of the carotid artery 

concurrent with carotid stent placement 

when furnished in accordance with the 

FDA-approved protocols governing 

Category B Investigational Device 

Exemption (IDE) clinical trials. PTA of 

the carotid artery, when provided solely 

for the purpose of carotid artery dilation 

concurrent with carotid stent 

placement, was considered to be a 

reasonable and necessary service only 

when provided in the context of such 

clinical trials and, therefore, was 

considered a covered service for the 

purposes of those trials. Performance of 

PTA in the carotid artery when used to 

treat obstructive lesions outside of 

approved protocols governing Category 

B IDE clinical trials remained 

noncovered until the release of the 

October 12, 2004 NCD for PTA of the 

carotid artery in post-approval studies. 

This decision extended coverage of PTA 

in the carotid artery concurrent with 

placement of an FDA-approved carotid 

stent for an FDA-approved indication 

when furnished in accordance with the 

FDA-approved protocols governing 

post-approval studies. On March 17, 

2005, CMS released an NCD that 

extended coverage to patients at high 

risk for carotid endarterectomy (CEA) 

who also have symptomatic carotid 

artery stenosis ≥70 percent. Procedures 

must be performed in CMS-approved 

facilities and with FDA-approved 

carotid artery stent(s) with distal 

embolic protection. (Section 20.7 of the 

NCD manual which discusses this 

decision may be viewed at the Web site: 

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

downloads/ncd103c1_Part1.pdf. 

Placement of a carotid artery stent in 

patients who have had a disabling 

stroke (modified Rankin scale ≥3) is 

excluded from coverage. 

We established codes for carotid 

artery stent procedures for use with 

discharges occurring on or after October 

1, 2004, for inpatients who were 

enrolled in an FDA-approved clinical 

trial and who were using on-label FDAapproved stents and embolic protection 

devices. These codes are as follows: 

• 00.61 (Percutaneous angioplasty or 

atherectomy of precerebral (extracranial 

vessel(s)); and 

• 00.63 (Percutaneous insertion of 

carotid artery stent(s)). 

We assigned procedure code 00.61 to 

four MDCs and seven DRGs. The most 

likely clinical scenario is that in which 

cases are assigned to MDC 1 (Diseases 

and Disorders of the Nervous System) in 

DRGs 533 (Extracranial Procedures with 

CC) and 534 (Extracranial Procedures 

without CC). Other DRG assignments 

can be found in Table 6B of the 

Addendum to the FY 2005 IPPS final 

rule (69 FR 49624). Code 00.63 is not 

considered a procedure code itself and 

should be used in combination with 

code 00.61. 

Based on the results of evaluation of 

PTA and carotid stents for our FY 2006 

final rule (70 FR 47300, August 12, 

2005), we did not find sufficient 

evidence to warrant a DRG change at 

that time. 

We again reviewed the PTA and 

insertion of a carotid stent(s) for the FY 

2007 proposed rule, as manufacturer 

representatives suggested that we assign 

all carotid stenting cases to DRG 533 

only, bypassing DRG 534. As we 

indicated in the FY 2007 IPPS proposed 

rule (71 FR 24032), we reviewed the FY 

2005 MedPAR data on all cases in DRGs 

533 and 534 and on those cases 

containing code 00.61 in combination 

with 00.63. The following table displays 

those results: 

DRG Number of 

cases 

Average 

length of 

stay (Days) 

Average 

charges 

DRG 533—All cases ............................................................................................................................ 44,031 3.65 $26,376 

DRG 533 with codes 00.61 and 00.63 reported ................................................................................. 2,400 2.94 33,344 

DRG 533 with code 00.61 and without 00.63 ..................................................................................... 99 5.95 46,591 

DRG 534—All cases ............................................................................................................................ 40,381 1.72 17,196 

DRG 534 with codes 00.61 and 00.63 reported ................................................................................. 2,056 1.52 25,000 


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DRG Number of 

cases 

Average 

length of 

stay (Days) 

Average 

charges 

DRG 534 with code 00.61 and without 00.63 ..................................................................................... 55 2.31 27,895 

We found that 5.5 and 5.1 percent of 

the cases in DRGs 533 and 534, 

respectively, involved placement of a 

carotid artery stent. In DRG 533, the 

average length of stay was 19.4 percent 

shorter for the carotid stenting cases 

than for all other cases. In DRG 534, the 

average length of stay was 11.6 percent 

shorter for the carotid stenting cases 

than for all other cases. However, the 

average charges for the carotid stent 

cases were higher by $6,968 in DRG 533 

and $7,804 in DRG 534. We reviewed all 

of the procedures that would result in 

a case being assigned to DRGs 533 and 

534. Unlike the carotid artery stent 

placements, we believe that, for most of 

the other cases assigned to these DRGs, 

there will be no device cost to the 

hospital. For this reason, we believe the 

higher average charges and lower length 

of stay for the cases involving carotid 

artery stents could be accounted for by 

the cost of the device. We discussed the 

possibility that the cost of the device 

itself makes the stent cases more 

expensive than other cases in the DRG, 

and that the hospital’s charge markup 

may also explain the higher charges but 

lower average length of stay. We also 

suggested that we intended to address 

this issue as we make further 

refinements to the CS DRG system 

previously described. The use of a 

carotid stent or stents may increase 

complexity and resource use even 

though the patient is not necessarily 

more severely ill. We indicated that we 

believed that the CS DRG system we 

proposed would need to be further 

refined to assign cases based on 

complexity as well as severity to 

account for technologies such as carotid 

stents that increase costs. For this 

reason, we did not propose a change to 

the current DRG assignment for these 

cases. 

Comment: More than a dozen 

commenters addressed this topic. State 

hospital associations, in particular, were 

unanimous in their recommendation 

that all carotid stenting cases should 

immediately be assigned only to DRG 

533, bypassing DRG 534 entirely. The 

commenters suggested this solution to 

increase payments to hospitals in order 

that the higher costs associated with 

carotid stents are recognized within the 

existing DRG system. 

Response: We are opposed to this 

suggestion. The DRGs comprise a native 

structure of the types of patients within 

each DRG category. Further, this 

structure is based on an organizing 

principle. For example, cases in DRGs 

533 and 534 are organized on the 

principle of surgical approach 

(extracranial procedures) as well as the 

presence or absence of CCs. To ignore 

the structure of the DRG solely for the 

purpose of increasing payment would 

set an unwelcome precedent for 

defining all of the other DRGs in the 

system. 

Comment: Several commenters 

mentioned that, while CMS suggested 

that the higher average charges and 

lower lengths of stay for cases involving 

carotid artery stents are likely accounted 

for by the cost of the device, CMS 

provided no evidence to support this 

assertion. 

Response: The average length of stay 

for patients in DRGs 533 and 534 with 

the placement of carotid stent(s) are 19.4 

and 11.6 percent shorter than the other 

patients assigned to DRGs 533 and 534, 

respectively. Therefore, a long length of 

stay is not the reason for the higher 

average charges. We based our assertion 

on the contribution of the cost of the 

device to the total cost of the patients in 

these DRGs compared to other cases in 

the DRG with longer lengths of stay. We 

note that the next comment suggests 

that our analysis is correct that the 

higher charges for the carotid artery 

stent cases relative to other cases in the 

DRG are, in part, associated with higher 

supply costs. 

Comment: One commenter suggested 

that CMS create a new pair of DRGs 

with and without MCVs until the 

adequacy of payment under the severity 

adjustment methodology is fully 

assessed. This commenter noted that, 

while length of stay and operating room 

costs are lower for carotid stenting, 

supply and radiology charges associated 

with the stent and the angiography are 

higher, resulting in higher overall costs 

for carotid stenting. 

Response: While we recognize the 

creativity of this approach, we note that 

the MCVs are applicable to cases in 

MDC 5 (Diseases and Disorders of the 

Circulatory System), while DRGs 533 

and 534 are in MDC 1 (Diseases and 

Disorders of the Nervous System). Such 

an approach for MDC 1 might have 

merit, but we would want to evaluate 

the entire MDC thoroughly before 

creating such a list of complicating 

diagnoses. We will further consider this 

concept as we evaluate severity DRG 

systems for adoption in FY 2008. 

Comment: One commenter, while 

urging CMS to reconsider our decision 

not to assign all carotid cases to DRG 

533, noted that the current National 

Coverage Determination on CAS 

[Carotid Artery Stenting] very clearly 

states that only those patients who are 

at high risk for [open] surgery due to the 

presence of a detailed list of 

complications or comorbidities are 

eligible for carotid artery stenting. 

Therefore, by CMS’ own 

characterization, all patients undergoing 

carotid artery stenting have 

complications and comorbidities and 

should be assigned to DRG 533. 

Response: This assumption is 

theoretically correct. However, the 

detailed list of comorbidities or 

anatomical risk factors that are required 

to support the surgeon’s decision to 

perform carotid stenting instead of a 

carotid endarterectomy is not the same 

as the CMS list of CCs. For example, 

amaurosis fugax, code 362.34 (Transient 

arterial occlusion) is recognized as a risk 

factor which would justify carotid 

stenting, but is not recognized by the 

CMS GROUPER as a diagnosis defined 

as a CC. 

Comment: Several commenters 

suggested that CMS create two new 

DRGs for the carotid stent cases. 

Response: We note that the number of 

procedures has increased from the data 

reported in the FY 2006 IPPS final rule 

(70 FR 47300), thus indicating 

acceptance of this procedure by the 

medical community as a main-stream 

surgical alternative. In FY 2006, as the 

specific codes for carotid stenting had 

only been in use since October 1, 2004, 

we used the existing codes 39.50 

(Angioplasty or atherectomy of other 

noncoronary vessel(s)) and 39.90 

(Insertion of non-drug-eluting 

peripheral vessel stent(s)), in 

combination with principal diagnosis 

code 433.10 (Occlusion and stenosis of 

carotid artery, without mention of 

cerebral infarction) as a proxy for the 

number of cases involved in clinical 

trials. In DRG 533, we had 1,586 cases 

with the proxy codes reported, and in 

DRG 534, there were 1,397 cases. In FY 

2005, the patients represented 3.5 

percent and 3.3 percent of all cases in 

DRGs 533 and 534, respectively. That 

figure has now climbed to 2,400 cases 


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and 2,056 cases, and 5.5 percent and 5.1 

percent, respectively. 

In addition, the difference in the 

average charges are 26 percent higher 

for carotid artery stent cases in DRG 533 

than for the average charges in all cases 

in that DRG, and 45 percent higher 

using the same parameters for DRG 534. 

We believe these data are compelling 

enough to warrant creation of a new 

DRG. 

Accordingly, we are creating DRG 583 

(Carotid Artery Stent Procedure). This 

DRG will be located in MDC 1, and will 

be hierarchically ordered above DRGs 

533 and 534. DRG 583 will contain two 

procedure codes. Code 00.61 will 

determine the DRG, and will be 

combined with code 00.63. Both codes 

must be reported in order for cases to be 

assigned to this DRG. 

We are not splitting this DRG based 

on the presence or absence of a CC as 

suggested by the commenters. One 

criterion for splitting a DRG based on 

the presence or the absence of a CC is 

that it must have an impact of at least 

$40 million. In this situation, the overall 

average of the charges for all cases in 

DRGs 533 and 534 is $30,193. We then 

subtracted the actual average charges for 

only the carotid stent cases in both 

DRGs 533 and 534, and multiplied that 

figure by the actual number of cases. For 

DRG 533 and DRG 534, we estimate an 

impact of approximately $10 million 

each. Added together, the total impact 

would be $20 million, falling short of 

our threshold of a $40 million impact to 

create a CC/non-CC split. Therefore, we 

are not creating a CC/non-CC split in the 

DRG for carotid artery stenting at this 

time. 

We reiterate that coverage of the 

carotid artery stent procedure is limited 

to patients at risk of developing a stroke 

due to narrowing or stenosis of the 

carotid artery. Diagnosis code 433.10 

(Occlusion and stenosis of carotid artery 

without mention of cerebral infarction) 

should be used to identify the site of the 

procedure in the carotid artery. If it is 

necessary to identify bilateral occlusion 

or stenosis, diagnosis code 433.30 

(Occlusion and stenosis of multiple and 

bilateral arteries without mention of 

cerebral infarction) may also be used. 

These codes should be used together, as 

code 433.30 contains arterial sites that 

are not currently covered for Medicare 

patients. Reporting of code 433.30 alone 

will cause the case to fail the editing 

system at the fiscal intermediary, and 

the case could be denied. 

Inclusion of the fifth digit of ‘‘1’’ (with 

cerebral infarction) with either 433.1x or 

433.3x will cause the claim to be 

rejected. 

3. MDC 5 (Diseases and Disorders of the 

Circulatory System) 

a. Insertion of Epicardial Leads for 

Defibrillator Devices 

As we indicated in the FY 2007 IPPS 

proposed rule (71 FR 24033), we 

received a comment indicating that a 

change in coding advice for the 

insertion of epicardial leads for CRT–D 

defibrillator devices affects DRG 

assignment. The commenter noted that 

the Third Quarter 2005 issue of the 

American Hospital Association’s 

publication Coding Clinic for ICD–9–CM 

instructs coders to assign code 37.74 

(Insertion or replacement of epicardial 

lead [electrode] into atrium) for 

pacemaker or defibrillator leads inserted 

through use of a thoracotomy into the 

epicardium. While the use of code 37.74 

is standard coding practice for 

pacemakers, the advice is new for 

defibrillators. This coding advice was 

discussed at the ICD–9–CM 

Coordination and Maintenance 

Committee meeting held on September 

29 and 30, 2005. Participants at the 

Committee meeting proposed 

modifications for the code category 37.7 

(insertion, revision, replacement, and 

removal of pacemaker leads; insertion of 

temporary pacemaker system; and 

revision of cardiac device pocket). 

These modifications involved 

expanding the category so that the codes 

for leads would no longer be restricted 

to pacemakers. This change would 

guide coders to use code 37.74 for the 

insertion of epicardial leads for both 

defibrillators and pacemakers for the 

ICD–9–CM and will become effective on 

October 1, 2006. 

The commenter indicated that this 

coding advice would restrict some 

defibrillator cases from being assigned 

to the defibrillator DRGs. Specifically, 

the commenter expressed concerns 

about the DRG logic for the following 

DRGs: 

• DRG 515 (Cardiac Defibrillator 

Implant without Cardiac Catheter) 

• DRG 535 (Cardiac Defibrillator 

Implant with Cardiac Catheter with 

AMI/Heart Failure/Shock) 

• DRG 536 (Cardiac Defibrillator 

Implant with Cardiac Catheter without 

AMI/Heart Failure/Shock) 

Cases are assigned to one of these 

three DRGs when a total defibrillator 

system, including both the device and 

one or more leads, is implanted. The 

implant could be represented by the 

ICD–9–CM codes for the total system, 

that is, code 00.51 (Implantation of 

cardiac resynchronization defibrillator, 

total system [CRT–D]) or code 37.94 

(Implantation or replacement of 

automatic cardioverter/defibrillator, 

total system [AICD]). Cases can also be 

assigned to DRGs 515, 535, and 536 

when a combination of a device and a 

lead code is reported. The following 

combinations of defibrillator device and 

lead codes are present in the current 

DRG logic: 

• 00.52 (Implantation or replacement 

of transvenous lead [electrode] into left 

ventricular coronary venous system) 

and 00.54 (Implantation or replacement 

of cardiac resynchronization 

defibrillator, pulse generator device 

only [CRT–D]) 

• 37.95 (Implantation of automatic 

cardioverter/defibrillator lead(s) only) 

and 00.54 (Implantation or replacement 

of cardiac resynchronization 

defibrillator, pulse generator device 

only [CRT–D]) 

• 37.95 (Implantation of automatic 

cardioverter/defibrillator lead(s) only) 

and 37.96 (Implantation of automatic 

cardioverter/defibrillator pulse 

generator only) 

• 37.97 (Replacement of automatic 

cardioverter/defibrillator lead(s) only) 

and 00.54 (Implantation or replacement 

of cardiac resynchronization 

defibrillator, pulse generator device 

only [CRT–D]) 

• 37.97 (Replacement of automatic 

cardioverter/defibrillator lead(s) only) 

and 37.98 (Replacement of automatic 

cardioverter/defibrillator pulse 

generator only) 

A DRG logic issue has arisen 

concerning the instruction to use code 

37.74 for epicardial leads inserted with 

CRT–D defibrillators. The new 

combination of a defibrillator device 

with an epicardial lead (code 37.74) is 

not included in DRGs 515, 535, and 536. 

The commenter recommended that the 

following combinations be added to 

DRGs 515, 535, and 536 so that all types 

of defibrillator device and lead 

combinations would be included: code 

37.74 and code 00.54; code 37.74 and 

code 37.96; and code 37.74 and code 

37.98. 

We agree that these three 

combinations should be added to the 

list of combination codes included in 

DRGs 515, 535, and 536. This change 

would result in all combinations of 

defibrillator devices and leads being 

assigned to one of the defibrillator 

DRGs. Therefore, in the FY 2007 IPPS 

proposed rule, we proposed to add these 

three combinations to the list of 

procedure combinations under DRGs 

515, 535, and 536. 

Comment: A number of commenters 

supported adding the new combinations 

of defibrillator devices with the 

epicardial leads to DRGs 515, 535, and 

536. One commenter stated that this 

change would bring the DRGs into 


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alignment with the change in coding 

advice to assign code 37.74 in 

conjunction with implantation of CRT–

D defibrillators. 

Response: We appreciate the support 

of commenters and agree that this 

change would bring the DRGs into 

alignment with the change in coding 

advice. 

In this final rule, we are adding the 

following combinations of device and 

lead codes to DRGs 515, 535, and 536: 

code 37.74 and code 00.54; code 37.74 

and code 37.96; and code 37.74 and 

code 37.98. 

b. Application of Major Cardiovascular 

Diagnoses (MCVs) List to Defibrillator 

DRGs 

In the FY 2006 IPPS final rule (70 FR 

47289 and 47474 through 47479), we 

addressed a comment we had received 

in response to the FY 2006 proposed 

rule which noted that section 507(c) of 

Pub. L. 108–173 required MedPAC to 

conduct a study to determine how the 

DRG system should be updated to better 

reflect the cost of delivering care in a 

hospital setting. The commenter noted 

that MedPAC reported that the ‘‘cardiac 

surgery DRGs have high relative 

profitability ratios.’’ While the 

commenter acknowledged that it may 

take time to conduct and complete a 

thorough evaluation of the MedPAC 

payment recommendations for all DRGs, 

the commenter strongly encouraged 

CMS to revise the cardiac DRGs through 

patient severity refinement as part of the 

IPPS final rule effective for FY 2006. 

In response to this comment, we 

performed an extensive review of the 

cardiovascular DRGs in MDC 5, 

particularly those DRGs that were 

commonly billed by specialty hospitals. 

We observed that there was some 

overlap between the lists of 

cardiovascular complications and 

complex diagnoses and that these lists 

were already used to segregate patients 

into DRGs that used greater resources. 

Because the hospital industry already 

was familiar with the major 

complication and complex diagnosis 

lists used within the cardiovascular 

DRGs, we began our analysis with these 

two overlapping lists. 

The two lists were originally 

developed for the current DRG system 

because they contained conditions that 

could have an impact on the resources 

needed to treat a patient with 

cardiovascular complications. Many of 

the conditions were cardiovascular 

diagnoses and, therefore, would be 

classified to MDC 5. However, we 

determined that some of the diagnoses 

were not cardiovascular, but would still 

have an impact on a patient with 

cardiovascular complications. The 

conditions that were not cardiovascular 

diagnoses were not assigned to MDC 5 

if they were the principal diagnosis. 

We reviewed the conditions on the 

two overlapping lists and identified 

conditions that we believed would lead 

to a more complicated patient stay 

requiring greater resource use. We 

referred to these conditions as ‘‘major 

cardiovascular conditions (MCVs).’’ The 

MCVs could be present as either a 

principal diagnosis or a secondary 

diagnosis and lead to greater resource 

consumption. The complete list of 

MCVs was published in the FY 2006 

IPPS final rule (70 FR 47477 and 47478). 

In the FY 2006 IPPS final rule, we 

also adopted new DRGs 547 through 

558, effective October 1, 2005 (70 FR 

47475 and 47476). However, we 

emphasized that the refinements to the 

DRGs were being taken as an interim 

step to better recognize severity in the 

DRG system for FY 2006 until we could 

complete a more comprehensive 

analysis of the APR DRG system and the 

CC list as part of a complete analysis of 

the MedPAC recommendations that we 

planned to perform for FY 2007 (and 

which was addressed in section II.C. of 

the preamble of the FY 2007 proposed 

rule). 

Since publication of the FY 2006 IPPS 

final rule, we have received a question 

from a commenter as to why we did not 

apply the MCV list to the following 

defibrillator DRGs: 515, 535, and 536. 

The commenter noted that the 

pacemaker DRGs were revised using the 

MCV list, but the defibrillator DRGs 

were not. 

As noted above, for FY 2006, we 

created new DRGs 546 through 558 to 

identify cases with more costly and 

severely ill patients as an interim step 

to evaluating severity DRGs. We 

analyzed for the first time last year data 

on cases within MDC 5 and presented 

data that showed significant difference 

for patients in certain DRGs based on 

the presence or absence of an MCV. This 

split did not work for the defibrillator 

DRGs, as we could not identify groups 

with significantly different resource use. 

For instance, splitting DRG 515 based 

on the presence of an MCV would lead 

to two groups with differences in 

charges of only $3,430 ($89,341 for 

those with an MCV and $85,911 for 

those without an MCV). In the data we 

displayed in the FY 2006 IPPS final 

rule, the differences for DRGs selected 

for an MCV split ranged from $10,319 to 

$21,035. Splitting DRG 515 based on an 

MCV would produce a difference in 

charges of only 10.1 percent as 

compared to differences of 28.7 to 47.7 

percent for DRGs 547 through 558. 

Therefore, the data did not support 

including DRG 515 among those split 

based on the presence or absence of an 

MCV. Similar results were found when 

DRG 536 was split by an MCV. There 

was only an 8.1 percent difference in 

charges between the two groups. We 

also identified other problems with 

splitting DRG 535 based on the presence 

or absence of an MCV. Some of the 

codes a claim must include for the case 

to be grouped to DRG 535 under our 

current system are also codes on the 

MCV list. Therefore, applying the MCV 

list to DRG 535 would result in all cases 

being assigned to the DRG with an MCV 

and none to the DRG without an MCV. 

For these reasons, we did not subdivide 

DRGs 515, 535, and 536 based on the 

presence or absence of an MCV. 

In the FY 2007 IPPS proposed rule, 

we indicated that we had decided not to 

propose additional refinements of the 

DRGs based on MCVs for FY 2007 

because of our efforts to propose a 

broader refinement of the DRG system, 

as discussed in detail in section II.C. of 

the proposed rule. However, as 

discussed further in section II.C. of the 

preamble of the proposed rule, we 

solicited comments on whether it would 

be appropriate in FY 2007 to apply a 

clinical severity concept to an expanded 

set of DRGs, similar to the approach we 

used in FY 2006 to refine cardiac DRGs 

based on the presence or absence of an 

MCV. 

Comment: Commenters agreed with 

the recommendation that we not 

subdivide DRGs 515, 535, and 536 based 

on MCV. However, one commenter 

expressed concerns about how the 

current DRGs were achieving their goal 

of identifying patients with greater 

severity of illness. Other commenters 

opposed the proposal to delay refining 

defibrillator DRGs based on MCVs. 

These commenters believed it was 

appropriate for CMS to apply a clinical 

severity concept similar to the approach 

used in FY 2006 to refine cardiac DRGs 

to an expanded set of DRGS (for 

example, defibrillator DRGs) based on 

the presence or absence of an MCV. 

Response: We agree with the 

commenters who suggested that our goal 

should be to reform the Medicare DRG 

system to develop a better means of 

capturing severity of illness and 

complexity. As discussed in section II.C. 

of the preamble of the proposed rule, we 

solicited comments on whether it would 

be appropriate in FY 2007 to apply a 

clinical severity concept to an expanded 

set of DRGs, similar to the approach we 

used in FY 2006 to refine cardiac DRGs 

based on the presence or absence of an 

MCV. As discussed in section II.C.7., we 

are implementing revisions to the 


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current DRGs to better recognize 

severity of illness. However, the 

analysis we have performed to this 

point does not support splitting 

defibrillator DRGs based on the 

presence or absence of an MCV. As 

stated earlier, simply applying the 

MCVs to the defibrillator DRGs in DRGs 

515, 535, and 536 would not lead to 

significant improvements for DRG 515. 

Applying the MCV list to DRG 535 

would result in all cases being assigned 

to the DRG with an MCV and none to 

the DRG without an MCV. For these 

reasons, we did not subdivide DRGs 

515, 535, and 536 based on the presence 

or absence of an MCV. 

While we did not find additional 

severity improvements for defibrillator 

cases, we will continue to study this 

area and look for further improvements. 

4. MDC 8 (Diseases and Disorders of the 

Musculoskeletal System and Connective 

Tissue) 

a. Hip and Knee Replacements 

In the FY 2006 final rule (70 FR 

47303), we deleted DRG 209 (Major 

Joint and Limb Reattachment 

Procedures of Lower Extremity) and 

created new DRGs 544 (Major Joint 

Replacement or Reattachment of Lower 

Extremity) and 545 (Revision of Hip or 

Knee Replacement) to help resolve 

payment issues for hospitals that 

perform revisions of joint replacements 

because we found revisions of joint 

replacements to be significantly more 

resource intensive than original hip and 

knee replacements. DRG 544 includes 

the following code assignments: 

• 81.51, Total hip replacement 

• 81.52, Partial hip replacement 

• 81.54, Total knee replacement 

• 81.56, Total ankle replacement 

• 84.26, Foot reattachment 

• 84.27, Lower leg or ankle 

reattachment 

• 84.28, Thigh reattachment 

DRG 545 includes the following 

procedure code assignments: 

• 00.70, Revision of hip replacement, 

both acetabular and femoral 

components 

• 00.71, Revision of hip replacement, 

acetabular component 

• 00.72, Revision of hip replacement, 

femoral component 

• 00.73, Revision of hip replacement, 

acetabular liner and/or femoral head 

only 

• 00.80, Revision of knee 

replacement, total (all components) 

• 00.81, Revision of knee 

replacement, tibial component 

• 00.82, Revision of knee 

replacement, femoral component 

• 00.83, Revision of knee 

replacement, patellar component 

• 00.84, Revision of knee 

replacement, tibial insert (liner) 

• 81.53, Revision of hip replacement, 

not otherwise specified 

• 81.55, Revision of knee 

replacement, not otherwise specified 

In the FY 2006 IPPS final rule (70 FR 

47305), we indicated that the American 

Association of Orthopaedic Surgeons 

had requested that, once we receive 

claims data using the two DRG 

procedure code assignments, we closely 

examine data from the use of the codes 

under the two DRGs to determine if 

future additional DRG modifications are 

needed. 

After publication of the FY 2006 IPPS 

final rule, a number of hospitals and 

coding personnel advised us that the 

DRG logic for DRG 471 (Bilateral or 

Multiple Major Joint Procedures of 

Lower Extremity), which utilizes the 

new and revised hip and knee 

procedure codes under DRGs 544 and 

545, also includes codes that describe 

procedures that are not bilateral or that 

do not involve multiple major joints. 

DRG 471 was developed to include 

cases where major joint procedures such 

as revisions or replacements were 

performed either bilaterally or on two 

joints of one lower extremity. We 

changed the logic for DRG 471 last year 

for the first time when we added the 

new and revised codes. The commenters 

indicated that, by adding the more 

detailed codes that do not include total 

revisions or replacements to the list of 

major joint procedures to DRG 471, we 

are assigning cases to DRG 471 that do 

not have bilateral or multiple joint 

procedures. For example, when a 

hospital reports a code for revision of 

the tibial component (code 00.81) and 

patellar component of the right knee 

(code 00.83), the current DRG logic 

assigns the case to DRG 471. The 

commenters indicated that this code 

assignment is incorrect because only 

one joint has undergone surgery, but 

two components were used. One 

commenter indicated that ICD–9–CM 

does not identify left/right laterality. 

Therefore, it is difficult to use the 

current coding structure to determine if 

procedures are performed on the same 

leg or on both legs. The commenters 

raised a concern about whether CMS 

intended to pay hospitals using DRG 

471 for procedures performed on one 

joint. The commenters indicated that 

the DRG assignments for these codes 

would also make future data analysis 

misleading. The commenters 

recommended removing codes from 

DRG 471 that do not specifically 

identify bilateral or multiple joint 

procedures. 

We agree that the new and revised 

joint procedure codes should not be 

assigned to DRG 471 unless they 

include bilateral and multiple joints. 

Therefore, in the FY 2007 IPPS 

proposed rule (71 FR 24035), we 

proposed to remove the following codes 

from DRG 471: 

• 00.71, Revision of hip replacement, 

acetabular component 

• 00.72, Revision of hip replacement, 

femoral component 

• 00.73, Revision of hip replacement, 

acetabular liner and/or femoral head 

only 

• 00.81, Revision of knee 

replacement, tibial component 

• 00.82, Revision of knee 

replacement, femoral component 

• 00.83, Revision of knee 

replacement, patellar component 

• 00.84, Revision of total knee 

replacement, tibial insert (liner) 

• 81.53, Revision of hip replacement, 

not otherwise specified 

• 81.55, Revision of knee 

replacement, not otherwise specified 

The proposed revised DRG 471 would 

then contain only the following codes: 

• 00.70, Revision of hip replacement, 

both acetabular and femoral 

components 

• 00.80, Revision of knee 

replacement, total (all components) 

• 81.51, Total hip replacement 

• 81.52, Partial hip replacement 

• 81.54, Total knee replacement 

• 81.56, Total ankle replacement 

We proposed to assign the codes 

removed from DRG 471 (codes 00.71, 

00.72, 00.73, 00.81, 00.82, 00.83, 00.84, 

81.53, and 81.55) to DRG 545 when used 

either alone or in combination. This list 

of codes removed from DRG 471 and 

added to DRG 545 includes partial 

revisions of the knee and hip as well as 

unspecified joint procedures such as 

code 81.55 where it is not clear if the 

revision is total or partial. 

Comment: Several comments 

supported our proposals to remove 

codes 00.71, 00.72, 00.73, 00.81, 00.82, 

00.83, 00.84, 81.53, and 81.55 from the 

combinations assigned to DRG 471 and 

assign cases with these codes to DRG 

545. The commenters agreed that these 

codes should be removed from DRG 471 

because they do not represent bilateral 

and multiple joint revisions or 

replacements. 

Response: We appreciate the 

commenters support to remove codes 

00.71, 00.72, 00.73, 00.81, 00.82, 00.83, 

00.84, 81.53, and 81.55 from the 

combinations assigned to DRG 471. 

These cases will be assigned to DRG 

545. 

We are finalizing the changes to DRG 

471 and DRG 545 that we proposed. 


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Further, as we indicated in the proposed 

rule, we plan to perform extensive data 

analysis on the new and revised joint 

procedure codes as we receive billing 

data to determine if future refinements 

of these DRGs are needed. In addition, 

as indicated in section II.C. of the 

preamble of the proposed rule, we are 

planning in the future to adopt a revised 

DRG system for the IPPS that addresses 

severity of illness. We encouraged 

commenters to evaluate how the new 

and revised joint procedures should be 

addressed in such a revised system. We 

received comments indicating that the 

CS DRGs that we proposed do not 

distinguish between patients receiving 

an original joint replacement from a 

revision. As we indicate elsewhere in 

this final rule, we will evaluate these 

issues as we develop our plans for 

adopting a revised DRG system that 

addresses severity of illness. 

b. Spinal Fusion 

In the FY 2006 IPPS final rule (70 FR 

47307), we created new DRG 546 

(Spinal Fusions Except Cervical with 

Curvature of the Spine or Malignancy). 

DRG 546 is composed of all noncervical 

spinal fusions previously assigned to 

DRGs 497 (Spinal Fusion Except 

Cervical with CC) and 498 (Spinal 

Fusion Except Cervical without CC) that 

have a principal or secondary diagnosis 

of curvature of the spine or a principal 

diagnosis of a malignancy. The 

principal diagnosis codes that lead to 

DRG 546 assignment are the following: 

• 170.2, Malignant neoplasm of 

vertebral column, excluding sacrum and 

coccyx 

• 198.5, Secondary malignant 

neoplasm of bone and bone marrow 

• 213.2, Benign neoplasm of bone and 

articular cartilage; vertebral column, 

excluding sacrum and coccyx 

• 238.0, Neoplasm of uncertain 

behavior of other and unspecified sites 

and tissues; Bone and articular cartilage 

• 239.2, Neoplasms of unspecified 

nature; bone, soft tissue, and skin 

• 732.0, Juvenile osteochondrosis of 

spine 

• 733.13, Pathologic fracture of 

vertebrae 

• 737.0, Adolescent postural kyphosis 

• 737.10, Kyphosis (acquired) 

(postural) 

• 737.11, Kyphosis due to radiation 

• 737.12, Kyphosis, postlaminectomy 

• 737.19, Kyphosis (acquired), other 

• 737.20, Lordosis (acquired) 

(postural) 

• 737.21, Lordosis, postlaminectomy 

• 737.22, Other postsurgical lordosis 

• 737.29, Lordosis (acquired), other 

• 737.30, Scoliosis [and 

kyphoscoliosis], idiopathic 

• 737.31, Resolving infantile 

idiopathic scoliosis 

• 737.32, Progressive infantile 

idiopathic scoliosis 

• 737.33, Scoliosis due to radiation 

• 737.34, Thoracogenic scoliosis 

• 737.39, Other kyphoscoliosis and 

scoliosis 

• 737.8, Other curvatures of spine 

• 737.9, Unspecified curvature of 

spine 

• 754.2, Congenital scoliosis 

• 756.51, Osteogenesis imperfecta 

The secondary diagnoses that will 

lead to DRG 546 assignment are: 

• 737.40, Curvature of spine, 

unspecified 

• 737.41, Curvature of spine 

associated with other conditions, 

kyphosis 

• 737.42, Curvature of spine 

associated with other conditions, 

lordosis 

• 737.43, Curvature of spine 

associated with other conditions, 

scoliosis 

After publication of the FY 2006 IPPS 

final rule, we received a comment 

stating that creating new DRG 546 was 

insufficient to address clinical severity 

and resource differences among spinal 

fusion cases that involve fusing multiple 

levels of the spine. Specifically, the 

commenter suggested that the spinal 

fusion DRGs be further modified to 

incorporate Bone Morphogenic Protein 

(BMP), code 84.52 (Insertion of 

recombinant bone morphogenetic 

protein). The commenter also suggested 

that CMS apply a clinical severity 

concept to all back and spine surgical 

cases similar to the approach that we 

used for the MCVs to refine the cardiac 

DRGs in the final rule for FY 2006. The 

commenter recommended recognizing 

additional conditions that reflect higher 

resource needs, regardless of whether 

they are principal or secondary 

diagnoses. The commenter also 

suggested that the spine DRGs be further 

subdivided based on the use of specific 

spinal devices such as artificial discs. 

These changes would entail the creation 

of 10 new spine DRGs in addition to 

other changes requested. 

Response: We agree that it is 

important to recognize severity when 

classifying patients into specific DRGs. 

In response to recommendations made 

by MedPAC last year that are discussed 

in section II.C. of this final rule, we are 

conducting a comprehensive analysis of 

the entire DRG system to determine 

whether to undertake significant reform 

to better recognize severity of illness. At 

this time, we believe it is premature to 

develop a severity adjustment for spine 

surgeries while we are considering a 

more systematic approach to capturing 

severity of illness across all DRGs. We 

also believe it would be premature to 

make revisions to DRG 546 because this 

DRG was created on October 1, 2005, 

and we do not yet have data to analyze 

its impact. Given the number of 

innovations occurring in spinal surgery 

over the last several years (for example, 

artificial spinal disc prostheses, 

kyphoplasty, and vertebroplasty), we 

agree that additional analysis of the 

spine DRGs would be warranted if we 

were to continue with the current DRG 

system and not adopt CS DRGs. 

However, as discussed above, in the FY 

2007 IPPS proposed rule, we proposed 

to develop a severity-adjusted DRG 

system. For this reason, we are not 

further researching this issue for FY 

2007. However, in the proposed rule, we 

encouraged commenters to examine the 

proposed CS DRG system described in 

section II.C. of the preamble of the 

proposed rule to determine whether 

there is a better recognition of severity 

of illness and resource use in that 

system. 

Comment: One commenter stated that 

it was premature to consider splitting 

the spinal fusion DRGs into potentially 

up to 10 new DRGs at this time. The 

commenter stated there is a need for 

additional data analysis prior to 

recommending new DRGs. 

Response: We agree with the 

commenter that it is premature to 

consider splitting the spinal fusion 

DRGs into as many as 10 new DRGs. We 

will continue to study this area. In the 

meantime, we will not modify the 

spinal fusion DRGs for October 1, 2006. 

c. CHARITETM Spinal Disc Replacement 

Device 

CHARITETM is a prosthetic 

intervertebral disc. On October 26, 2004, 

the FDA approved the CHARITETM

Artificial Disc for single level spinal 

arthroplasty in skeletally mature 

patients with degenerative disc disease 

between L4 and S1. On October 1, 2004, 

we created new procedure codes for the 

insertion of spinal disc prostheses 

(codes 84.60 through 84.69). We 

provided the DRG assignments for these 

new codes in Table 6B of the FY 2005 

IPPS proposed rule (69 FR 28673). We 

received comments on the FY 2005 

proposed rule recommending that we 

change the assignments for these codes 

from DRG 499 (Back and Neck 

Procedures Except Spinal Fusion With 

CC) and DRG 500 (Back and Neck 

Procedures Except Spinal Fusion 

Without CC) to the DRGs for spinal 

fusion, DRG 497 (Spinal Fusion Except 

Cervical With CC) and DRG 498 (Spinal 

Fusion Except Cervical Without CC) for 

procedures on the lumbar spine and to 


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DRGs 519 and 520 for procedures on the 

cervical spine. In the FY 2005 IPPS final 

rule (69 FR 48938, August 11, 2004), we 

indicated that DRGs 497 and 498 are 

limited to spinal fusion procedures. 

Because the surgery involving the 

CHARITETM Artificial Disc is not a 

spinal fusion, we decided not to include 

this procedure in these DRGs. However, 

we stated that we would continue to 

analyze this issue and solicited further 

public comments on the DRG 

assignment for spinal disc prostheses. 

In the FY 2006 final rule (70 FR 

47353, August 12, 2005), we noted that, 

if a product meets all of the criteria for 

Medicare to pay for the product as a 

new technology under section 

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

preference expressed in the statute for 

us to assign the technology to a DRG 

based on similar clinical or anatomical 

characteristics or costs. However, for FY 

2006, we did not find that the 

CHARITETM Artificial Disc met the 

substantial clinical improvement 

criterion and, thus, did not qualify as a 

new technology. Consequently, we did 

not address the DRG classification 

request made under the authority of this 

provision of the Act. 

However, we did evaluate whether to 

reassign the CHARITETM Artificial Disc 

to different DRGs using the Secretary’s 

authority under section 1886(d)(4) of the 

Act (70 FR 47308, August 12, 2005). We 

indicated that we did not have Medicare 

charge information to evaluate DRG 

changes for cases involving an implant 

of a prosthetic intervertebral disc like 

the CHARITETM and did not make a 

change in its DRG assignments. We 

stated that we would consider whether 

changes to the DRG assignments for the 

CHARITETM Artificial Disc were 

warranted for FY 2007, once we had 

information from Medicare’s data 

system that would assist us in 

evaluating the costs of these patients. 

As we discussed in the FY 2007 IPPS 

proposed rule (71 FR 24036), we 

received correspondence regarding the 

DRG assignments for the CHARITETM

Artificial Disc, code 84.65 (Insertion of 

total spinal disc prosthesis, 

lumbosacral). The commenter had 

previously submitted an application for 

the CHARITETM Artificial Disc for new 

technology add-on payments for FY 

2006 and had requested a reassignment 

of cases involving CHARITETM

implantation to DRGs 497 and 498. The 

commenter asked that we examine 

claims data for FY 2005 and reassign 

procedure code 84.65 from DRGs 499 

and 500 into DRGs 497 and 498. The 

commenter again stated the view that 

cases with the CHARITETM Artificial 

Disc reflect comparable resource use 

and similar clinical indications as do 

those in DRGs 497 and 498. If CMS were 

to reject reassignment of the 

CHARITETM Artificial Disc to DRGs 497 

and 498, the commenter suggested 

creating two separate DRGs for lumbar 

disc replacements. 

On February 15, 2006, we posted a 

proposed national coverage 

determination (NCD) on the CMS Web 

site seeking public comment on our 

proposed finding that the evidence is 

not adequate to conclude that lumbar 

artificial disc replacement with the 

CHARITETM Artificial Disc is reasonable 

and necessary. The proposed NCD 

stated that lumbar artificial disc 

replacement with the CHARITETM

Artificial Disc is generally not indicated 

in patients over 60 years old. Further, it 

stated that there is insufficient evidence 

among either the aged or disabled 

Medicare population to make a 

reasonable and necessary determination 

for coverage. With an NCD pending to 

make spinal arthroplasty with the 

CHARITETM Artificial Disc noncovered, 

we indicated in the FY 2007 IPPS 

proposed rule that we did not believe it 

was appropriate at that time to reassign 

procedure code 84.65 from DRGs 499 

and 500 to DRGs 497 and 498. 

After considering the public 

comments and additional evidence 

received, we made a final NCD on May 

16, 2006, that Medicare would not cover 

the CHARITETM Artificial Disc for the 

Medicare population over 60 years of 

age. For Medicare beneficiaries 60 years 

of age and under, local Medicare 

contractors have the discretion to 

determine coverage for lumbar artificial 

disc replacement procedures involving 

the CHARITETM Artificial Disc. The 

final NCD can be found at: http:// 

www.cms.hhs.gov/mcd/ 

viewncd.asp:ncd_;id-150.10&ncd

_version1&basket=ncd%3A150%2E10%

3A1%3ALumbar+Artificial+Disc+

Replacement%280ADR%29. 

Comment: Some commenters agreed 

with our proposed decision not to 

reassign CHARITETM Artificial Disc at 

this time to the spinal fusion DRGs. 

Other commenters disagreed with our 

proposal not to move code 84.65 

(CHARITETM) from DRGs 499 and 500 to 

DRGs 497 and 498. One commenter 

noted that the national noncoverage 

determination for the CHARITETM

Artificial Disc only applies to patients 

over 60 years of age. The commenter 

further noted that local Medicare 

carriers have the discretion to make 

coverage decisions for Medicare 

beneficiaries who are under 60 years of 

age. The commenter stated that patients 

who receive the CHARITETM Artificial 

Disc are candidates for a fusion 

procedure involving an anterior surgical 

approach. The commenter goes on to 

state that the CHARITETM Artificial Disc 

is an alternative therapy to spinal fusion 

for patients with similar diagnoses. The 

commenter supplied data from FY 2005 

MedPAR file in support of its request for 

a DRG change. These data included 54 

cases that were assigned to DRGs 499 

and 500. The 23 cases in DRG 499 had 

mean charges of $61,750, while the 31 

cases assigned to DRG 500 had mean 

charges of $53,802. These data compare 

to mean charges of $26,974 for all cases 

in DRG 499 and $17,731 for all cases in 

DRG 500. The commenter reported 

mean charges of $71,581 for DRG 497 

and $55,489 for DRG 498. The 

commenter stated that the 54 

CHARITETM cases are more similar in 

average charges to all cases in DRGs 497 

and 498 than to DRGs 499 and 500. 

Response: We agree with the 

commenter that it is not appropriate to 

consider a DRG revision at this time for 

the CHARITETM Artificial Disc, given 

the recent decision to limit coverage for 

surgical procedures involving this 

device. Although we have reviewed the 

Medicare charge data, we are concerned 

that there are a very small number of 

cases for patients under 60 years of age 

who have received the CHARITETM

Artificial Disc. We believe it appropriate 

to base the decision on a DRG change 

on charge data only on the population 

for which the procedure is covered. We 

have an extremely small number of 

cases for patients under 60 on which to 

base such a decision. For this reason, we 

do not believe it is appropriate to 

modify the DRGs at this time for 

CHARITETM cases. 

5. MDC 18 (Infectious and Parasitic 

Diseases (Systemic or Unspecified 

Sites)): Severe Sepsis 

In FYs 2005 and 2006, we considered 

requests for the creation of a separate 

DRG for the diagnosis of severe sepsis. 

Severe sepsis is described by ICD–9–CM 

code 995.92 (Systemic inflammatory 

response syndrome due to infection 

with organ dysfunction). Patients 

admitted with sepsis as a principal 

diagnosis currently are assigned to DRG 

416 (Septicemia Age > 17) and DRG 417 

(Septicemia Age 0–17) in MDC 18 

(Infectious and Parasitic Diseases 

(Systemic or Unspecified Sites)). The 

commenter requested that all cases in 

which severe sepsis is present on 

admission, as well as those cases in 

which it develops after admission 

(which are currently classified 

elsewhere), be included in this new 

DRG. In both FY 2005 and FY 2006 (69 

FR 48975 and 70 FR 47309), we did not 

believe the current clinical definition of 


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severe sepsis was specific enough to 

identify a meaningful cohort of patients 

in terms of clinical coherence and 

resource utilization to warrant a 

separate DRG. Sepsis is found across 

hundreds of medical and surgical DRGs, 

and the term ‘‘organ dysfunction’’

implicates numerous currently existing 

diagnosis codes. While we recognize 

that Medicare beneficiaries with severe 

sepsis are quite ill and require extensive 

hospital resources, in the past we have 

not found that they can be identified 

adequately to justify removing them 

from all of the other DRGs in which they 

appear. For this reason, we did not 

create a new DRG for severe sepsis for 

FY 2005 or FY 2006. We indicated that 

we would continue to work with 

National Center for Health Statistics 

(NCHS) to improve the codes so that our 

data on these patients improve. We also 

indicated that we would continue to 

examine data on these patients as we 

consider future modifications. 

For the FY 2007 IPPS proposed rule, 

we again received a request to consider 

creating a separate DRG for patients 

diagnosed with severe sepsis (71 FR 

24037). The information and data 

available to us from hospital bills with 

respect to identifying patients with 

severe sepsis have not changed since 

last year. However, the NCHS discussed 

modifications to the current ICD–9–CM 

diagnosis codes for systemic 

inflammatory response syndrome 

(SIRS), codes 995.91 through 995.94 

(which include severe sepsis) at the 

September 29–30, 2005 ICD–9–CM 

Coordination and Maintenance 

Committee meeting. During the meeting, 

it became clear that there is still 

confusion surrounding the use of these 

codes. As a result of the meeting and the 

comments received, the Committee 

made modifications to the set of SIRS 

codes. These modifications are reflected 

in Table 6E, Revised Diagnosis Code 

Titles, of the Addendum to this final 

rule. 

We believe that implementation of the 

modified SIRS diagnosis codes and the 

updated coding guidelines over the next 

year could begin the process of 

improving data for this group of 

patients. The desired outcome is to be 

able to better evaluate Medicare 

beneficiaries with severe sepsis with 

regard to their clinical coherence, 

resource utilization, and charges. 

Therefore, in the FY 2007 IPPS 

proposed rule, we did not propose to 

create a new DRG for severe sepsis for 

FY 2007. 

Comment: Numerous commenters 

asked for changes to the current sepsis 

classification. The commenters agreed 

that coding of systemic inflammatory 

response syndrome (SIRS), sepsis, 

septicemia, severe sepsis, and septic 

shock has been confusing to the 

provider community in the last few 

years. Specifically, one commenter 

stated coding guidelines have been 

revised based on clinical definitions, 

which in turn has affected the DRG 

classification for sepsis. Another 

commenter referenced the ICD–9–CM 

Code Book tabular section and the 

American Hospital Association’s (AHA) 

fourth quarter (4Q) 2003 Coding Clinic, 

‘‘for patients with severe sepsis, the 

code for the systemic infection (038.x) 

or trauma should be sequenced first, 

followed by either code 995.92 

(Systemic Inflammatory Response 

Syndrome due to infectious process 

with organ dysfunction) or code 995.94 

(Systemic inflammatory response 

syndrome due to noninfectious process 

with organ dysfunction). Codes for the 

specific organ dysfunction should also 

be assigned.’’ The commenter stated that 

as a result of this coding guideline, 

respiratory failure cannot be sequenced 

as the principal diagnosis because it is 

considered an organ dysfunction of the 

patient’s sepsis. However, reverting 

sequencing instructions would be 

confusing and again disrupt the data 

according to some of the commenters. 

As a result, many commenters stated 

that a new DRG for severe sepsis is not 

appropriate due to the inconsistent data. 

Response: We agree that there has 

been a great deal of confusion in the 

coding and sequencing of cases with 

severe sepsis and SIRS. The commenters 

are correct that the coding directives 

lead cases with severe sepsis that are on 

mechanical ventilation for respiratory 

failure to be assigned to DRG 416 

(Septicemia Age >17) and DRG 417 

(Septicemia Age 0 >17) instead of DRG 

475 (Respiratory System Diagnosis with 

Ventilator Support). As stated in the 

proposed rule, we have continued to 

work with NCHS to improve the codes 

so that our data on these patients 

improve. We believe that 

implementation of the modified SIRS 

diagnosis codes and the updated coding 

guidelines over the next year will 

further improve the coding of this 

subset of patients. 

Comment: One commenter presented 

its analysis of the MedPAR data and 

again requested the creation of two new 

DRGS for severe sepsis, one medical and 

one surgical. The other option suggested 

by the commenter was to split DRGs 415 

and 416 into DRGs with and without 

severe sepsis cases. The commenter 

expressed concern that, while there has 

been some confusion over the use of the 

SIRS family of codes (995.90–995.94) 

over the past three years, the confusion 

has been mainly associated with the 

other codes and not the severe sepsis 

code (995.92). The commenter provided 

information concerning the definition of 

severe sepsis and its adoption following 

a 1992 consensus panel of the American 

College of Chest Physicians and the 

Society of Critical Care Medicine. 

According to the commenter, the panel 

defined severe sepsis as a systemic 

inflammatory response to infection that 

leads to acute organ dysfunction. The 

commenter noted this definition has 

been used successfully to identify 

thousands of patients with severe sepsis 

and in more than 30 large-scale clinical 

trials. The commenter also stated severe 

sepsis cases are clinically coherent with 

a common underlying problem (SIRS) 

leading to complications (acute organ 

dysfunction) and are managed similarly, 

receiving advanced life support in 

intensive care units. The commenter 

also provided examples to demonstrate 

how clinical coherence leads to resource 

use coherence. 

Response: We appreciate the 

commenter’s analysis of the data. As 

stated above, there has been significant 

confusion over the use of the sepsis 

codes. While the definition may be well 

understood among the individuals 

involved with the clinical trials, there 

has been uncertainty in the application 

of the codes as evidenced by repeated 

discussions at the ICD–9–CM 

Coordination and Maintenance 

Committee meetings and comments 

received in response to the proposed 

rule. We note that the National Center 

for Health Statistics has revised the 

sepsis and systemic inflammatory 

response syndrome codes in response to 

suggestions made at the Committee 

meetings. These revisions are shown in 

Table 6E of the Addendum to this final 

rule and will go into effect on October 

1, 2006 (codes 995.91 through 995.94). 

We did not propose a new DRG for 

severe sepsis for FY 2007 in the 

proposed rule due to the data 

inconsistencies and difficulty expressed 

with properly assigning the sepsis 

codes, among other reasons cited 

previously. 

In the FY 2007 IPPS proposed rule, 

we also solicited comments on the 

proposal we were considering to adopt 

a CS DRG system. We noted it is 

possible that the proposed system 

would better recognize the extensive 

resources that hospitals use to treat 

patients with severe sepsis. We 

encouraged commenters to examine the 

proposed system and provide 

comments. The comments and 

responses on this proposal are discussed 

in section II.C of this final rule. 


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Therefore, in this FY 2007 final rule 

we are not creating new DRGs for 

medical or surgical severe sepsis cases 

as requested by the commenter. 

6. Medicare Code Editor (MCE) Changes 

As explained under section II.B.1. of 

this preamble, 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), discharge status, and 

demographic information go 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 a DRG. 

For FY 2007, we proposed to make 

several changes to the MCE edits (71 FR 

24038 and 24039). We received one 

comment on this topic. As a result of 

new and modified codes approved after 

the annual spring ICD–9–CM 

Coordination and Maintenance meeting, 

we make changes to the MCE. In the 

past, in both the IPPS proposed and 

final rules, we only provided the list of 

changes to the MCE in the IPPS that 

were brought to our attention after the 

prior year’s final rule. We historically 

have not listed the changes we have 

made to the MCE as a result of the new 

and modified codes approved after the 

annual spring ICD–9–CM Coordination 

and Maintenance meeting. These 

changes are approved too late in the 

rulemaking schedule for inclusion in 

the proposed rule. Furthermore, 

although our MCE policies have been 

described in our proposed and final 

rules, we have not provided the detail 

of each new or modified diagnosis and 

procedure code edit in the final rule. 

However, in response to a public 

comment and in the interest of making 

the IPPS more transparent, we are 

including in this final rule a 

comprehensive list of all the changes to 

the MCE edits for the next fiscal year as 

a result of coding changes. 

a. Edit: Newborn Diagnoses 

We proposed to add code 780.92 

(Excessive crying of infant (baby)) to the 

‘‘Newborn Diagnoses’’ edit in the MCE. 

This edit is structured for patients with 

an age of ‘‘0’’. In the Tabular portion of 

the ICD–9–CM diagnosis codes, the 

‘‘excludes’’ note at code 780.92 states 

that this code ‘‘excludes excessive 

crying of child, adolescent or adult’’ and 

sends the coder to code 780.95 (Other 

excessive crying. (The new title of this 

code, shown on Table 6E of the 

Addendum to this final rule is 

‘‘Excessive crying of child, adolescent, 

or adult’’.) To make a conforming 

change, we also proposed that code 

780.92 be removed from the ‘‘Pediatric 

Diagnoses—Age 0 Through 17’’ edit. 

We did not receive any public 

comments on the proposed edit and, 

therefore, are adopting it as final. 

In addition, there were diagnosis 

codes discussed at the March 2006 ICD–

9–CM Coordination and Maintenance 

meeting that were approved too late in 

the rulemaking schedule for inclusion 

in the proposed rule. Therefore, the 

following ICD–9–CM diagnosis codes 

are added to the ‘‘Newborn Diagnosis’’

MCE edit for FY 2007: 

• 768.7, Hypoxic-ischemic 

encephalopathy (HIE) 

• 770.87, Respiratory arrest of 

newborn 

• 770.88, Hypoxemia of newborn 

• 775.81, Other acidosis of newborn 

• 775.89, Other neonatal endocrine 

and metabolic disturbances 

• 779.85, Cardiac arrest of newborn 

Because diagnosis code 775.8 (Other 

transitory neonatal endocrine and 

metabolic disturbances) was expanded 

to the fifth-digit level, this code is being 

deleted from the Newborn Diagnosis 

edit. 

b. Edit: Diagnoses for Pediatric—Age 0–

17 Years Old 

We are adding the following new 

diagnosis codes to the edit for diagnosis 

for pediatrics—age 0–17 years old: 

• V85.51, Body Mass Index, pediatric, 

less than 5th percentile for age 

• V85.52, Body Mass Index, pediatric, 

5th percentile to less than 85th 

percentile for age 

• V85.53, Body Mass Index, pediatric, 

85th percentile to less than 95th 

percentile for age 

• V85.54, Body Mass Index, pediatric, 

greater than or equal to 95th percentile 

for age 

c. Edit: Maternity Diagnoses—Age 12 

through 55 

We are adding the following new 

codes to the edit for maternity 

diagnoses—age 12 through 55: 

• 649.00, Tobacco use disorder 

complicating pregnancy, childbirth, or 

the puerperium, unspecified as to 

episode of care or not applicable 

• 649.01, Tobacco use disorder 

complicating pregnancy, childbirth, or 

the puerperium, delivered, with or 

without mention of antepartum 

condition 

• 649.02, Tobacco use disorder 

complicating pregnancy, childbirth, or 

the puerperium, delivered, with 

mention of postpartum complication 

• 649.03, Tobacco use disorder 

complicating pregnancy, childbirth, or 

the puerperium, antepartum condition 

or complication 

• 649.04, Tobacco use disorder 

complicating pregnancy, childbirth, or 

the puerperium, postpartum condition 

or complication 

• 649.10, Obesity complicating 

pregnancy, childbirth, or the 

puerperium, unspecified as to episode 

of care or not applicable 

• 649.11, Obesity complicating 

pregnancy, childbirth, or the 

puerperium, delivered, with or without 

mention of antepartum condition 

• 649.12, Obesity complicating 

pregnancy, childbirth, or the 

puerperium, delivered, with mention of 

postpartum complication 

• 649.13, Obesity complicating 

pregnancy, childbirth, or the 

puerperium, antepartum condition or 

complication 

• 649.14, Obesity complicating 

pregnancy, childbirth, or the 

puerperium, postpartum condition or 

complication 

• 649.20, Bariatric surgery status 

complicating pregnancy, childbirth, or 

the puerperium, unspecified as to 

episode of care or not applicable 

• 649.21, Bariatric surgery status 

complicating pregnancy, childbirth, or 

the puerperium, delivered, with or 

without mention of antepartum 

condition 

• 649.22, Bariatric surgery status 

complicating pregnancy, childbirth, or 

the puerperium, delivered, with 

mention of postpartum complication 

• 649.23, Bariatric surgery status 

complicating pregnancy, childbirth, or 

the puerperium, antepartum condition 

or complication 

• 649.24, Bariatric surgery status 

complicating pregnancy, childbirth, or 

the puerperium, postpartum condition 

or complication 

• 649.30, Coagulation defects 

complicating pregnancy, childbirth, or 

the puerperium, unspecified as to 

episode of care or not applicable 

• 649.31, Coagulation defects 

complicating pregnancy, childbirth, or 

the puerperium, delivered, with or 

without mention of antepartum 

condition 

• 649.32, Coagulation defects 

complicating pregnancy, childbirth, or 

the puerperium, delivered, with 

mention of postpartum complication 

• 649.33, Coagulation defects 

complicating pregnancy, childbirth, or 

the puerperium, antepartum condition 

or complication 

• 649.34, Coagulation defects 

complicating pregnancy, childbirth, or 

the puerperium, postpartum condition 

or complication 

• 649.40, Epilepsy complicating 

pregnancy, childbirth, or the 

puerperium, unspecified as to episode 

of care or not applicable 


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• 649.41, Epilepsy complicating 

pregnancy, childbirth, or the 

puerperium, delivered, with or without 

mention of antepartum condition 

• 649.42, Epilepsy complicating 

pregnancy, childbirth, or the 

puerperium, delivered, with mention of 

postpartum complication 

• 649.43, Epilepsy complicating 

pregnancy, childbirth, or the 

puerperium, antepartum condition or 

complication 

• 649.44, Epilepsy complicating 

pregnancy, childbirth, or the 

puerperium, postpartum condition or 

complication 

• 649.50, Spotting complicating 

pregnancy unspecified as to episode of 

care or not applicable 

• 649.51, Spotting complicating 

pregnancy delivered, with or without 

mention of antepartum condition 

• 649.53, Spotting complicating 

pregnancy antepartum condition or 

complication 

• 649.60, Uterine size date 

discrepancy, unspecified as to episode 

of care or not applicable 

• 649.61, Uterine size date 

discrepancy, delivered, with or without 

mention of antepartum condition 

• 649.62, Uterine size date 

discrepancy, delivered, with mention of 

postpartum complication 

• 649.63, Uterine size date 

discrepancy, antepartum condition or 

complication 

• 649.64, Uterine size date 

discrepancy, postpartum condition or 

complication 

d. Edit: Diagnoses Allowed for Females 

Only 

The following codes are now invalid 

codes, as shown in Table 6C of the 

Addendum to the FY 2007 IPPS 

proposed rule and this final rule. In the 

FY 2007 IPPS proposed rule, we 

proposed to remove them from the 

‘‘Diagnosis Allowed for Females Only’’

edit in the MCE. 

• 616.8, Other specified inflammatory 

diseases of cervix, vagina, and vulva 

• 629.8, Other specified disorders of 

female genital organs 

Codes 616.8 and 629.8 have been 

expanded to the fifth-digit level. 

Therefore, we proposed to place the 

following expanded codes in the 

‘‘Diagnoses Allowed for Females Only’’

edit. 

• 616.81, Mucositis (ulcerative) of 

cervix, vagina, and vulva 

• 616.89, Other inflammatory disease 

of cervix, vagina, and vulva 

• 629.81, Habitual aborter without 

current pregnancy 

• 629.89, Other specified disorders of 

female genital organs 

The following two codes have revised 

descriptions (as shown in Table 6E of 

the Addendum to this final rule) which 

specify gender. Therefore, we proposed 

to add them to ‘‘Diagnoses Allowed for 

Females Only’’ edit. 

• V26.31, Testing of female for 

genetic disease carrier status 

• V26.32, Other genetic testing of 

female 

We did not receive any public 

comments on the proposed changes to 

this edit. Therefore, we are adopting the 

changes as final. 

In addition, we are adding the 

following new ICD–9–CM codes to this 

edit: 

• 618.84, Cervical stump prolapse 

• 629.29, Other female genital 

mutilation status 

• 649.00, Tobacco use disorder 

complicating pregnancy, childbirth, or 

the puerperium, unspecified as to 

episode of care or not applicable 

• 649.01, Tobacco use disorder 

complicating pregnancy, childbirth, or 

the puerperium, delivered, with or 

without mention of antepartum 

condition 

• 649.02, Tobacco use disorder 

complicating pregnancy, childbirth, or 

the puerperium, delivered, with 

mention of postpartum complication 

• 649.03, Tobacco use disorder 

complicating pregnancy, childbirth, or 

the puerperium, antepartum condition 

or complication 

• 649.04, Tobacco use disorder 

complicating pregnancy, childbirth, or 

the puerperium, postpartum condition 

or complication 

• 649.10, Obesity complicating 

pregnancy, childbirth, or the 

puerperium, unspecified as to episode 

of care or not applicable 

• 649.11, Obesity complicating 

pregnancy, childbirth, or the 

puerperium, delivered, with or without 

mention of antepartum condition 

• 649.12, Obesity complicating 

pregnancy, childbirth, or the 

puerperium, delivered, with mention of 

postpartum complication 

• 649.13, Obesity complicating 

pregnancy, childbirth, or the 

puerperium, antepartum condition or 

complication 

• 649.14, Obesity complicating 

pregnancy, childbirth, or the 

puerperium, postpartum condition or 

complication 

• 649.20, Bariatric surgery status 

complicating pregnancy, childbirth, or 

the puerperium, unspecified as to 

episode of care or not applicable 

• 649.21, Bariatric surgery status 

complicating pregnancy, childbirth, or 

the puerperium, delivered, with or 

without mention of antepartum 

condition 

• 649.22, Bariatric surgery status 

complicating pregnancy, childbirth, or 

the puerperium, delivered, with 

mention of postpartum complication 

• 649.23, Bariatric surgery status 

complicating pregnancy, childbirth, or 

the puerperium, antepartum condition 

or complication 

• 649.24, Bariatric surgery status 

complicating pregnancy, childbirth, or 

the puerperium, postpartum condition 

or complication 

• 649.30, Coagulation defects 

complicating pregnancy, childbirth, or 

the puerperium, unspecified as to 

episode of care or not applicable 

• 649.31, Coagulation defects 

complicating pregnancy, childbirth, or 

the puerperium, delivered, with or 

without mention of antepartum 

condition 

• 649.32, Coagulation defects 

complicating pregnancy, childbirth, or 

the puerperium, delivered, with 

mention of postpartum complication 

• 649.33, Coagulation defects 

complicating pregnancy, childbirth, or 

the puerperium, antepartum condition 

or complication 

• 649.34, Coagulation defects 

complicating pregnancy, childbirth, or 

the puerperium, postpartum condition 

or complication 

• 649.40, Epilepsy complicating 

pregnancy, childbirth, or the 

puerperium, unspecified as to episode 

of care or not applicable 

• 649.41, Epilepsy complicating 

pregnancy, childbirth, or the 

puerperium, delivered, with or without 

mention of antepartum condition 

• 649.42, Epilepsy complicating 

pregnancy, childbirth, or the 

puerperium, delivered, with mention of 

postpartum complication 

• 649.43, Epilepsy complicating 

pregnancy, childbirth, or the 

puerperium, antepartum condition or 

complication 

• 649.44, Epilepsy complicating 

pregnancy, childbirth, or the 

puerperium, postpartum condition or 

complication 

• 649.50, Spotting complicating 

pregnancy unspecified as to episode of 

care or not applicable 

• 649.51, Spotting complicating 

pregnancy delivered, with or without 

mention of antepartum condition 

• 649.53, Spotting complicating 

pregnancy antepartum condition or 

complication 

• 649.60, Uterine size date 

discrepancy, unspecified as to episode 

of care or not applicable 

• 649.61, Uterine size date 

discrepancy, delivered, with or without 

mention of antepartum condition 


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• 649.62, Uterine size date 

discrepancy, delivered, with mention of 

postpartum complication 

• 649.63, Uterine size date 

discrepancy, antepartum condition or 

complication 

• 649.64, Uterine size date 

discrepancy, postpartum condition or 

complication 

• 795.06, Papanicolaou smear of 

cervix with cytologic evidence of 

malignancy 

• 795.82, Elevated cancer antigen 125 

[CA 125] 

e. Edit: Diagnoses Allowed for Males 

Only 

Code 608.2 (Torsion of testis) is now 

an invalid code (as shown in Table 6C 

of the Addendum to the proposed rule 

and this final rule). Therefore, we 

proposed to remove it from the 

‘‘Diagnoses Allowed for Males Only’’

edit. This code has been expanded to 

the fifth-digit level. We proposed to 

place the following expanded codes in 

the ‘‘Diagnoses Allowed for Males 

Only’’ edit: 

• 608.20, Torsion of testis, 

unspecified 

• 608.21, Extravaginal torsion of 

spermatic cord 

• 608.22 Intravaginal torsion of 

spermatic cord 

• 608.23, Torsion of appendix testis 

• 608.24, Torsion of appendix 

epididymis 

The following codes have been 

created effective for FY 2007 and are 

gender specific. Therefore, we proposed 

to add them to the ‘‘Diagnosis Allowed 

for Males Only’’ edit. 

• V26.34, Testing of male for genetic 

disease carrier status 

• V26.35, Encounter for testing of 

male partner of habitual aborter 

• V26.39, Other genetic testing of 

male 

We did not receive any public 

comments on our proposed changes to 

this edit. Therefore, we are adopting the 

changes as final. 

f. Edit: Procedures Allowed for Females 

Only 

The following new codes are added to 

the list of female procedures: 

• 68.41, Laparoscopic total abdominal 

hysterectomy 

• 68.49, Other and unspecified total 

abdominal hysterectomy 

• 68.61, Laparoscopic radical 

abdominal hysterectomy 

• 68.69, Other and unspecified 

radical abdominal hysterectomy 

• 68.71, Laparoscopic radical vaginal 

hysterectomy [LRVH] 

• 68.79, Other and unspecified 

radical vaginal hysterectomy 

In addition, the following codes were 

expanded to the fourth digit and, 

therefore, are removed from this edit: 

• 68.4, Total abdominal hysterectomy 

• 68.6, Radical abdominal 

hysterectomy 

• 68.7, Radical vaginal hysterectomy 

g. Edit: Manifestations Not Allowed as 

Principal Diagnosis 

We proposed to add the following 

codes to the ‘‘Manifestations Not 

Allowed as Principal Diagnosis’’ edit in 

the MCE: 

• 362.03, Nonproliferative diabetic 

retinopathy, NOS 

• 362.04, Mild nonproliferative 

diabetic retinopathy 

• 362.05, Moderate nonproliferative 

diabetic retinopathy 

• 362.06, Severe nonproliferative 

diabetic retinopathy 

• 362.07, Diabetic macular edema. 

We did not receive any public 

comments concerning this proposed 

change. Therefore, we are adopting the 

above proposed changes as final. 

In addition, we are adding the 

following new codes to this edit: 

• 284.2, Myelophthisis 

• 289.83, Myelofibrosis 

• 323.01, Encephalitis and 

encephalomyelitis in viral diseases 

classified elsewhere 

• 323.02, Myelitis in viral diseases 

classified elsewhere 

• 323.41, Other encephalitis and 

encephalomyelitis due to infection 

classified elsewhere 

• 323.42, Other myelitis due to 

infection classified elsewhere 

• 323.61, Infectious acute 

disseminated encephalomyelitis 

(ADEM) 

• 323.62, Other postinfectious 

encephalitis and encephalomyelitis 

• 323.63, Postinfectious myelitis 

• 323.71, Toxic encephalitis and 

encephalomyelitis 

• 323.72, Toxic myelitis 

• 341.21, Acute (transverse) myelitis 

in conditions classified elsewhere 

The following codes have been 

expanded to the fifth-digit level of 

specificity, which results in making the 

four-digit code invalid. Therefore, these 

codes are removed from the 

manifestation edit: 

• 323.0, Encephalitis in viral diseases 

classified elsewhere 

• 323.4, Other encephalitis due to 

infection classified elsewhere 

• 323.6, Postinfectious encephalitis 

• 323.7, Toxic encephalitis 

In the proposed rule, we had 

suggested we would remove code 

525.10 (Acquired absence of teeth, 

unspecified) from this edit in the MCE. 

However, all codes in subcategory 525.1 

(Loss of teeth due to trauma, extraction, 

or periodontal disease) are considered 

manifestation codes. Therefore, we are 

retracting this proposal, and are leaving 

code 525.10 in this edit. 

h. Edit: Nonspecific Principal Diagnosis 

We proposed to add the following 

codes to the ‘‘Nonspecific Principal 

Diagnosis’’ edit in the MCE: 

• 255.10, Hyperaldosteronism, 

unspecified 

• 323.9, Unspecified causes of 

encephalitis, myelitis, and 

encephalomyelitis 

• 770.10, Fetal and newborn 

aspiration, unspecified. 

• 780.31, Febrile convulsions 

(simple), unspecified 

Codes 255.10, 323.9, and 780.31 

appear on Table 6E, Revised Diagnosis 

Codes, and are being included in this 

edit because of their revised 

descriptions. Code 770.10 was 

inadvertently left off this list for FY 

2006 when the code was created. 

We did not receive any public 

comments on the proposed changes to 

this edit. Therefore, we are adopting the 

proposed changes as final. In addition, 

we are adding the following codes to 

this edit: 

• 238.75, Myelodysplastic syndrome, 

unspecified 

• 276.50, Volume depletion NOS 

• 277.30, Amyloidosis, unspecified 

• 288.00, Neutropenia, unspecified 

• 288.50, Leukocytopenia, 

unspecified 

• 288.60, Leukocytosis, unspecified 

• 341.20, Acute (transverse) myelitis 

NOS 

• 379.60, Inflammation (infection) of 

postprocedural bleb, unspecified 

• 523.30, Aggressive periodontitis, 

unspecified 

• 523.40, Chronic periodontitis, 

unspecified 

• 525.60, Unspecified unsatisfactory 

restoration of tooth 

• 528.00, Stomatitis and mucositis, 

unspecified 

• 608.20, Torsion of testis, 

unspecified 

• 649.00, Tobacco use disorder 

complicating pregnancy, childbirth, or 

the puerperium, unspecified as to 

episode of care or not applicable 

• 649.10, Obesity complicating 

pregnancy, childbirth, or the 

puerperium, unspecified as to episode 

of care or not applicable 

• 649.20, Bariatric surgery status 

complicating pregnancy, childbirth, or 

the puerperium, unspecified as to 

episode of care or not applicable 

• 649.30, Coagulation defects 

complicating pregnancy, childbirth, or 

the puerperium, unspecified as to 

episode of care or not applicable 


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• 649.40, Epilepsy complicating 

pregnancy, childbirth, or the 

puerperium, unspecified as to episode 

of care or not applicable 

• 649.50, Spotting complicating 

pregnancy, childbirth, or the 

puerperium, unspecified as to episode 

of care or not applicable 

• 649.60, Uterine size date 

discrepancy, unspecified as to episode 

of care or not applicable 

• 958.90, Compartment syndrome, 

unspecified 

• 995.20, Unspecified adverse effect 

of unspecified drug, medicinal and 

biological substance 

• 995.22, Unspecified adverse effect 

of anesthesia 

• 995.23, Unspecified adverse effect 

of insulin 

• 995.29, Unspecified adverse effect 

of other drug, medicinal and biological 

substance 

We are removing the following codes 

from this edit: 

• 362.03, Nonproliferative diabetic 

retinopathy NOS 

• 525.10, Acquired absence of teeth, 

unspecified 

• 793.9, Other nonspecific abnormal 

findings on radiological and other 

examinations of body structure 

Comment: Two commenters suggested 

that the expanded code (793.99, Other 

nonspecific abnormal findings on 

radiological and other examinations of 

body structure) be added back into this 

edit. 

Response: We will not act on those 

suggestions at this time, as we believe 

that code 739.9 should not originally 

have been in the edit as it is more like 

an ‘‘other’’ code than a ‘‘nonspecific’’

code. 

i. Edit: Unacceptable Principal 

Diagnosis 

Most V-codes describe an individual’s 

health status, but these codes are not 

usually a current illness or injury. 

Therefore, most V-codes are included in 

the ‘‘Unacceptable Principal Diagnosis’’

edit. The following codes became 

invalid (as shown in Table 6C of the 

Addendum to the proposed rule and 

this final rule) for FY 2007, and we 

proposed to remove them from this edit: 

• V18.5, Family history, digestive 

disorders 

• V58.3, Attention to surgical 

dressings and sutures 

• V72.1, Examination of ears and 

hearing 

The following V-codes represent 

either fifth-digit extensions of the above 

codes, or new codes that were created 

effective October 1, 2006 (Table 6A of 

the Addendum to the proposed rule and 

this final rule). Therefore, we proposed 

to add the following codes to the 

‘‘Unacceptable Principal Diagnosis’’

edit: 

• V18.51, Family history, colonic 

polyps 

• V18.59, Family history, other 

digestive disorders 

• V26.34, Testing of male for genetic 

disease carrier status 

• V26.35, Encounter for testing of 

male partner of habitual aborter 

• V26.39, Other genetic testing of 

male 

• V45.86, Bariatric surgery status 

• V58.30, Encounter for change or 

removal of nonsurgical wound dressing 

• V58.31, Encounter for change or 

removal of surgical wound dressing 

• V58.32, Encounter for removal of 

sutures 

• V72.11, Encounter for hearing 

examination following failed hearing 

screening 

• V72.19, Other examination of ears 

and hearing 

• V82.71, Screening for genetic 

disease carrier status 

• V82.79, Other genetic screening 

• V85.51, Body mass index, pediatric, 

less than 5th percentile for age 

• V85.52, Body mass index, pediatric, 

5th percentile to less than 85th 

percentile for age 

• V85.53, Body mass index, pediatric, 

85th percentile to less than 95th 

percentile for age 

• V85.54, Body mass index, pediatric, 

greater than or equal to 95th percentile 

for age 

• V86.0, Estrogen receptor positive 

status [ER+] 

• V86.1, Estrogen receptor negative 

status [ER¥] 

We did not receive any public 

comments on these proposed edits. 

Therefore, we are adopting the proposed 

changes as final. 

j. Edit: Nonspecific O.R. Procedures 

We proposed to remove code 00.29 

(Intravascular imaging unspecified 

vessel(s)) from the ‘‘Nonspecific O.R. 

Procedure’’ edit in the MCE. This code 

was erroneously placed in this edit; it is 

not considered an O.R. procedure. 

We did not receive any public 

comments on these proposed edits. 

Therefore, we are adopting the proposed 

changes as final. 

In addition, we are removing code 

68.39 (Other subtotal abdominal 

hysterectomy) from this edit. Code 68.39 

is not a nonspecific code, it is 

considered other, and was originally 

included in this edit in error. 

k. Edit: Noncovered Procedures 

Under the proposed changes to DRG 

513 (Pancreas Transplant) under the 

Pre-MDCs described in section II.D.1. of 

the preamble of the FY 2007 IPPS 

proposed rule, a patient must have a 

history of medically uncontrollable, 

insulin-dependent diabetes mellitus, 

that is, Type I diabetes mellitus. 

Therefore, to conform the ‘‘Noncovered 

Procedures’’ Edit in the MCE to these 

proposed changes, we proposed to 

revise Diagnosis List 1 in this edit to 

include only the following codes: 

• 250.01, Diabetes mellitus without 

mention of complication, type I 

[juvenile type], not stated as 

uncontrolled 

• 250.03, Diabetes mellitus without 

mention of complication, type I 

[juvenile type], uncontrolled 

• 250.11, Diabetes with ketoacidosis, 

type I [juvenile type], not stated as 

uncontrolled 

• 250.13, Diabetes with ketoacidosis, 

type I [juvenile type], uncontrolled 

• 250.21, Diabetes with 

hyperosmolarity, type I [juvenile type], 

not stated as uncontrolled 

• 250.23, Diabetes with 

hyperosmolarity, type I [juvenile type], 

uncontrolled 

• 250.31, Diabetes with other coma, 

type I [juvenile type], not stated as 

uncontrolled 

• 250.33, Diabetes with other coma, 

type I [juvenile type], uncontrolled 

• 250.41, Diabetes with renal 

manifestations, type I [juvenile type], 

not stated as uncontrolled 

• 250.43, Diabetes with renal 

manifestations, type I [juvenile type], 

uncontrolled 

• 250.51, Diabetes with ophthalmic 

manifestations, type I [juvenile type], 

not stated as uncontrolled 

• 250.53, Diabetes with ophthalmic 

manifestations, type I [juvenile type], 

uncontrolled 

• 250.61, Diabetes with neurological 

manifestations, type I [juvenile type], 

not stated as uncontrolled 

• 250.63, Diabetes with neurological 

manifestations, type I [juvenile type], 

uncontrolled 

• 250.71, Diabetes with peripheral 

circulatory disorders, type I [juvenile 

type], not stated as uncontrolled 

• 250.73, Diabetes with peripheral 

circulatory disorders, type I [juvenile 

type], uncontrolled 

• 250.81, Diabetes with other 

specified manifestations, type I [juvenile 

type], not stated as uncontrolled 

• 250.83, Diabetes with other 

specified manifestations, type I [juvenile 

type], uncontrolled 

• 250.91, Diabetes with unspecified 

complication, type I [juvenile type], not 

stated as uncontrolled 

• 250.93, Diabetes with unspecified 

complication, type I [juvenile type], 

uncontrolled 


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In addition, we proposed to remove 

Diagnosis List 2 from the ‘‘Noncovered 

Procedures’’ edit, which is comprised of 

the following codes: 

• 403.01, Hypertensive kidney 

disease, malignant, with chronic kidney 

disease 

• 403.11, Hypertensive kidney 

disease, benign, with chronic kidney 

disease 

• 403.91, Hypertensive kidney 

disease, unspecified, with chronic 

kidney disease 

• 404.02, Hypertensive heart and 

kidney disease, malignant, with chronic 

kidney disease 

• 404.03, Hypertensive heart and 

kidney disease, malignant, with heart 

failure and chronic kidney disease 

• 404.12, Hypertensive heart and 

kidney disease, benign, with chronic 

kidney disease 

• 404.13, Hypertensive heart and 

kidney disease, benign, with heart 

failure and chronic kidney disease 

• 404.92, Hypertensive heart and 

kidney disease, unspecified, with 

chronic kidney disease 

• 404.93, Hypertensive heart and 

kidney disease, unspecified, with heart 

failure and chronic kidney disease 

• 585.1, Chronic kidney disease, 

Stage I 

• 585.2, Chronic kidney disease, 

Stage II (mild) 

• 585.3, Chronic kidney disease, 

Stage III (moderate) 

• 585.4, Chronic kidney disease, 

Stage IV (severe) 

• 585.5, Chronic kidney disease, 

Stage V 

• 585.6, End stage renal disease 

• 585.9, Chronic kidney disease, 

unspecified 

• V42.0, Organ or tissue replaced by 

transplant, kidney 

• V43.89, Organ or tissue replaced by 

other means, other organ or tissue, other 

All of the comments we received 

regarding this proposal were favorable. 

Therefore, we are adopting the above 

changes as final. 

Lumbar Artificial Disc: CMS has 

found that lumbar artificial disc 

replacement (LADR) with the ChariteTM

lumbar artificial disc is not reasonable 

and necessary for the Medicare 

population over 60 years of age. 

Therefore, we issued a national 

noncoverage determination for LADR 

with the ChariteTM lumbar artificial disc 

for Medicare patients over 60 years of 

age. For Medicare beneficiaries 60 years 

of age and under, there is no national 

coverage determination, leaving such 

determinations to be made on a local 

basis. The coverage decision memo can 

be viewed on the CMS Web site at 

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

viewdecisionmemo.asp?id=170. 

To conform to this decision, 

procedure code 84.65 (Insertion of total 

spinal disc prosthesis, lumbosacral) is 

put on the Non-Covered Procedure edit 

except when the patient is 60 years of 

age or less. The logic will be as follows: 

84.65, Insertion of total spinal disc 

prosthesis, lumbosacral 

AND 

Age <=61 

l. Edit: Bilateral Procedure 

We proposed to remove the following 

codes from the Bilateral Procedure edit, 

as these are adjunct codes. They are not 

O.R. codes recognized by the GROUPER 

as procedures, and the edit was created 

in error last year. 

• 00.74, Hip replacement bearing 

surface, metal-on-polyethylene 

• 00.75, Hip replacement bearing 

surface, metal-on-metal 

• 00.76, Hip replacement bearing 

surface, ceramic-on-ceramic 

We did not receive any public 

comments on these proposed edits. 

Therefore, we are adopting the proposed 

changes as final. 

In addition, we are deleting the 

following joint revision codes from this 

edit, as they should not have been 

added last year. 

• 00.71, Revision of hip replacement, 

acetabular component 

• 00.72, Revision of hip replacement, 

femoral component 

• 00.73, Revision of hip replacement, 

acetabular liner and/or femoral head 

only 

• 00.81, Revision of knee 

replacement, tibial component 

• 00.82, Revision of knee 

replacement, femoral component 

• 00.83, Revision of knee 

replacement, patellar component 

• 00.84, Revision of total knee 

replacement, tibial insert (liner) 

• 81.53, Revision of hip replacement 

not otherwise specified 

• 81.55, Revision of knee replacement 

not otherwise specified 

7. 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 

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 DRG. The surgical hierarchy, an 

ordering of surgical classes from most 

resource-intensive to least resourceintensive, performs that function. 

Application of this hierarchy ensures 

that cases involving multiple surgical 

procedures are assigned to the DRG 

associated with the most resourceintensive surgical class. 

Because the relative resource intensity 

of surgical classes can shift as a function 

of 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 DRGs. For example, in 

MDC 11, the surgical class ‘‘kidney 

transplant’’ consists of a single DRG 

(DRG 302) and the class ‘‘kidney, ureter 

and major bladder procedures’’ consists 

of three DRGs (DRGs 303, 304, and 305). 

Consequently, in many cases, the 

surgical hierarchy has an impact on 

more than one DRG. The methodology 

for determining the most resourceintensive surgical class involves 

weighting the average resources for each 

DRG by frequency to determine the 

weighted average resources for each 

surgical class. For example, assume 

surgical class A includes DRGs 1 and 2 

and surgical class B includes DRGs 3, 4, 

and 5. Assume also that the average 

charge of DRG 1 is higher than that of 

DRG 3, but the average charges of DRGs 

4 and 5 are higher than the average 

charge of DRG 2. To determine whether 

surgical class A should be higher or 

lower than surgical class B in the 

surgical hierarchy, we would weight the 

average charge of each DRG in the class 

by frequency (that is, by the number of 

cases in the 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 lowerweighted 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 charge is ordered above a 

surgical class with a higher average 

charge. 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 charge for the 


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DRG or DRGs in that surgical class may 

be higher than that 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 charges 

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 charges 

are likely to shift such that the higherordered surgical class has a lower 

average charge than the class ordered 

below it. 

Based on the preliminary 

recalibration of the DRGs, in the FY 

2007 IPPS proposed rule (71 FR 24039), 

we proposed to revise the surgical 

hierarchy for Pre-MDCs, MDC 1 

(Diseases and Disorders of the Nervous 

System), MDC 2 (Diseases and Disorders 

of the Eye), MDC 3 (Diseases and 

Disorders of the Ear, Nose, Mouth, and 

Throat), MDC 8 (Diseases and Disorders 

of the Musculoskeletal System and 

Connective Tissue), MDC 10 (Endocrine, 

Nutritional and Metabolic Diseases and 

Disorders), and MDC 13 (Diseases and 

Disorders of the Female Reproductive 

System) as follows: 

In Pre-MDCs, we proposed to reorder 

DRG 481 (Bone Marrow Transplant) 

above DRG 513 (Pancreas Transplant). 

In MDC 1, we proposed to reorder 

DRGs 531-532 (Spinal Procedures, With 

CC and Without CC, respectively) above 

DRGs 529-530 (Ventricular Shunt 

Procedures, With CC and Without CC, 

respectively). 

In MDC 2, we proposed to reorder 

DRG 42 (Intraocular Procedures Except 

Retina, Iris and Lens) above DRG 36 

(Retinal Procedures). 

In MDC 3, we proposed to reorder 

DRGs 168-169 (Mouth Procedures, With 

CC and Without CC, respectively) above 

DRG 57 (T&A Procedures, Except 

Tonsillectomy and/or Adenoidectomy 

Only, Age > 17) and DRG 58 (T&A 

Procedures, Except Tonsillectomy and/ 

or Adenoidectomy Only, Age 0–17). 

In MDC 8, we proposed to reorder 

DRG 213 (Amputation for 

Musculoskeletal System and Connective 

Tissue Disorders) above DRG 216 

(Biopsies of Musculoskeletal System 

and Connective Tissue). 

In MDC 10, we proposed to reorder 

DRG 285 (Amputation of Lower Limb 

for Endocrine, Nutritional and 

Metabolic Diseases and Disorders) above 

DRG 288 (O.R. Procedures for Obesity). 

In MDC 13, we proposed to reorder 

DRG 363 (D&C, Conization and RadioImplant, for Malignancy) and DRG 364 

(D&C, Conization and Radio-Implant, 

Except for Malignancy) above DRG 360 

(Vagina, Cervix, and Vulva Procedures). 

We did not receive any public 

comments on the proposed changes to 

the surgical hierarchy described above. 

Based on a test of the proposed 

revisions using the March 2006 update 

of the FY 2005 MedPAR file and the 

revised GROUPER software, we found 

that the revisions are still supported by 

the data. Therefore, we are 

incorporating these proposed revisions 

to the surgical hierarchy as final for FY 

2007. In addition, because, in this final 

rule, we are deleting 8 DRGs and 

creating 20 new DRGs as discussed 

under section II.D.7. of this preamble, 

we are reordering the following DRGs in 

MDC 1 (Diseases and disorders of the 

Nervous System), MDC 6 (Diseases and 

Disorders of the Digestive System), MDC 

11 (Diseases and Disorders of the 

Kidney and urinary Tract), and MDC 18 

(Infectious and Parasitic Diseases 

(Systemic or Unspecified Sites)): 

• In MDC 1, we are reordering DRG 

577 (Carotid Artery Stent Procedure) 

above DRG 533 (Extracranial Procedures 

With CC). 

• In MDC 6, we are reordering DRGs 

567 and 568 (Stomach, Esophageal and 

Duodenal Procedures Age >17 With CC 

With and Without Major GI Diagnoses, 

respectively) above DRG 155 (Stomach, 

Esophageal and Duodenal Procedures 

Age >17 Without CC); 

• In MDC 6, we are reordering DRGs 

569-570 (Major Small and Large Bowel 

Procedures With CC With and Without 

Major GI Diagnoses, respectively) above 

DRG 149 (Major Small and Large Bowel 

Procedures Without CC). 

• In MDC 11, we are reordering DRG 

573 (Major Bladder Procedures) above 

DRG 303 (Kidney, Ureter and Major 

Bladder Procedures for Neoplasm). 

• In MDC 18, we are reordering DRG 

578 (Infections and Parasite Diseases 

With O.R. Procedure) above DRG 579 

(Postoperative or Post-Traumatic 

Infections With O.R. Procedure). 

8. Refinement of Complications and 

Comorbidities (CC) List 

a. Background 

As indicated earlier in this preamble, 

under the IPPS DRG classification 

system, we have developed a standard 

list of diagnoses that are considered 

complications or comorbidities (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. 

b. Comprehensive Review of the CC List 

In previous years, we have made 

changes to the standard list of CCs, 

either by adding new CCs or deleting 

CCs already on the list, but we have 

never conducted a comprehensive 

review of the list. Given the long period 

of time that had elapsed since the 

original CC list was developed, the 

incremental nature of changes to it, and 

changes in the way inpatient care is 

delivered, and in partial response to 

recommendations in MedPAC’s March 

2005 Report to Congress on PhysicianOwned Specialty Hospitals, for the FY 

2006 IPPS final rule, we reviewed the 

121-paired DRGs that were split on the 

presence or absence of a CC among the 

3,285 diagnosis codes on the CC list. We 

presented the results of that review and 

summarized public comments that we 

received in the FY 2006 proposed rule 

on the review results in the FY 2006 

IPPS final rule (70 FR 47313 through 

47315). Further analysis of the CC list 

and refinement to recognize the effects 

of differences in severity of illness 

among patients is discussed in section 

II.C. of the preamble of the proposed 

rule as part of our efforts to develop a 

CSDRG system for use in the IPPS. 

During this past winter, CMS began a 

comprehensive review of over 13,000 

diagnosis codes to determine whether 

they should be classified as CCs when 

present as a secondary diagnosis. 

Although we did not complete this 

review because of the work we did to 

develop the CS DRGs, we are 

considering whether to continue our 

analysis of the CC list as part of an effort 

to develop and adopt a severity DRG 

system that is in the public domain for 

FY 2008. As we explained in more 

detail above, we may update the work 

we did to develop a severity DRG 

system in the mid-1990s that classified 

patients into a base DRG that was 

further subdivided based on three levels 

of severity depending upon whether the 

patient had no CC, a CC, or a major CC 

in conjunction with continuing our 

review of the CC list. 


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17See 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; and the FY 2006 final rule (70 FR 47640, 

August 12, 2005), for the FY 2006 revisions. 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. 

c. CC Exclusions List for FY 2007 

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. 

We did not propose to delete any of the 

diagnosis codes on the CC list for FY 

2007. 

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.17

As we proposed, we are making 

limited revisions to the CC Exclusions 

List to take into account the changes 

that will be made in the ICD–9–CM 

diagnosis coding system effective 

October 1, 2006. (See section II.D.10. of 

this preamble for a discussion of ICD–

9–CM changes.) We are making these 

changes in accordance with the 

principles established when we created 

the CC Exclusions List in 1987. 

Tables 6G and 6H in the Addendum 

to this final rule contain the revisions to 

the CC Exclusions List that will be 

effective for discharges occurring on or 

after October 1, 2006. Each table shows 

the principal diagnoses with changes to 

the excluded CCs. Each of these 

principal diagnoses is shown with an 

asterisk, and the additions or deletions 

to the CC Exclusions List are provided 

in an indented column immediately 

following the affected principal 

diagnosis. 

CCs that are added to the list are in 

Table 6G—Additions to the CC 

Exclusions List. Beginning with 

discharges on or after October 1, 2006, 

the indented diagnoses will not be 

recognized by the GROUPER as valid 

CCs for the asterisked principal 

diagnosis. 

CCs that are deleted from the list are 

in Table 6H—Deletions from the CC 

Exclusions List. Beginning with 

discharges on or after October 1, 2006, 

the indented diagnoses will be 

recognized by the GROUPER as valid 

CCs for the asterisked principal 

diagnosis. 

Copies of the original CC Exclusions 

List applicable to FY 1988 can be 

obtained from the National Technical 

Information Service (NTIS) of the 

Department of Commerce. It is available 

in hard copy for $152.50 plus shipping 

and handling. A request for the FY 1988 

CC Exclusions List (which should 

include the identification accession 

number (PB) 88–133970) should be 

made to the following address: National 

Technical Information Service, United 

States Department of Commerce, 5285 

Port Royal Road, Springfield, VA 22161; 

or by calling (800) 553–6847. 

Users should be aware of the fact that 

all revisions to the CC Exclusions List 

(FYs 1989, 1990, 1991, 1992, 1993, 

1994, 1995, 1996, 1997, 1998, 1999, 

2001, 2002, 2003, 2004, 2005, and 2006) 

and those in Tables 6G and 6H of this 

final rule for FY 2007 must be 

incorporated into the list purchased 

from NTIS in order to obtain the CC 

Exclusions List applicable for 

discharges occurring on or after October 

1, 2006. (Note: There was no CC 

Exclusions List in FY 2000 because we 

did not make changes to the ICD–9–CM 

codes for FY 2000.) 

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 DRG 

Definitions Manual, Version 23.0, is 

available for $225.00, which includes 

$15.00 for shipping and handling. 

Version 24.0 of this manual, which will 

include the final FY 2007 DRG changes, 

will be available in hard copy for 

$250.00. Version 24.0 of the manual is 

also available on a CD for $200.00; a 

combination hard copy and CD is 

available for $400.00. 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. Please specify the 

revision or revisions requested. 

9. Review of Procedure Codes in DRGs 

468, 476, and 477 

Each year, we review cases assigned 

to DRG 468 (Extensive O.R. Procedure 

Unrelated to Principal Diagnosis), DRG 

476 (Prostatic O.R. Procedure Unrelated 

to Principal Diagnosis), and DRG 477 

(Nonextensive O.R. Procedure Unrelated 

to Principal Diagnosis) to determine 

whether it would be appropriate to 

change the procedures assigned among 

these DRGs. 

DRGs 468, 476, and 477 are reserved 

for those cases in which none of the 

O.R. procedures performed are related 

to the principal diagnosis. These DRGs 

are intended to capture atypical cases, 

that is, those cases not occurring with 

sufficient frequency to represent a 

distinct, recognizable clinical group. 

DRG 476 is assigned to those discharges 


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18The 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 361.35), 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 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 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 DRGs 468 and 477, with 

DRG 477 assigned to those discharges in 

which the only procedures performed 

are nonextensive procedures that are 

unrelated to the principal diagnosis.18

For FY 2007, we did not propose to 

change the procedures assigned among 

these DRGs. We did not receive any 

comments on our proposal and, 

therefore, are adopting it as final. 

a. Moving Procedure Codes From DRG 

468 or DRG 477 to MDCs 

We annually conduct a review of 

procedures producing assignment to 

DRG 468 or DRG 477 on the basis of 

volume, by procedure, to see if it would 

be appropriate to move procedure codes 

out of these DRGs into one of the 

surgical 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 DRGs for the MDC in 

which the diagnosis falls. Based on this 

year’s review, as proposed, we are not 

removing any procedures from DRG 477 

with assignment to one of the surgical 

DRGs. We did not receive any 

comments on our proposal, and, 

therefore, there will be no change to 

DRG 477. 

However, we did receive a comment 

regarding DRG 468 after the publication 

of the proposed rule. The comment 

addressed advances in treatment 

technology for hypertension and noted 

that two procedure codes cause cases to 

be assigned to DRG 468 instead of more 

appropriately to DRGs in MDC 5. 

Therefore, we are moving the following 

two codes into MDC 5, DRG 479 (Other 

Vascular Procedures without CC), and 

paired DRGs 553 and 554 (Other 

Vascular Procedures with CC with and 

without Major CV Diagnosis, 

respectively): 

• 04.92, Implantation or replacement 

of peripheral neurostimulator lead(s) 

• 86.96, Insertion or replacement of 

other neurostimulator pulse generator 

b. Reassignment of Procedures Among 

DRGs 468, 476, and 477 

We also annually review the list of 

ICD–9–CM procedures that, when in 

combination with their principal 

diagnosis code, result in assignment to 

DRGs 468, 476, and 477, to ascertain if 

any of those procedures should be 

reassigned from one of these three DRGs 

to another of the three 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 

DRG assignment illogical. If we find 

these shifts, we would propose to move 

cases to keep the 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. 

We did not propose to move any 

procedure codes from DRG 476 to DRGs 

468 or 477, or from DRG 477 to DRGs 

468 or 476 for FY 2007. We did not 

receive any public comments on our 

proposal and; therefore, are adopting it 

as final. 

c. Adding Diagnosis or Procedure Codes 

to MDCs 

Based on our review this year, as we 

proposed, we are not adding any 

diagnosis codes to MDCs for FY 2007. 

We did not receive any public 

comments on our proposal and, 

therefore, are adopting it as final. 

10. Changes to the ICD–9–CM Coding 

System 

As described in section II.B.1. of this 

preamble, the ICD–9–CM is a coding 

system 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 $25.00 by calling (202) 512–

1800.) 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 


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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 2007 at a public meeting held on 

September 29–30, 2005, and finalized 

the coding changes after consideration 

of comments received at the meetings 

and in writing by December 2, 2005. 

Those coding changes were announced 

in the FY 2007 IPPS proposed rule and 

are listed in Tables 6A through 6F in the 

Addendum to this final rule. The 

Committee held its 2006 meeting on 

March 23–24, 2006. Proposed new 

codes for which there was a consensus 

of public support and for which 

complete tabular and indexing changes 

can be made by May 2006 will be 

included in the October 1, 2006 update 

to ICD–9–CM. Code revisions that were 

discussed at the March 23–24, 2006 

Committee meeting could not be 

finalized in time to include them in the 

FY 2007 IPPS proposed rule. These 

additional codes are included in Tables 

6A through 6F of this final rule and are 

marked with an asterisk (*). 

Copies of the minutes of the 

procedure codes discussions at the 

Committee’s September 29–30, 2005 

meeting can be obtained from the CMS 

Web site: http://cms.hhs.gov/ 

ICD9ProviderDiagnosticCodes/ 

03_meetings.asp. The minutes of the 

diagnosis codes discussions at the 

September 29–30, 2005 meeting are 

found at: http://www.cdc.gov/nchs/ 

icd9.htm. Paper copies of these minutes 

are no longer available and the mailing 

list has been discontinued. 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 

diagnosis codes to: Donna Pickett, CoChairperson, 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, CoChairperson, 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, 2006. The new ICD–

9–CM codes are listed, along with their 

DRG classifications, in Tables 6A and 

6B (New Diagnosis Codes and New 

Procedure Codes, respectively) in the 

Addendum to this proposed rule. 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 2007 IPPS proposed rule, we only 

solicited comments on the proposed 

classification of these new codes. 

Comment: One commenter expressed 

concern about the DRG assignment for 

codes 629.81 (Habitual aborter without 

current pregnancy) and 629.89 (Other 

specified disorders of female genital 

organs). The commenter indicated that 

CMS proposed to assign both codes to 

DRG 368 (Infections, Female 

Reproductive System) within MDC–18. 

The commenter posited that CMS may 

have erred in listing the DRG 

assignment as DRG 368 and instead 

intended to assign the code to DRG 369 

(Menstrual and Other Female 

Reproductive System Disorders) since 

these conditions are not infections. 

Response: We agree with the 

commenter that codes 629.81 and 

629.89 do not represent infections and 

should not be assigned to DRG 368 

within MDC 18. They should instead be 

assigned to DRG 369 as the commenter 

suggested. Therefore, we are changing 

the DRG assignment for codes 629.81 

and 629.89 from DRG 368 to DRG 369. 

This change is shown in Table 6A of the 

Addendum to this final rule. 

Comment: One commenter asked 

whether the footnotes for codes 995.20 

through 995.29 in Table 6A of the 

Addendum to the proposed rule was in 

error. The commenter stated that the 

predecessor code, 995.2 (Unspecified 

adverse effect of drug, medicinal and 

biological substance) is considered a 

secondary diagnosis of a ‘‘major 

problem’’ diagnosis that will assign a 

patient to DRGs 387 (Prematurity with 

Major Problems) and DRG 389 (Full–

Term Neonate with Major Problems) 

when present only as a secondary 

diagnosis. However, the commenter 

added, the footnote on the expanded 

codes 995.20 through 995.29 lists them 

as principal or secondary diagnoses that 

will assign a patient to DRGs 387 and 

389 for neonates with major problems. 

The specific codes are as follows: 

• 995.20 (Unspecified adverse effect 

of unspecified drug, medicinal and 

biological substance) 

• 995.21 (Arthus phenomenon) 

• 995.22 (Unspecified adverse effect 

of anesthesia) 

• 995.23 (Unspecified adverse effect 

of insulin) 

• 995.27 (Other drug allergy) 

• 995.29 (Unspecified adverse effect 

of other drug, medicinal and biological 

substance) 

Response: The commenter is correct 

that we made an error in the footnote. 

The predecessor code 995.2 when 

present as a secondary diagnosis, will be 

a major problem that assigns the patient 

to DRGs 387 and 389. The footnote 

should have indicated codes 995.20 

through 995.29 will only assign patients 

DRGs 387 and 389 when present as a 

secondary diagnosis. We have corrected 

the footnote in Table 6A of the 

Addendum to this final rule. 

For codes that have been replaced by 

new or expanded codes, the 

corresponding new or expanded 

diagnosis codes are included in Table 

6A. New procedure codes are shown in 

Table 6B. Diagnosis codes that have 

been replaced by expanded codes or 

other codes or have been deleted are in 

Table 6C (Invalid Diagnosis Codes). 

These invalid diagnosis codes will not 

be recognized by the GROUPER 

beginning with discharges occurring on 

or after October 1, 2006. Table 6D 

contains invalid procedure codes. These 

invalid procedure codes will not be 

recognized by the GROUPER beginning 

with discharges occurring on or after 

October 1, 2006. Revisions to diagnosis 

code titles are in Table 6E (Revised 

Diagnosis Code Titles), which also 

includes the DRG assignments for these 

revised codes. Table 6F includes revised 

procedure code titles for FY–2007. 

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 


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would describe new technology 

discussed and approved at the April 

meeting as part of the code revisions 

effective the following October. As 

stated previously, ICD–9–CM codes 

discussed at the March 23–24, 2006 

Committee meeting that received 

consensus and that were finalized by 

May 2006, are included in Tables 6A 

through 6F of the Addendum to this 

final rule. 

Section 503(a) of Pub. L. 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 in 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 capture 

the new codes. Hospitals also have to 

obtain the new code books and encoder 

updates, and make other system changes 

in order to capture 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 publicized on CMS 

and NCHS Web pages 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) 

of Pub. L. 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 for an expedited April 1, 2006 

implementation of an ICD–9–CM code 

at the September 29–30, 2005 

Committee meeting. Therefore, there 

were no new ICD–9–CM codes 

implemented on April 1, 2006. 

We believe that this process captures 

the intent of section 1886(d)(5)(K)(vii) of 

the Act. This requirement was included 

in the provision revising the standards 

and process for recognizing new 

technology under the IPPS. In addition, 

the need for approval of new codes 

outside the existing cycle (October 1) 

arises most frequently and most acutely 

where the new codes will capture new 

technologies that are (or will be) under 

consideration for new technology addon payments. Thus, we believe this 

provision was intended to expedite data 

collection through the assignment of 

new ICD–9–CM codes for new 

technologies seeking higher payments. 

Current addendum and code title 

information is published on the CMS 

Web page at: 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 page at: 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 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 DRG in which its 

predecessor code was assigned so there 

will be no DRG impact as far as DRG 

assignment. This mapping was specified 

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

as added by section 503(a) of Pub. L. 

108–173. 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 


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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. 

Comment: Many commenters 

recommended that the Secretary use the 

regulatory process to replace ICD–9–CM 

with ICD–10–CM and ICD–10–PCS 

expeditiously. Several commenters 

indicated that the April 2005 ICD–9–CM 

Coordination and Maintenance 

Committee meeting included 

discussions of limiting the creation of 

new procedure codes in order to allow 

the classification system to last at least 

2 more years. ICD–9–CM procedure 

code categories 00 and 17 were created 

to identify a diverse group of procedures 

and interventions affecting all body 

systems. The commenters stressed that 

the establishment of these code 

categories represented a deviation from 

the normal structure of ICD–9–CM and 

was a stopgap measure to accommodate 

new technology when there are no other 

codes available in the corresponding 

body system chapters (for example, 

musculoskeletal system and circulatory 

system). The commenters indicated that 

category 00 is now full, and the ICD–9–

CM Coordination and Maintenance 

Committee is considering proposals for 

codes in category 17. The commenters 

stated that at the April Coordination and 

Maintenance meeting a proposal was 

presented that would in effect leave 

only 80 codes available in the new 

category 17. The commenters stated that 

in recent years, as many as 50 new 

procedure codes have been created in a 

single year. The commenters strongly 

recommended that the Secretary use the 

regulatory process to implement ICD–

10–CM and ICD–10–PCS in place of 

ICD–9–CM expeditiously. 

Several commenters indicated that 

limitations with ICD–9–CM make data 

collected with these codes less precise. 

The commenters stated that systems 

such as the CS DRGs could make use of 

the more detailed information in ICD–

10–CM and ICD–10–PCS to group 

claims more accurately and better 

identify differences in severity and 

complexity. Similar comments were 

received from a number of other 

individuals. 

Response: We agree that it is 

important to have an accurate and 

precise coding system. The Department 

will continue to study whether to adopt 

ICD–10–CM. In the interim, we continue 

to update both ICD–9–CM and ICD–10–

PCS. 

Comment: A number of commenters 

expressed concern that only nine 

diagnosis codes and six procedure codes 

are processed by Medicare. The 

commenters recommended that CMS 

modify its systems so that the number 

of diagnoses codes processed would 

increase from 9 to 25 and the number 

of procedures processed would increase 

from 6 to 25. The commenters stated 

that hospitals submit claims to CMS in 

electronic format, and that the HIPAA 

compliant electronic transaction 

standard, HIPAA 837i, allows up to 25 

diagnoses and 25 procedures. The 

commenters stated that CMS does not 

require its fiscal intermediaries to 

process codes beyond the first nine 

diagnosis codes and six procedure 

codes. The commenters indicated that 

complex classification systems such as 

the proposed CS DRGs could make use 

of the information in these additional 

codes to better classify the patients. 

One commenter stated that an 

incremental step in working towards a 

refined DRG system is to have CMS 

systems process 25 diagnosis and 

procedure codes. 

Response: The commenters are correct 

that CMS does not process codes 

submitted electronically on the 837i 

electronic format beyond the first 9 

diagnosis codes and first 6 procedure 

codes. While HIPAA requires CMS to 

accept up to 25 ICD–9–CM diagnosis 

and procedure codes on the HIPAA 837i 

electronic format, it does not require 

that CMS process that many diagnosis 

and procedure codes. 

As suggested by the commenters, 

there is value in retaining additional 

data on patient conditions that would 

result from expanding Medicare’s data 

system so it can accommodate 

additional diagnosis and procedure 

codes. We have been considering this 

issue while we contemplated 

refinements to our DRG system to better 

recognize patient severity of illness. 

However, extensive lead time is 

required to allow for modifications to 

our internal and contractors’ electronic 

systems in order to process and store 

this additional information. We are 

unable to move forward with this 

recommendation without carefully 

evaluating implementation issues. We 

will continue to carefully evaluate this 

request to expand the process capacity 

of our systems. 

Comment: One commenter expressed 

concern about the process involved with 

updating the ICD–9–CM Coding 

Guidelines. The guidelines are updated 

by the cooperating parties of ICD–9–CM, 

including representatives from the 

Centers for Disease and Prevention 

Control (CDC), CMS, the AHA, and the 

AHIMA. The commenter complimented 

CMS staff for becoming more ‘‘provider 

friendly’’ and using such tools as the 

open door forum to involve providers in 

policy discussions. The commenter 

requested that some of the coding 

guideline discussions be held in an 

open meeting so that providers could 

give input. 

Response: We agree with the 

commenter that it is important to 

involve the provider community in 

activities involving the updating of ICD–

9–CM codes and guidelines. The 

Department utilizes the ICD–9–CM 

Coordination and Maintenance 

Committee to discuss proposed changes 

to the coding system. At times, this 

Committee also addresses coding 

guidelines that affect code selection. 

The current process of approving new 

and revised coding guidelines involves 

approval by all four cooperating parties. 

It is our understanding that AHA and 

AHIMA actively seek input from their 

members on coding issues. AHA and 

AHIMA use this input when they are 

voting on coding issue to be published 

in the AHA’s Coding Clinic for ICD–9–

CM and on coding guidelines. We will 

refer these concerns to the cooperating 

parties so that they may discuss 

improvements which could be made in 

obtaining providers’ input into coding 

guidelines. We will also welcome 

recommendations on specific coding 

guideline issues that providers wish to 

be included in future agendas of the 

ICD–9–CM Coordination and 

Maintenance Committee. The 

Committee recently discussed coding 

guidelines for septicemia. We will 

continue to work with the provider 

community to offer a public forum for 

discussion of ICD–9–CM code revisions 

and guidelines. 

11. Other Issues 

a. Chronic Kidney Disease 

Comment: Two commenters 

expressed concern regarding the revised 

diagnosis codes for chronic kidney 

disease and their DRG assignments 

which appeared in Table 6E of the 

Addendum to the proposed rule. The 

following codes were identified as being 

classified to DRGs 331, 332, and 333 

(Other kidney and urinary tract 

diagnoses with and without CC, and age 

0–17, respectively) in MDC 11 (Diseases 

and Disorders of the Kidney and 

Urinary Tract): 

• 403.00 (Hypertensive chronic 

kidney disease, malignant, with chronic 

kidney disease stage I through stage IV, 

or unspecified) 

• 403.10 (Hypertensive chronic 

kidney disease, benign, with chronic 

kidney disease stage I through stage IV, 

or unspecified) 


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• 403.90 (Hypertensive chronic 

kidney disease, unspecified, with 

chronic kidney disease stage I through 

stage IV, or unspecified) 

The commenters stated that revisions 

made to these three codes will go into 

effect October 1. These changes would 

add the concept of chronic kidney 

disease to the three codes. Therefore, 

these three codes should be assigned to 

the same DRGs as other codes for 

chronic kidney disease. The codes with 

chronic kidney disease are assigned to 

DRGs 315 (Other kidney and urinary 

tract procedures) and 316 (Renal failure) 

and not to DRGs 331 through 333 where 

they were proposed. 

Response: The commenters are 

correct. The three codes listed above 

were modified to include the concept of 

chronic kidney disease. As such, they 

should be assigned to DRG 315 (Other 

Kidney and Urinary Tract Procedures) 

and DRG 316 (Renal Failure) (and not to 

DRGs 331 through 333. We have made 

these changes in Table 6E of the 

Addendum to this final rule. Therefore, 

we will assign codes 403.00, 403.10, and 

403.90 to DRG 315–316. 

b. Bronchial Valve 

Comment: Two commenters that 

manufacture minimally invasive 

surgical therapies for patients with 

chronic obstructive pulmonary disease 

addressed the establishment of a new 

code for the insertion of a bronchial 

valve. This topic was discussed at the 

March 23–24, 2006 meeting of the ICD–

9–CM Coordination and Maintenance 

Committee. (A complete summary 

report of the meeting including 

handouts can be found at: http:// 

www.cms.hhs.gov/ 

ICD9ProviderDiagnosticCodes/ 

03_meetings.asp#TopofPage.) CMS 

created a new code for endoscopic 

insertion of a bronchial valve: code 

33.71 (Endoscopic insertion or 

replacement of bronchial valve(s)). The 

new code is listed in Table 6B of the 

Addendum to this final rule. The 

predecessor codes that are currently 

used for this procedure are: 

• 33.22, Fiber-optic bronchoscopy 

• 96.05, Other intubation of 

respiratory tract 

The commenters expressed support 

for the creation of the new code, but 

requested that the code not be assigned 

to the same DRG as its predecessor 

codes. The predecessor codes are 

assigned to a medical DRG if the patient 

is admitted with a respiratory diagnosis. 

If the patient is admitted with a history 

of malignancy, the patient would be 

assigned to DRG 412 (History of 

Malignancy with Endoscopy). The 

commenters requested that code 33.71 

be assigned to DRG 75 (Major Chest 

Procedure). Although the commenters 

acknowledged that CMS has no data on 

which to evaluate this request, they 

recommended that CMS use a 

combination of the diagnosis of air leaks 

and treatment with scarification as a 

proxy for cases that receive a bronchial 

valve. The commenters stated that these 

patients are clinically similar and can be 

expected to have similar resource 

intensity to patients that would receive 

an endobronchial insertion or 

replacement of bronchial valves. 

The commenters undertook their own 

data analysis using the FY 2005 

MedPAR file. They used the following 

diagnosis procedure codes to identify 

the proxy patients: 

• 512.0, Spontaneous tension 

pneumothorax 

• 512.8, Other spontaneous 

pneumothorax 

• 34.6, Scarification of the pleura 

Using these codes, the companies 

identified 490 patients which were 

assigned to DRG 75. These patients had 

average charges of $56,711 as compared 

to $49,698 for all patients in DRG 75. 

The commenters stated that, although 

the resource utilization for scarification 

(and by inference, valve implantation) 

appears to be higher than the average for 

DRG 75, they believed it would still be 

reasonable to initially assign code 33.71 

to DRG 75 until actual cost data can be 

gathered using the new procedure code. 

Response: We do not agree that the 

endoscopic insertion of a bronchial 

valve is clinically similar to 

scarification of the pleura. The 

commenters themselves indicate that 

insertion of the bronchial valve is a 

minimally invasive procedure. 

Scarification of the pleura is a 

significantly invasive procedure. 

Furthermore, the bronchial valves are 

inserted into patients admitted with 

chronic obstructive pulmonary disease, 

not spontaneous pneumothorax. 

Therefore, we do not agree with using 

the pneumothorax diagnoses as a proxy 

for patients who will receive the 

bronchial valve. 

The bronchial valve code 33.71 will 

go into effect on October 1, 2006. At this 

time, we have no information that 

suggests we should assign this new code 

to a DRG that is different than the 

predecessor codes. For this reason, we 

are classifying code 33.71, Endoscopic 

insertion or replacement of bronchial 

valve(s) as a nonoperating room 

procedure that will be assigned to DRG 

412. This classification is listed in Table 

6B of the Addendum to this final rule. 

Once we receive data using the new 

code, we will evaluate this issue further. 

c. Female Reproductive System 

Reconstruction Procedures 

Comment: One commenter 

recommended that CMS consider 

revising the current procedure code 

assignments for DRG 356 (Female 

Reproductive System Reconstructive 

Procedures) under MDC 13 (Diseases 

and Disorders of the Female 

Reproduction System) to better reflect 

the clinical coherence of those 

procedures that are specific to 

maintaining reproductive health. The 

proposal suggested by the commenter 

would distinguish procedures that are 

intended to ensure the reproductive 

function of a woman from urinary 

conditions that cause discomfort and 

emptying the bladder. The commenter 

suggested revising DRG 356 to limit it to 

procedures that are specific to 

maintaining reproductive health while 

creating four new DRGs that would be 

clinically similar for procedures 

performed to repair pelvic floor defects 

which cause urinary incontinence. The 

commenter stated these new DRGs 

would be timely with the procedure 

code proposal they are planning to 

present at the September 28–29, 2006 

ICD–9–CM Coordination and 

Maintenance Committee meeting. 

Response: We appreciate the 

commenter’s recommendation to create 

four new DRGs in order to recognize the 

clinical coherence of procedures 

specific to maintaining reproductive 

health. There are two aspects to the 

commenter’s proposal. The first part of 

the proposal would limit DRG 356 to 

procedures that are intended to 

maintain reproductive health. The 

second part of the commenter’s proposal 

would create four new DRGs for 

repairing pelvic floor defects that create 

urinary incontinence. These four new 

DRGs would consist of two new DRG 

pairs (each split based on whether or 

not the patient has a CC) that would 

separate patients based on whether or 

not they had a graft procedure. 

The commenter provided no data to 

support its proposal. Further, two of the 

four new DRGs being requested by the 

commenter would be based on new and 

revised procedure codes that have not 

yet been proposed or created. Therefore, 

we are unable to evaluate the request at 

this time. We may consider this 

proposal further in the future if the ICD–

9–CM Coordination and Maintenance 

Committee creates the new codes being 

requested by the commenter and further 

data are made available for review. 


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d. Devices That Are Replaced Without 

Cost or Where Credit for a Replaced 

Device Is Furnished to the Hospital 

In recent years, there have been 

several field actions and recalls with 

regard to failure of implantable cardiac 

defibrillators (ICDs) and pacemakers. In 

many of these cases, the manufacturers 

have offered replacement devices 

without cost to the hospital or credit for 

the device being replaced if the patient 

required a more expensive device. In 

some circumstances, manufacturers 

have also offered, through a warranty 

package, to pay specified amounts for 

unreimbursed expenses to persons who 

had replacement devices implanted. In 

addition, we believe that incidental 

device failures that are covered by 

manufacturer warranties occur 

routinely. While we understand that 

some device malfunctions may be 

inevitable as medical technology grows 

increasingly sophisticated, we believe 

that early recognition of problems 

would reduce the number of people 

with the potential to be adversely 

affected by these device problems. The 

medical community needs heightened 

and early awareness of patterns of 

device failures, voluntary field actions, 

and recalls so that it can take 

appropriate action to care for Medicare 

beneficiaries. Systematic efforts must be 

undertaken by all interested and 

involved parties, including 

manufacturers, insurers, and the 

medical community, to ensure that 

device problems are recognized and 

addressed as early as possible so that 

people’s health is protected and high 

quality medical care is provided. We are 

taking several steps to assist in the early 

recognition and analysis of patterns of 

device problems to minimize the 

potential for harmful device-related 

effects on the health of Medicare 

patients and the public in general. 

In recent years, CMS has recognized 

the importance of data collection as a 

condition of Medicare coverage for 

selected services. In 2005, CMS issued 

a National Coverage Determination 

(NCD) that expanded coverage of ICDs 

and also required registry participation 

when the devices were implanted for 

certain clinical indications. The NCD 

included this requirement in order to 

ensure that the care received by 

Medicare beneficiaries was reasonable 

and necessary and, therefore, 

appropriately reimbursed. Presently, the 

American College of Cardiology—

National Cardiovascular Data Registry 

(ACC–NCDR) collects these data and 

maintains the registry. 

In addition to ensuring appropriate 

payment of claims, collection, and 

ongoing analysis of ICD implantation, 

data can facilitate public health 

response in the event of future device 

recalls. The systematic recording of 

device manufacturer and model number 

can enhance patient and provider 

notification. Analysis of registry data 

may uncover patterns in complication 

rates (for example, device malfunction, 

device related infection, or early battery 

depletion) associated with particular 

devices that signify the need for a more 

specific investigation. Patterns found in 

registry data may identify problems 

earlier than the currently available 

mechanisms, which do not 

systematically collect such detailed 

information surrounding procedures. 

We encourage the medical community 

to work to develop additional registries 

for implantable devices, so that timely 

and comprehensive information is 

available regarding devices, recipients 

of those devices, and their health status 

and outcomes. While participation in an 

ICD registry is required as a condition 

of coverage for ICD implantation for 

certain clinical conditions, we believe 

that the potential benefits of registries 

extend well beyond their application in 

Medicare’s specific NCDs. As medical 

technology continues to advance 

swiftly, data collection regarding the 

short and long term outcomes of new 

technologies, and especially concerning 

implanted devices that may remain in 

the bodies of patients for their lifetimes, 

will be essential to the timely 

recognition of any specific problems 

and patterns of complications. This 

information will facilitate early 

interventions to mitigate harm and 

improve the quality and efficiency of 

health care services. 

Moreover, data from registries may 

help further the development of high 

quality, evidence-based clinical practice 

guidelines for the care of patients who 

may receive device-intensive 

procedures. In turn, widespread use of 

evidence-based guidelines may reduce 

variation in medical practice, leading to 

improved personal and public health. 

Registry information may also 

contribute to the development of more 

comprehensive and refined quality 

metrics that may be used to 

systematically assess and then improve 

the safety and quality of health care. 

Such improvements in the quality of 

care that result in better personal health 

will require the sustained commitment 

of industry, payers, health care 

providers, and others towards that goal, 

along with excellent and open 

communication and rapid systemwide 

responses in a comprehensive effort to 

protect and enhance the health of the 

public. We look forward to further 

discussions with the public about new 

strategies to recognize device problems 

early and how to definitively address 

them, in order to minimize both the 

harmful health effects and increased 

health care costs that may result. 

In addition, we believe that the 

routine identification of Medicare 

claims for certain device implantation 

procedures in situations where a 

payment adjustment is appropriate may 

enhance the medical community’s 

recognition of device problems, 

potentially leading to more timely 

improvements in device technologies. 

This systematic approach, where 

hospitals identify and then 

appropriately report selected services 

when devices are replaced without cost 

to the hospital or with full credit to the 

hospital for the cost of the replaced 

device, should provide comprehensive 

information regarding the hospital 

experiences of Medicare patients with 

certain devices that are being replaced. 

Because Medicare patients are common 

recipients of implanted devices, this 

claims information may be particularly 

helpful in identifying patterns of device 

problems early in their natural history 

so that appropriate strategies to reduce 

future problems may be developed. 

In addition to our concern for the 

public health, we also have a fiduciary 

responsibility to the Medicare Trust 

Fund to ensure that Medicare pays only 

for covered services. Therefore, we 

believe that we need to consider 

whether it is appropriate to reduce the 

Medicare payment in cases in which an 

implanted device is replaced without 

cost to the hospital or with full credit 

for the removed device. Such a proposal 

could cover certain devices for which 

credit for the replaced device is given or 

which are replaced as a result of or 

pursuant to a warranty, field action, 

voluntary recall, involuntary recall, and 

certain devices which are provided free 

of charge. It could provide for a 

reduction in the IPPS payment when we 

determine that the device is replaced 

without cost to the provider or 

beneficiary or when the provider 

receives full credit for the cost of a 

replaced device. We will need to 

develop a methodology to determine the 

amount of the reduction to the 

otherwise payable IPPS payment. We 

believe that this is appropriate because 

in these cases the full cost of the 

replaced device is not incurred and, 

therefore, we believe that an adjustment 

to the payment is necessary to remove 

the cost of the device. 

E. Recalibration of DRG Weights 

In the FY 2007 IPPS proposed rule, 

we proposed to change the DRG 


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recalibration process methodology for 

FY 2007 to move to an HSRV weighting 

method as discussed in section II.C.2. of 

the preamble to the proposed rule (71 

FR 24044). For FY 2006 and years prior, 

we have recalibrated the DRG weights 

based on charge data for Medicare 

discharges using the most current 

charge information available (for 

example, the FY 2005 MedPAR file 

would have been used for FY 2007). Our 

thorough analysis of the March 2005 

MedPAC recommendations regarding 

refinement of the DRG system used for 

the IPPS (see discussion of the MedPAC 

recommendations in section II.C.2. of 

this preamble) has shown that using 

gross charges as a basis for setting the 

DRG weights has introduced bias into 

the weighting process. Specifically, 

hospitals that are systematically more 

expensive than others (that is, teaching 

hospitals and specialty hospitals) tend 

to treat certain cases more commonly 

than others, causing the weights for 

these cases to be artificially high. In 

addition, hospitals may mark up their 

charges for routine days, intensive care 

days, and various ancillary services by 

different percentages. This practice of 

differential markups among hospital 

cost centers may also introduce bias into 

the weights. For instance, we have 

observed that ancillary service cost 

centers generally have higher charge 

markups than routine services. Thus, 

the charge-based relative weight 

methodology may result in higher 

weights for DRGs that use more 

ancillary services relative to DRGs that 

use more routine services than would 

occur under a system where the weights 

are based on costs. 

As discussed in section II.C.2. of the 

preamble of the proposed rule, based on 

our study of the MedPAC 

recommendations, we developed an 

alternative methodology for 

recalibrating the DRG weights. This 

proposed method is discussed in detail 

beginning on 71 FR 24044. The 

proposed method involved applying the 

HSRV methodology at the cost center 

level (HSRVcc) to remove the bias 

introduced by hospital characteristics 

(that is, teaching, disproportionate 

share, location, and size, among others) 

and then scaling the weights to costs 

using national cost center CCRs derived 

from cost report data. However, in 

response to comments discussed in 

section II.C.2 of this final rule, we have 

postponed the implementation of the 

HSRV methodology in order to further 

study its effects and have subsequently 

revised the methodology for setting 

relative weights based on cost. Further, 

we are adopting the cost relative 

weights under a 3-year transition period 

such that in FY 2007, year one of the 

transition, the relative weights will be a 

blend of 33 percent of the relative cost 

weight and 67 percent of the relative 

charge weight. In year two, the relative 

weights will be based on 67 percent of 

the relative cost weight and 33 percent 

of the relative charge weight and in year 

three, the relative weights will be 100 

percent cost based. 

In developing the final 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 2005 MedPAR data used 

in this proposed rule include discharges 

occurring on October 1, 2004, through 

September 30, 2005, based on bills 

received by CMS through March 31, 

2006, 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 2005 MedPAR file 

used in calculating the relative weights 

includes data for approximately 

12,238,146 Medicare discharges. 

Discharges for Medicare beneficiaries 

enrolled in a Medicare+Choice managed 

care plan are excluded from this 

analysis. 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 relative 

weight methodology are the FY 2004 

Medicare cost report data files from 

HCRIS, which represents the most 

recent full set of cost report data 

available. We used the March 31, 2006 

update of the HCRIS cost report files for 

FY 2004 in setting the final relative cost 

based weights. 

Because we are implementing the 

relative weights on a transitional basis 

it is necessary to calculate both charge 

based and cost based relative weights. 

The charge-based methodology used to 

calculate the DRG relative weights from 

the MedPAR data is the same 

methodology that was in place for FY 

2006 and was applied as follows: 

• To the extent possible, all the 

claims were regrouped using the FY 

2007 DRG classification revisions 

discussed in section II.D. of this 

preamble. 

• The transplant cases that were used 

to establish the relative weight for heart 

and heart-lung, liver and/or intestinal, 

and lung transplants (DRGs 103, 480, 

and 495) were limited to those 

Medicare-approved transplant centers 

that have cases in the FY 2005 MedPAR 

file. (Medicare coverage for heart, heartlung, 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 

was necessary to subtract the 

acquisition charges from the total 

charges on each transplant bill that 

showed acquisition charges before 

computing the average charge for the 

DRG and before eliminating statistical 

outliers. 

• Total charges were standardized to 

remove the effects of differences in area 

wage levels, indirect medical education 

and disproportionate share payments, 

and, for hospitals in Alaska and Hawaii, 

the applicable cost-of-living adjustment. 

• The average standardized charge 

per DRG was calculated by summing the 

standardized total charges for all cases 

in the DRG and dividing that amount by 

the number of cases classified in the 

DRG. A transfer case was counted as a 

fraction of a case based on the ratio of 

its transfer payment under the per diem 

payment methodology to the full DRG 

payment for non-transfer cases. That is, 

a transfer case receiving payment under 

the transfer methodology equal to half of 

what the case would receive as a nontransfer would be counted as 0.5 of a 

total case. 

• 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 

charges per case and the charges per day 

for each DRG. 

• The average charge for each DRG 

was then recomputed (excluding the 

statistical outliers) and divided by the 

national average standardized charge 

per case to determine the relative 

weight. 

The new charge-based weights were 

then normalized by an adjustment factor 

of 1.49338 so that the average case 

weight after recalibration was equal to 

the average case weight before 

recalibration. This 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. We note 

that due to the decision in Bellevue 

Hosp. Center v. Leavitt, in which the 

Court of Appeals for the Second Circuit 

(the Court) ordered CMS to apply the 

occupational mix adjustment to 100 

percent of the wage index effective for 

FY 2007 (see section III.C. of this final 


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rule for more details of this Court 

decision), we are unable to finalize the 

FY 2007 wage index data at this time. 

Since we are relying on the wage index 

data as one of the standardizing factors 

that we use in calculating both the 

charge-based and the cost-based relative 

weights that are blended to set the FY 

2007 transitional relative weights, we 

will recalculate the FY 2007 relative 

weights when the wage data becomes 

available and will publish these 

recalculated relative weights in a 

subsequent Federal Register notice 

prior to October 1, 2006. 

The methodology we used to calculate 

the DRG cost-based weights from the FY 

2005 MedPAR claims data and FY 2004 

Medicare cost report data is as follows: 

• To the extent possible, all the 

claims were regrouped using the FY 

2007 DRG classification revisions 

discussed in section II.D. of this 

preamble. 

• The transplant cases that were used 

to establish the relative weight for heart 

and heart-lung, liver and/or intestinal, 

and lung transplants (DRGs 103, 480, 

and 495) were limited to those 

Medicare-approved transplant centers 

that have cases in the FY 2005 MedPAR 

file. (Medicare coverage for heart, heartlung, 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 DRG and before 

eliminating statistical outliers. 

• Claims with total charges or total 

length of stay less than or equal to zero 

were dropped. 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 and 

anesthesia charges were also dropped. 

At least 94 percent of the providers in 

the MedPAR file had charges for 10 of 

the 13 cost centers. Claims for providers 

that did not have charges greater than 

zero for at least 10 of the 13 cost centers 

were dropped. 

• 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 DRG. 

Once the MedPAR data were trimmed 

and the statistical outliers were 

removed, the charges for each of the 13 

cost groups for each claim were 

standardized to remove the effects of 

differences in area wage levels, indirect 

medical education and disproportionate 

share payments, and for hospitals in 

Alaska and Hawaii, the applicable costof-living adjustment. Charges were then 

summed by DRG for each of the 13 cost 

groups such that each DRG had 13 

standardized charge totals. These 

charges were then adjusted to cost by 

applying the national average CCRs 

developed from the FY 2004 cost report 

data. 

The 13 cost centers that we used in 

the DRG cost calculation are shown in 

the following table. In addition, the 

table shows the lines on the cost report 

that we used to create the national cost 

center CCRs that we used to adjust the 

DRG charges to cost: 

BILLING CODE 4120–01–P 


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We developed the national average 

CCRs as follows: 

Taking the FY 2004 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 as we are including 

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 .01. In response to 

a comment from MedPAC discussed in 

section II.C.1. of this preamble, 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 all 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. In the proposed rule 

we had used a trim of 1.96 times the 

standard deviation. However, in 

response to comments as discussed in 

section II C. of this preamble, we have 

subsequently revised our trim to 3 

standard deviations as commenters 

stated that this less stringent trim 

appropriately retains more providers in 

the database. Once the cost report data 

were trimmed, we calculated a Medicare 

specific CCR, again in response to a 

comment from MedPAC as discussed in 

section II.C. of this preamble. The 

Medicare specific CCR was determined 

by taking the Medicare charges for each 

line item from worksheet D Part 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 Part 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. In the proposed 

rule, we used hospital-specific CCRs, 

but in response to comments as 

discussed in section II C. of this 

preamble, we have revised our 

methodology to use charge-weighted 

CCRs in establishing the national 

average CCRs. 

After we multiplied the total charges 

for each DRG in each of the 13 cost 

centers by the corresponding national 

average CCR, we summed the 13 ‘‘costs’’

across each DRG to produce a total 

standardized cost for the DRG. The 

average standardized cost for each DRG 

was then computed as the total 

standardized cost for the DRG divided 

by the transfer adjusted case count for 

the DRG. The average cost for each DRG 

was then divided by the national 

average standardized cost per case to 

determine the relative weight. 

The new cost-based weights were 

then normalized by an adjustment factor 

of 1.49338 so that the average case 

weight after recalibration was equal to 

the average case weight before 

recalibration. This 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. 

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. We used that same 

case threshold in recalibrating the DRG 

weights for FY 2007. Using the FY 2005 

MedPAR data set, there are 40 DRGs 

that contain fewer than 10 cases. In FY 

2006, we computed weights for low 

volume DRGs by adjusting the FY 2005 

weights of these low volume DRGs by 

the percentage change in the average 

weight of the cases in other DRGs. 

Because we believe that we do not have 

sufficient MedPAR data to set accurate 

and stable HSRVcc weights for these 

low-volume DRGs, we proposed to 

assign them the weights of similar DRGs 

for which we have more complete data 

and solicited comment on this proposal. 

The crosswalk table we proposed is 

shown in the FY 2007 IPPS proposed 

rule (71 FR 24048). 

Comment: One commenter stated that 

we should not assign weights based on 

other DRGs but should instead 

supplement our current data the data 

from other sources so that we can set 

weights for these DRGs based on actual 

cases. 

Response: Because we are 

implementing cost based weights in a 

transition phase and because we intend 

to study the DRGs and relative weight 

methodologies during the coming year 

we have reconsidered our proposal to 

assign low volume DRGs the weights of 

other DRGS for FY 2007 and are 

reverting to our previous method of 

updating the prior year’s weight for 

these DRGs by the percentage change in 

the average weight of the cases in the 

other DRGs. We may consider 

supplementing our MedPAR data with 

additional claims data in the future. 

Section 1886(d)(4)(C)(iii) of the Act 

requires that, beginning with FY 1991, 

reclassification and recalibration 

changes be made in a manner that 

assures that the aggregate payments are 

neither greater than nor less than the 

aggregate payments that would have 

been made without the changes. 

Although normalization is intended to 

achieve this effect, equating the average 

case weight after recalibration to the 

average case weight before recalibration 

does not necessarily achieve budget 

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payments to hospitals because payments 

to hospitals are affected by factors other 

than average case weight. Therefore, as 

we have done in past years, and as 

discussed in section II.A.4.a. of the 

Addendum to this final rule, we are 

making a budget neutrality adjustment 

to ensure that the requirement of section 

1886(d)(4)(C)(iii) of the Act is met. 

F. LTC–DRG Reclassifications and 

Relative Weights for LTCHs for FY 2007 

1. Background 

In the June 6, 2003 LTCH PPS final 

rule (68 FR 34122), we changed the 

LTCH PPS annual payment rate update 

cycle to be effective July 1 through June 

30 instead of October 1 through 

September 30. In addition, because the 

patient classification system utilized 

under the LTCH PPS uses the same 

DRGs as those currently used under the 

IPPS for acute care hospitals, in that 

same final rule, we explained that the 

annual update of the long-term care 

diagnosis-related group (LTC–DRG) 

classifications and relative weights will 

continue to remain linked to the annual 

reclassification and recalibration of the 

DRGs used under the IPPS. In that same 

final rule, we specified that we will 

continue to update the LTC–DRG 

classifications and relative weights to be 

effective for discharges occurring on or 

after October 1 through September 30 

each year. Furthermore, we stated that 

we will publish the annual update of 

the LTC–DRGs in the proposed and final 

rules for the IPPS. 

In the past, the annual update to the 

IPPS DRGs has been based on the 

annual revisions to the ICD–9–CM codes 

and was effective each October 1. As 

discussed in the FY 2006 IPPS final rule 

(70 FR 47323 through 47341) and in the 

Rate Year (RY) 2007 LTCH PPS final 

rule (71 FR 27803 through 27809), with 

the implementation of section 503(a) of 

Pub. L. 108–173, there is the possibility 

that one feature of the GROUPER 

software program may be updated twice 

during a Federal fiscal year (October 1 

and April 1) as required by the statute 

for the IPPS. Section 503(a) of Pub. L. 

108–173 amended section 1886(d)(5)(K) 

of the Act by adding a new clause (vii) 

which states that ‘‘the Secretary shall 

provide for the addition of new 

diagnosis and procedure codes in [sic] 

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 by 

accounting for those ICD–9–CM codes 

in the MedPAR claims data at an earlier 

date. In implementing the statutory 

change, the agency has provided that 

ICD–9–CM diagnosis and procedure 

codes for new medical technology may 

be created and added to existing DRGs 

in the middle of the Federal fiscal year 

on April 1. However, this policy change 

will have no effect on the LTC–DRG 

relative weights, which will continue to 

be updated only once a year (October 1), 

nor will there be any impact on 

Medicare payments under the LTCH 

PPS. The use of the ICD–9–CM code set 

is also compliant with the current 

requirements of the Transactions and 

Code Sets Standards regulations at 45 

CFR Parts 160 and 162, promulgated in 

accordance with the Health Insurance 

Portability and Accountability Act of 

1996 (HIPAA), Pub. L. 104–191. 

As we explained in the RY 2007 

LTCH PPS final rule (71 FR 27805 

through 27809), in the health care 

industry, historically annual changes to 

the ICD–9–CM codes were effective for 

discharges occurring on or after October 

1 each year. Thus, the manual and 

electronic versions of the GROUPER 

software, which are based on the ICD–

9–CM codes, were also revised annually 

and effective for discharges occurring on 

or after October 1 each year. As noted 

above, the patient classification system 

used under the LTCH PPS (LTC–DRGs) 

is based on the patient classification 

system used under the IPPS (CMS 

DRGs), which historically had been 

updated annually and is effective for 

discharges occurring on or after October 

1 through September 30 each year. As 

also mentioned above, the ICD–9–CM 

coding update process was revised as a 

result of implementing section 503(a) of 

Pub. L. 108–173, which includes a 

requirement for updating diagnosis and 

procedure codes as often as twice a year 

instead of the current process of annual 

updates on October 1 of each year (as 

discussed in greater detail in section 

II.D.10. of the preamble of this final 

rule). The agency uses the ICD–9–CM 

codes as its code set for diagnoses and 

procedures. Therefore, the ICD–9–CM 

codes currently used under both the 

IPPS and LTCH PPS may be updated as 

often as twice a year. This requirement 

is included as part of the amendments 

to the Act relating to recognition of new 

medical technology under the IPPS. 

Despite the fact that aspects of the 

GROUPER software may be updated to 

recognize any new technology ICD–9–

CM codes, as discussed most recently in 

the RY 2007 LTCH PPS final rule (71 FR 

27805 through 27808), there will be no 

impact on either LTC–DRG assignments 

or payments under the LTCH PPS at that 

time. That is, changes to the LTC–DRGs 

(such as the creation or deletion of LTC–

DRGs) and the relative weights will 

continue to be updated in the manner 

and timing (October 1) as they are now. 

As noted above and as described in the 

RY 2007 LTCH PPS final rule (71 FR 

27805 through 27809), updates to the 

GROUPER for both the IPPS and the 

LTCH PPS (with respect to relative 

weights and the creation or deletion of 

DRGs) are made in the annual IPPS 

proposed and final rules and are 

effective each October 1. We also 

explained that because we do not 

publish a midyear IPPS rule, any April 

1 code updates will not be published in 

a midyear IPPS rule. Rather, we will 

assign any new diagnosis or procedure 

codes to the same DRG in which its 

predecessor code was assigned, so that 

there will be no impact on the DRG 

assignments (as also discussed in 

section II.D.10. of this preamble). Any 

coding updates will be available 

through the Web sites provided in 

section II.D.10. of this preamble and 

through the Coding Clinic for ICD–9–

CM. Publishers and software vendors 

currently obtain code changes through 

these sources in order to update their 

code books and software system. If new 

codes are implemented on April 1, 

revised code books and software 

systems, including the GROUPER 

software program, will be necessary 

because we must use current ICD–9–CM 

codes. Therefore, for purposes of the 

LTCH PPS, because each ICD–9–CM 

code must be included in the GROUPER 

algorithm to classify each case into a 

LTC–DRG, the GROUPER software 

program used under the LTCH PPS 

would need to be revised to 

accommodate any new codes. 

In implementing section 503(a) of 

Pub. L. 108–173, there will only be an 

April 1 update if new technology codes 

are requested and approved. We note 

that any new codes created for April 1 

implementation will be limited to those 

diagnosis and procedure code revisions 

primarily needed to describe new 

technologies and medical services. 

However, we reiterate that the process 

of discussing updates to the ICD–9–CM 

has been an open process through the 

ICD–9–CM Coordination and 

Maintenance Committee since 1995. 

Requestors will be given the 

opportunity to present the merits for a 

new code and make a clear and 

convincing case for the need to update 

ICD–9–CM codes for purposes of the 

IPPS new technology add-on payment 

process through an April 1 update (as 

also discussed in section II.D.10. of this 

preamble). 

However, as we discussed in the RY 

2007 LTCH PPS final rule (71 FR 27805 


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through 27809), at the September 29–30, 

2005 ICD–9–CM Coordination and 

Maintenance Committee meeting, there 

were no requests for an April 1, 2006 

implementation of ICD–9–CM codes, 

and, therefore, the next update to the 

ICD–9–CM coding system would not 

occur until October 1, 2006 (FY 2007). 

Presently, as there were no coding 

changes suggested for an April 1, 2006 

update, the ICD–9–CM coding set 

implemented on October 1, 2005, will 

continue through September 30, 2006 

(FY 2006). The update to the ICD–9–CM 

coding system for FY 2007 is discussed 

above in section II.D.10. of this 

preamble. Accordingly, in this final 

rule, as discussed in greater detail 

below, we are revising the LTC–DRG 

classifications and relative weights, to 

be effective October 1,2006 through 

September 30, 2007 (FY 2007). 

Furthermore, we will notify LTCHs of 

any revisions to the GROUPER software 

used under the IPPS and the LTCH PPS 

that will be implemented April 1, 2007. 

The LTC–DRGs and relative weights for 

FY 2007 in this final rule are based on 

the IPPS DRGs (GROUPER Version 24.0) 

discussed in section II.B. of the 

preamble to this final rule. 

Comment: Two commenters urged us 

to consolidate rulemaking for the LTCH 

PPS into one annual cycle rather than 

setting the payment rates and policy 

changes on a July 1 through June 30 rate 

year but making changes to the LTC–

DRGs and relative weights based on the 

Federal fiscal year, October 1 through 

September 30. Both commenters noted 

that this situation has caused 

management and planning difficulty for 

some LTCHs. One of the commenters, 

whose LTCH has a June 1 through May 

31 fiscal year, emphasizes the 

difficulties in ‘‘estimating the impact of 

changes in case weights as part of the 

final rule’’ associated with the hospital 

IPPS. 

One commenter noted that other 

Medicare provider types only 

experience one routine annual 

adjustment to their respective PPSs and 

that it is not reasonable to expect the 

LTCH provider community to comment 

on the reasonableness of a proposed 

payment level in February when ‘‘that 

payment level is subject to change in a 

second rulemaking proposed in April or 

May of the same year.’’ This commenter 

suggested that, commencing with FY 

2008, all LTCH PPS rulemaking should 

occur on the same schedule as it does 

under the IPPS, which would maintain 

the established cycle for the update of 

the LTC–DRGs and relative weights. The 

same commenter further suggested that, 

should CMS make this change in the 

rulemaking schedule, for the first year 

only, CMS should establish a 3-month 

(July through September) and 12-month 

(October through September) update 

factor to the Federal rate. 

Response: In the LTCH RY 2004 final 

rule (68 FR 34122), we revised our 

regulations at § 412.535, which 

established a LTCH PPS rate year with 

a July 1 effective date for the annual 

update of the Federal payment rate and 

associated payment policies while also 

maintaining an October 1 

implementation date for the update of 

the LTC–DRG patient classification 

system and associated weighting factors. 

In changing the effective date of the 

annual LTCH PPS rate year update and 

the resulting publication dates of the 

proposed and final regulations for the 

LTCH PPS, we stated that this shift in 

the schedule would promote 

‘‘administrative feasibility and 

efficiency’’ by avoiding concurrent 

rulemaking and publication with the 

IPPS final rule. We also noted that 

although section 1886(e)(5)(A) of the 

Act required that, for the IPPS, the 

proposed rule be published in the 

Federal Register ‘‘not later than the 

April 1 before each fiscal year; and the 

final rule, not later than the August 1 

before such fiscal year,’’ no similar 

requirement is imposed on the LTCH 

PPS and that we believed that this 

schedule change was well within the 

considerable discretion that Congress 

afforded the Secretary in the 

implementation of the LTCH PPS (68 FR 

34125 through 34128). We maintained 

at that time, and we continue to believe, 

that this change to the LTCH rate year 

annual rulemaking schedule was not 

unduly burdensome for the LTCH 

industry because we had not added any 

requirements that LTCHs maintain 

payment systems or coding software in 

order to be paid under the LTCH PPS, 

although we understood that it was 

common for many hospitals, 

consultants, and industry associations 

to do so. 

With regard to the commenter who 

described a LTCH with a fiscal year 

beginning on June 1, we would also 

reiterate what we stated in the FY 2004 

final rule that ‘‘since the start of cost 

reporting periods for many LTCHs, as 

well as acute care hospitals, have not 

generally coincided with the October 

starting date of the Federal fiscal year, 

those hospitals that choose to have their 

own payment software are very familiar 

with the virtually seamless routine of 

inputting new numbers to their existing 

systems when a final rule is published’’

(68 FR 34127). 

Therefore, we continue to believe that 

there is no significant administrative 

burden imposed on the LTCH industry 

by the establishment of the July 1 

through June 30 rate year for the annual 

payment rate update under the LTCH 

PPS while still maintaining the October 

1 through September 30 update of the 

LTC–DRGs and relative weights which 

are linked to the annual update of the 

diagnosis and procedure code set (ICD–

9–CM) currently adopted by the DHHS 

and the IPPS DRGs and relative weights. 

However, two commenters also stated 

that the separate rule-making cycles 

cause difficulty in ‘‘estimating the 

impact of changes in case weights,’’

which will be published in April or 

May, when commenting on the payment 

rates published in the LTCH PPS 

proposed rule in the preceding January 

or February. From the volume of 

correspondence that we receive from 

LTCH associations and their 

consultants, some of which include 

detailed analyses of CMS data, we do 

not believe that our annual publication 

in the IPPS proposed rule of the 

proposed updates of the LTC–DRGs and 

corresponding relative weights (which 

are derived solely from the best 

available LTCH MedPAR claims data) 

prohibits the public from assessing the 

impact such proposed changes would 

have if finalized. In fact, in their specific 

comments on the proposed FY 2007 

LTC–DRG relative weights (discussed in 

greater detail below), several 

commenters presented analyses of the 

combined effect of the policy changes 

established in the RY 2007 LTCH PPS 

final rule, effective July 1, 2007 (for 

example, revisions to the short-stay 

outlier policy), and the proposed 

changes to the LTC–DRGs and relative 

weights for FY 2007. Furthermore, the 

comments received on the policies 

presented in the LTCH PPS RY 2007 

proposed rule, a number of which 

contained detailed data evaluations, 

demonstrated the availability as well as 

the ability of the public to analyze the 

proposed policy changes using the most 

recent LTCH MedPAR claims data. 

Therefore, we do not believe that our 

present publication schedule deprives 

industry stakeholders of the opportunity 

to submit meaningful comments on 

proposed changes to payment levels 

when we are establishing the payment 

rates and associated policy under the 

LTCH PPS, even though changes to the 

LTC–DRG weights are proposed in a 

separate notice of proposed rulemaking. 

Given the considerable discretion 

granted to the Secretary under the BBRA 

of 1999 and the BIPA of 2000 to develop 

the LTCH PPS, we may revisit the 

rulemaking schedule for the LTCH PPS 

in the future. If a revision to the 

schedule is proposed, the public will 

have the opportunity to submit 


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comments on any proposed change to 

the schedule during the rulemaking 

process. 

2. Changes in the LTC–DRG 

Classifications 

a. Background 

Section 123 of Pub. L. 106–113 

specifically requires that the agency 

implement a PPS for LTCHs that is a per 

discharge system with a DRG-based 

patient classification system reflecting 

the differences in patient resources and 

costs in LTCHs. Section 307(b)(1) of 

Pub. L. 106–554 modified the 

requirements of section 123 of Pub. L. 

106–113 by specifically requiring that 

the Secretary examine ‘‘the feasibility 

and the impact of basing payment under 

such a system [the LTCH PPS] on the 

use of existing (or refined) hospital 

diagnosis-related groups (DRGs) that 

have been modified to account for 

different resource use of long-term care 

hospital patients as well as the use of 

the most recently available hospital 

discharge data.’’

In accordance with section 307(b)(1) 

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

existing regulations, the LTCH PPS uses 

information from LTCH patient records 

to classify patient cases into distinct 

LTC–DRGs based on clinical 

characteristics and expected resource 

needs. The LTC–DRGs used as the 

patient classification component of the 

LTCH PPS correspond to the DRGs 

under the IPPS for acute care hospitals. 

Thus, in this final rule, we are using the 

IPPS GROUPER Version 24.0 for FY 

2007 to process LTCH PPS claims for 

LTCH discharges occurring from 

October 1, 2006, through September 30, 

2007. The changes to the CMS–DRG 

classification system used under the 

IPPS for FY 2007 (GROUPER Version 

24.0) are discussed in section II.D. of the 

preamble to this final rule. 

We note that, as we discuss in section 

II.C.6. of the preamble to this final rule, 

MedPAC, in its 2005 Report to Congress 

on Physician-Owned Specialty 

Hospitals, recommended that CMS, 

among other things, refine the current 

DRGs under the IPPS to more fully 

capture differences in severity of illness 

among patients. As we also discuss in 

that same section, in evaluating the 

MedPAC recommendation for the IPPS, 

we are evaluating the APR DRG 

GROUPER used by MedPAC in its 

analysis. Based on this analysis, we 

concur with MedPAC that the modified 

version of the APR DRGs would account 

more completely for differences in 

severity of illness and associated costs 

among hospitals. However, as we made 

clear in the proposed rule and reiterate 

in section II.C.6. of the preamble of this 

final rule, there are still further changes 

that are important to make to the CS 

DRG system before it is ready for 

adoption. At this time, we are not 

adopting a new severity-adjusted DRG 

system, such as the APR DRGs or a 

modified version of the APR DRGs, 

under the IPPS, as discussed in greater 

detail in section II.C.6. of the preamble 

of this final rule. However, we are 

refining the current CMS–DRG system 

by creating 20 new CMS DRGs and 

modifying 32 others across 13 different 

clinical areas involving 1,666,476 cases 

that would improve the CMS DRG 

system’s recognition of severity of 

illness for FY 2007. We note that the 

LTCH PPS uses the same patient 

classification system (DRGs) as the IPPS. 

That is, the patient classification system 

used under the LTCH PPS (LTC DRGs) 

is based on the patient classification 

system used under the IPPS (CMS 

DRGs), which historically had been 

updated annually and is effective for 

discharges occurring on or after October 

1 through September 30 each year. As 

such, the updates to the CMS DRG 

classification system used under the 

IPPS for FY 2007 (GROUPER Version 

24.0), discussed in section II.D. of the 

preamble to this final rule, will also be 

updates that apply under the LTCH PPS. 

Under the LTCH PPS, we determine 

relative weights for each of the DRGs to 

account for the difference in resource 

use by patients exhibiting the case 

complexity and multiple medical 

problems characteristic of LTCH 

patients. In a departure from the IPPS, 

as we discussed in the August 30, 2002 

LTCH PPS final rule (67 FR 55985), 

which implemented the LTCH PPS, and 

the FY 2006 IPPS final rule (70 FR 

47324), we use low-volume quintiles in 

determining the LTC–DRG relative 

weights for LTC–DRGs with less than 25 

LTCH cases, because LTCHs do not 

typically treat the full range of 

diagnoses as do acute care hospitals. 

Specifically, we group those lowvolume LTC–DRGs (that is, LTC–DRGs 

with fewer than 25 cases) into 5 

quintiles based on average charge per 

discharge. (A listing of the composition 

of low-volume quintiles for the FY 2006 

LTC–DRGs (based on FY 2004 MedPAR 

data) appears in section II.G.3. of the FY 

2006 IPPS final rule (70 FR 47325 

through 47332).) We also adjust for 

cases in which the stay at the LTCH is 

less than or equal to five-sixths of the 

geometric average length of stay; that is, 

short-stay outlier cases (§ 412.529), as 

discussed below in section II.F.4. of this 

preamble. 

b. Patient Classifications Into DRGs 

Generally, under the LTCH PPS, 

Medicare payment is made at a 

predetermined specific rate for each 

discharge; that is, payment varies by the 

LTC–DRG to which a beneficiary’s stay 

is assigned. Just as cases are classified 

into DRGs for acute care hospitals under 

the IPPS (see section II.B. of this 

preamble), cases are classified into 

LTC–DRGs for payment under the LTCH 

PPS based on the principal diagnosis, 

up to eight additional diagnoses, and up 

to six procedures performed during the 

stay, as well as age, sex, and discharge 

status of the patient. The diagnosis and 

procedure information is reported by 

the hospital using the ICD–9–CM codes. 

As discussed in section II.B. of this 

preamble, the CMS–DRGs are organized 

into 25 major diagnostic categories 

(MDCs), most of which are based on a 

particular organ system of the body; the 

remainder involve multiple organ 

systems (such as MDC 22, Burns). 

Accordingly, the principal diagnosis 

determines MDC assignment. Within 

most MDCs, cases are then divided into 

surgical DRGs and medical DRGs. Some 

surgical and medical DRGs are further 

differentiated based on the presence or 

absence of CCs. (See section II.B. of this 

preamble for further discussion of 

surgical DRGs and medical DRGs.) 

Because the assignment of a case to a 

particular LTC–DRG will determine the 

amount that is paid for the case, it is 

important that the coding is accurate. As 

used under the IPPS, classifications and 

terminology used under the LTCH PPS 

are consistent with the ICD–9–CM and 

the Uniform Hospital Discharge Data Set 

(UHDDS), as recommended to the 

Secretary by the National Committee on 

Vital and Health Statistics (‘‘Uniform 

Hospital Discharge Data: Minimum Data 

Set, National Center for Health 

Statistics, April 1980’’) and as revised in 

1984 by the Health Information Policy 

Council (HIPC) of the U.S. Department 

of Health and Human Services. We 

point out again that the ICD–9–CM 

coding terminology and the definitions 

of principal and other diagnoses of the 

UHDDS are consistent with the 

requirements of the Transactions and 

Code Sets Standards under HIPAA (45 

CFR Parts 160 and 162). 

The emphasis on the need for proper 

coding cannot be overstated. 

Inappropriate coding of cases can 

adversely affect the uniformity of cases 

in each LTC–DRG and produce 

inappropriate weighting factors at 

recalibration and result in inappropriate 

payments under the LTCH PPS. LTCHs 

are to follow the same coding guidelines 

used by acute care hospitals to ensure 


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accuracy and consistency in coding 

practices. There will be only one LTC–

DRG assigned per long-term care 

hospitalization; it will be assigned at the 

time of discharge of the patient. 

Therefore, it is mandatory that the 

coders continue to report the same 

principal diagnosis on all claims and 

include all diagnosis codes for 

conditions that coexist at the time of 

admission, for conditions that are 

subsequently developed, or for 

conditions that affect the treatment 

received. Similarly, all procedures 

performed in a LTCH, or paid for under 

arrangements by a LTCH, during that 

stay are to be reported on each claim. 

Upon the discharge of the patient 

from a LTCH, the LTCH must assign 

appropriate diagnosis and procedure 

codes from the ICD–9–CM. Completed 

claim forms are to be submitted 

electronically to the LTCH’s Medicare 

fiscal intermediary. Medicare fiscal 

intermediaries enter the clinical and 

demographic information into their 

claims processing systems and subject 

this information to a series of automated 

screening processes called the Medicare 

Code Editor (MCE). These screens are 

designed to identify cases that require 

further review before assignment into a 

LTC–DRG can be made. 

After screening through the MCE, 

each LTCH claim will be classified into 

the appropriate LTC–DRG by the 

Medicare LTCH GROUPER. The LTCH 

GROUPER is specialized computer 

software and is the same GROUPER 

used under the IPPS. After the LTC–

DRG is assigned, the Medicare fiscal 

intermediary determines the prospective 

payment by using the Medicare LTCH 

PPS PRICER program, which accounts 

for LTCH hospital-specific adjustments 

and payment rates. As provided for 

under the IPPS, we provide an 

opportunity for the LTCH to review the 

LTC–DRG assignments made by the 

fiscal intermediary and to submit 

additional information, if necessary, 

within a specified timeframe 

(§ 412.513(c)). 

The LTCH GROUPER is used both to 

classify past cases in order to measure 

relative hospital resource consumption 

to establish the 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 DRG 

classification changes and to recalibrate 

the DRG weights during our annual 

update (as discussed in section II.E. of 

this preamble). The LTC–DRG relative 

weights are based on data for the 

population of LTCH discharges, 

reflecting the fact that LTCH patients 

represent a different patient-mix than 

patients in short-term acute care 

hospitals. 

3. Development of the FY 2007 LTC–

DRG Relative Weights 

a. General Overview of Development of 

the LTC–DRG Relative Weights 

As we stated in the August 30, 2002 

LTCH PPS final rule (67 FR 55981), 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 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 

adjust the LTCH PPS standard Federal 

prospective payment system rate by the 

applicable LTC–DRG relative weight in 

determining payment to LTCHs for each 

case. Under the LTCH PPS, relative 

weights for each LTC–DRG are a 

primary element used to account for the 

variations in cost per discharge and 

resource utilization among the payment 

groups (§ 412.515). To ensure that 

Medicare patients classified to each 

LTC–DRG have access to an appropriate 

level of services and to encourage 

efficiency, we calculate a relative weight 

for each LTC–DRG that represents the 

resources needed by an average 

inpatient LTCH case in that LTC–DRG. 

For example, cases in a LTC–DRG with 

a relative weight of 2 will, on average, 

cost twice as much as cases in a LTC–

DRG with a weight of 1. 

b. Data 

In the FY 2007 IPPS proposed rule (71 

FR 24052), to calculate the proposed 

LTC–DRG relative weights for FY 2007, 

we obtained total Medicare allowable 

charges from FY 2005 Medicare LTCH 

bill data from the December 2005 

update of the MedPAR file, which were 

the best available data at that time, and 

we used the proposed Version 24.0 of 

the CMS GROUPER used under the IPPS 

(as discussed in that same proposed 

rule) to classify cases. In that same 

proposed rule, we also proposed that if 

more recent data were available, we 

would use that data and the finalized 

Version 24.0 of the CMS GROUPER 

(used under the IPPS) to determine the 

final LTC–DRG relative weights for FY 

2007. Accordingly, to calculate the final 

LTC–DRG relative weights for FY 2007 

in this final rule, we obtained total 

Medicare allowable charges from FY 

2005 Medicare hospital bill data from 

the March 2006 update of the MedPAR 

file (which are the most recent available 

data), and used the final Version 24.0 of 

the CMS GROUPER used under the IPPS 

(as discussed in section II.B. of this 

preamble) to classify cases. 

We also stated in the FY 2007 IPPS 

proposed rule (71 FR 24052), as we 

discussed in the FY 2006 IPPS final rule 

(70 FR 47325), we have 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 Pub. L. 90–248 

as amended. Therefore, consistent with 

the proposed rule, in the development 

of the FY 2007 LTC–DRG relative 

weights in this final rule, we have 

excluded the data of the 19 all-inclusive 

rate providers and the 3 LTCHs that are 

paid in accordance with demonstration 

projects that had claims in the FY 2005 

MedPAR file. 

c. Hospital-Specific Relative Value 

Methodology 

By nature, LTCHs often specialize in 

certain areas, such as ventilatordependent patients and rehabilitation 

and wound care. Some case types 

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

in hospitals that have, from a 

perspective of charges, relatively high 

(or low) charges. This nonarbitrary 

distribution of cases with relatively high 

(or low) charges in specific LTC–DRGs 

has the potential to inappropriately 

distort the measure of average charges. 

To account for the fact that cases may 

not be randomly distributed across 

LTCHs, we use a hospital-specific 

relative value (HSRV) method to 

calculate the LTC–DRG relative weights 

instead of the methodology used to 

determine the DRG relative weights 

under the IPPS described in section II.E. 

of this preamble. We believe this 

method will remove this hospitalspecific source of bias in measuring 

LTCH average charges. Specifically, we 

reduce the impact of the variation in 

charges across providers on any 

particular LTC–DRG relative weight by 

converting each LTCH’s charge for a 

case to a relative value based on that 

LTCH’s average charge. 

Under the HSRV method, we 

standardize charges for each LTCH by 

converting its charges for each case to 

hospital-specific relative charge values 

and then adjusting 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 


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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 the methodology 

established under § 412.523, as 

implemented in the August 30, 2002 

LTCH PPS final rule (67 FR 55989 

through 55991), we standardize charges 

for each case by first dividing the 

adjusted charge for the case (adjusted 

for short-stay outliers under § 412.529 as 

described in section II.F.4. (step 3) of 

this preamble) by the average adjusted 

charge for all cases at the LTCH in 

which the case was treated. Short-stay 

outliers under § 412.529 are cases with 

a length of stay that is less than or equal 

to five-sixths the average length of stay 

of the LTC–DRG. 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. 

Multiplying 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. 

d. Low-Volume LTC–DRGs 

In order to account for LTC–DRGs 

with low-volume (that is, with fewer 

than 25 LTCH cases), in accordance 

with the methodology established in the 

August 30, 2002 LTCH PPS final rule 

(67 FR 55984), we group those ‘‘lowvolume LTC–DRGs’’ (that is, DRGs that 

contained between 1 and 24 cases 

annually) into one of five categories 

(quintiles) based on average charges, for 

the purposes of determining relative 

weights. Consistent with the FY 2007 

IPPS proposed rule (71 FR 24052 and 

24053), we will continue to employ this 

treatment of low-volume LTC–DRGs in 

determining the FY 2007 LTC–DRG 

relative weights using the best available 

LTCH data in this final rule. In that 

same proposed rule, using LTCH cases 

from the December 2005 update of the 

FY 2005 MedPAR file, we identified 173 

LTC–DRGs that contained between 1 

and 24 cases. As noted above, we also 

proposed that if more recent data were 

available, we would use that data and 

the finalized Version 24.0 of the CMS 

GROUPER (used under the IPPS) to 

determine the final LTC–DRG relative 

weights for FY 2007. Accordingly, for 

this final rule, using LTCH cases from 

the March 2006 update of the FY 2005 

MedPAR file, we identified 180 LTC–

DRGs that contained between 1 and 24 

cases. This list of LTC–DRGs was then 

divided into one of the 5 low-volume 

quintiles, each containing 36 LTC–DRGs 

(180/5 = 36). In accordance with our 

established methodology, as we 

proposed, we then make an assignment 

to a specific low-volume quintile by 

sorting the low-volume LTC–DRGs in 

ascending order by average charge. For 

this final rule, this results in an 

assignment to a specific low-volume 

quintile of the sorted 180 low-volume 

LTC–DRGs by ascending order by 

average charge. For this final rule, based 

on LTCH claims data from the March 

2006 update of the FY 2005 MedPAR 

file and the finalized Version 24.0 of the 

CMS GROUPER, the number of lowvolume LTC–DRGs is evenly divisible 

by five (that is, the number of lowvolume quintile used to determine the 

LTC–DRG relative weights). 

Consequently, for this final rule, it was 

not necessary to employ our established 

methodology to determine which lowvolume quintile would receive the 

additional LTC–DRG(s) if the number of 

low-volume LTC–DRGs had not been 

evenly divisible by five. However, if the 

number of LTC–DRGs with less than 25 

LTCH cases for this final rule had not 

evenly divisible by five, we would have 

employed our established methodology 

that compares the average charge of the 

low-volume LTC–DRGs, to determine 

which low-volume quintile would 

receive the additional LTC–DRG, as 

presented in greater detail in the FY 

2007 IPPS proposed rule (71 FR 24053). 

Because, for this final rule, the number 

of LTC–DRGs with less than 25 LTCH 

cases was evenly divisible by five, to 

determine the composition of the lowvolume quintiles, in accordance with 

our established methodology, as was 

proposed, we sorted the 180 lowvolume LTC–DRGs in ascending order, 

and grouped the first fifth (1st through 

36th) of low-volume LTC–DRGs (with 

the lowest average charge) into Quintile 

1; the next fifth (37th through 72nd) of 

low-volume LTC–DRGs were into 

Quintile 2; and so on until the last fifth 

(145th through 180th) of low-volume 

LTC–DRGs (with the highest average 

charge) were grouped into Quintile 5. 

In order to determine the relative 

weights for the LTC–DRGs with low 

volume for FY 2007, as was proposed, 

in accordance with the methodology 

established in the August 30, 2002 

LTCH PPS final rule (67 FR 55984), in 

this final rule, we used the five lowvolume quintiles described above. The 

composition of each of the five lowvolume quintiles shown in the chart 

below was used in determining the 

LTC–DRG relative weights for FY 2007. 

As was proposed, for this final rule, we 

determined a relative weight and 

(geometric) average length of stay for 

each of the five low-volume quintiles 

using the formula that we apply to the 

regular LTC–DRGs (25 or more cases), as 

described below in section II.F.4. of this 

preamble. We assigned the same relative 

weight and average length of stay to 

each of the LTC–DRGs that make up that 

low-volume quintile. We note that, as 

this system is dynamic, it is possible 

that the number and specific type of 

LTC–DRGs with a low volume of LTCH 

cases will vary in the future. We use the 

best available claims data in the 

MedPAR file to identify low-volume 

LTC–DRGs and to calculate the relative 

weights based on our methodology. 

COMPOSITION OF LOW-VOLUME QUINTILES FOR FY 2007 

LTC–DRG Description 

Quintile 1 

29 .................. TRAUMATIC STUPOR & COMA, COMA <1 HR AGE >17 W/O CC. 


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COMPOSITION OF LOW-VOLUME QUINTILES FOR FY 2007—Continued 

LTC–DRG Description 

31 .................. CONCUSSION AGE >17 W CC. 

45 .................. NEUROLOGICAL EYE DISORDERS. 

65 .................. DYSEQUILIBRIUM. 

69 .................. OTITIS MEDIA & URI AGE >17 W/O CC. 

83 .................. MAJOR CHEST TRAUMA W CC. 

93 .................. INTERSTITIAL LUNG DISEASE W/O CC. 

102 ................ OTHER RESPIRATORY SYSTEM DIAGNOSES W/O CC. 

125 ................ CIRCULATORY DISORDERS EXCEPT AMI, W CARD CATH W/O COMPLEX DIAG. 

129 ................ CARDIAC ARREST, UNEXPLAINED. 

136 ................ CARDIAC CONGENITAL & VALVULAR DISORDERS AGE >17 W/O CC. 

140 ................ ANGINA PECTORIS. 

143 ................ CHEST PAIN. 

160 ................ HERNIA PROCEDURES EXCEPT INGUINAL & FEMORAL AGE >17 W/O CC. 

181 ................ G.I. OBSTRUCTION W/O CC. 

183 ................ ESOPHAGITIS, GASTROENT & MISC DIGEST DISORDERS AGE >17 W/O CC. 

208 ................ DISORDERS OF THE BILIARY TRACT W/O CC. 

224 ................ SHOULDER, ELBOW OR FOREARM PROC, EXC MAJOR JOINT PROC, W/O CC. 

237 ................ SPRAINS, STRAINS, & DISLOCATIONS OF HIP, PELVIS & THIGH. 

241 ................ CONNECTIVE TISSUE DISORDERS W/O CC. 

250 ................ FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT AGE >17 W CC. 

254 ................ FX, SPRN, STRN & DISL OF UPARM, LOWLEG EX FOOT AGE >17 W/O CC. 

273 ................ MAJOR SKIN DISORDERS W/O CC. 

323 ................ URINARY STONES W CC, &/OR ESW LITHOTRIPSY. 

324 ................ URINARY STONES W/O CC. 

332 ................ OTHER KIDNEY & URINARY TRACT DIAGNOSES AGE >17 W/O CC. 

335 ................ MAJOR MALE PELVIC PROCEDURES W/O CC. 

347 ................ MALIGNANCY, MALE REPRODUCTIVE SYSTEM, W/O CC. 

367 ................ MALIGNANCY, FEMALE REPRODUCTIVE SYSTEM W/O CC. 

383 ................ OTHER ANTEPARTUM DIAGNOSES W MEDICAL COMPLICATIONS. 

399 ................ RETICULOENDOTHELIAL & IMMUNITY DISORDERS W/O CC. 

425 ................ ACUTE ADJUSTMENT REACTION & PSYCHOSOCIAL DYSFUNCTION. 

432 ................ OTHER MENTAL DISORDER DIAGNOSES. 

509 ................ FULL THICKNESS BURN W/O SKIN GRFT OR INH INJ W/O CC OR SIG TRAUMA. 

511 ................ NON-EXTENSIVE BURNS W/O CC OR SIGNIFICANT TRAUMA. 

523 ................ ALCOHOL/DRUG ABUSE OR DEPENDENCE W/O REHABILITATION THERAPY W/O CC. 

Quintile 2 

8 .................... PERIPH & CRANIAL NERVE & OTHER NERV SYST PROC W/O CC. 

11 .................. NERVOUS SYSTEM NEOPLASMS W/O CC. 

17 .................. NONSPECIFIC CEREBROVASCULAR DISORDERS W/O CC. 

46 .................. OTHER DISORDERS OF THE EYE AGE >17 W CC. 

77 .................. OTHER RESP SYSTEM O.R. PROCEDURES W/O CC. 

117 ................ CARDIAC PACEMAKER REVISION EXCEPT DEVICE REPLACEMENT. 

122 ................ CIRCULATORY DISORDERS W AMI W/O MAJOR COMP, DISCHARGED ALIVE. 

128 ................ DEEP VEIN THROMBOPHLEBITIS. 

133 ................ ATHEROSCLEROSIS W/O CC. 

139 ................ CARDIAC ARRHYTHMIA & CONDUCTION DISORDERS W/O CC. 

173 ................ DIGESTIVE MALIGNANCY W/O CC. 

175 ................ G.I. HEMORRHAGE W/O CC. 

177 ................ UNCOMPLICATED PEPTIC ULCER W CC. 

189 ................ OTHER DIGESTIVE SYSTEM DIAGNOSES AGE >17 W/O CC. 

246 ................ NON-SPECIFIC ARTHROPATHIES. 

261 ................ BREAST PROC FOR NON-MALIGNANCY EXCEPT BIOPSY & LOCAL EXCISION. 

276 ................ NON-MALIGNANT BREAST DISORDERS. 

281 ................ TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE >17 W/O CC. 

284 ................ MINOR SKIN DISORDERS W/O CC. 

295 ................ DIABETES AGE 0–35. 

301 ................ ENDOCRINE DISORDERS W/O CC. 

325 ................ KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE >17 W CC. 

348 ................ BENIGN PROSTATIC HYPERTROPHY W CC. 

419 ................ FEVER OF UNKNOWN ORIGIN AGE >17 W CC. 

420 ................ FEVER OF UNKNOWN ORIGIN AGE >17 W/O CC. 

427 ................ NEUROSES EXCEPT DEPRESSIVE. 

431 ................ CHILDHOOD MENTAL DISORDERS. 

441 ................ HAND PROCEDURES FOR INJURIES. 

445 ................ TRAUMATIC INJURY AGE >17 W/O CC. 

447 ................ ALLERGIC REACTIONS AGE >17. 

450 ................ POISONING & TOXIC EFFECTS OF DRUGS AGE >17 W/O CC. 

479 ................ OTHER VASCULAR PROCEDURES W/O CC. 

492 ................ CHEMO W ACUTE LEUKEMIA AS SDX OR W USE OF HIGH DOSE CHEMO AGENT. 

521 ................ ALCOHOL/DRUG ABUSE OR DEPENDENCE W CC. 


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COMPOSITION OF LOW-VOLUME QUINTILES FOR FY 2007—Continued 

LTC–DRG Description 

524 ................ TRANSIENT ISCHEMIA. 

563 ................ SEIZURE AGE >17 W/O CC. 

Quintile 3 

21 .................. VIRAL MENINGITIS. 

22 .................. HYPERTENSIVE ENCEPHALOPATHY. 

44 .................. ACUTE MAJOR EYE INFECTIONS. 

67 .................. EPIGLOTTITIS. 

72 .................. NASAL TRAUMA & DEFORMITY. 

97* ................. BRONCHITIS & ASTHMA AGE >17 W/O CC. 

100 ................ RESPIRATORY SIGNS & SYMPTOMS W/O CC. 

118 ................ CARDIAC PACEMAKER DEVICE REPLACEMENT. 

119 ................ VEIN LIGATION & STRIPPING. 

142* ............... SYNCOPE & COLLAPSE W/O CC. 

157 ................ ANAL & STOMAL PROCEDURES W CC. 

171 ................ OTHER DIGESTIVE SYSTEM O.R. PROCEDURES W/O CC. 

199 ................ HEPATOBILIARY DIAGNOSTIC PROCEDURE FOR MALIGNANCY. 

206* ............... DISORDERS OF LIVER EXCEPT MALIG, CIRR, ALC HEPA W/O CC. 

227 ................ SOFT TISSUE PROCEDURES W/O CC. 

228 ................ MAJOR THUMB OR JOINT PROC, OR OTH HAND OR WRIST PROC W CC. 

235 ................ FRACTURES OF FEMUR. 

259 ................ SUBTOTAL MASTECTOMY FOR MALIGNANCY W CC. 

266 ................ SKIN GRAFT &/OR DEBRID EXCEPT FOR SKIN ULCER OR CELLULITIS W/O CC. 

270 ................ OTHER SKIN, SUBCUT TISS & BREAST PROC W/O CC. 

299 ................ INBORN ERRORS OF METABOLISM. 

312 ................ URETHRAL PROCEDURES, AGE >17 W CC. 

338 ................ TESTES PROCEDURES, FOR MALIGNANCY. 

339 ................ TESTES PROCEDURES, NON-MALIGNANCY AGE >17. 

344 ................ OTHER MALE REPRODUCTIVE SYSTEM O.R. PROCEDURES FOR MALIGNANCY. 

346 ................ MALIGNANCY, MALE REPRODUCTIVE SYSTEM, W CC. 

369 ................ MENSTRUAL & OTHER FEMALE REPRODUCTIVE SYSTEM DISORDERS. 

404 ................ LYMPHOMA & NON-ACUTE LEUKEMIA W/O CC. 

414 ................ OTHER MYELOPROLIF DIS OR POORLY DIFF NEOPL DIAG W/O CC. 

449 ................ POISONING & TOXIC EFFECTS OF DRUGS AGE >17 W CC. 

454 ................ OTHER INJURY, POISONING & TOXIC EFFECT DIAG W CC. 

467 ................ OTHER FACTORS INFLUENCING HEALTH STATUS. 

486 ................ OTHER O.R. PROCEDURES FOR MULTIPLE SIGNIFICANT TRAUMA. 

502 ................ KNEE PROCEDURES W PDX OF INFECTION W/O CC. 

532 ................ SPINAL PROCEDURES W/O CC. 

555 ................ PERCUTANEOUS CARDIOVASCULAR PROC W MAJOR CV DX. 

Quintile 4 

55 .................. MISCELLANEOUS EAR, NOSE, MOUTH & THROAT PROCEDURES. 

63 .................. OTHER EAR, NOSE, MOUTH & THROAT O.R. PROCEDURES. 

95* ................. PNEUMOTHORAX W/O CC. 

110 ................ MAJOR CARDIOVASCULAR PROCEDURES W CC. 

124 ................ CIRCULATORY DISORDERS EXCEPT AMI, W CARD CATH & COMPLEX DIAG. 

193 ................ BILIARY TRACT PROC EXCEPT ONLY CHOLECYST W OR W/O C.D.E. W CC. 

197 ................ CHOLECYSTECTOMY EXCEPT BY LAPAROSCOPE W/O C.D.E. W CC. 

223 ................ MAJOR SHOULDER/ELBOW PROC, OR OTHER UPPER EXTREMITY PROC W CC. 

262 ................ BREAST BIOPSY & LOCAL EXCISION FOR NON-MALIGNANCY. 

268 ................ SKIN, SUBCUTANEOUS TISSUE & BREAST PLASTIC PROCEDURES. 

288 ................ O.R. PROCEDURES FOR OBESITY. 

304 ................ KIDNEY AND URETER PROCEDURES FOR NON-NEOPLASM W CC. 

306 ................ PROSTATECTOMY W CC. 

308 ................ MINOR BLADDER PROCEDURES W CC. 

310 ................ TRANSURETHRAL PROCEDURES W CC. 

336 ................ TRANSURETHRAL PROSTATECTOMY W CC. 

345 ................ OTHER MALE REPRODUCTIVE SYSTEM O.R. PROC EXCEPT FOR MALIGNANCY. 

365 ................ OTHER FEMALE REPRODUCTIVE SYSTEM O.R. PROCEDURES. 

376 ................ POSTPARTUM & POST ABORTION DIAGNOSES W/O O.R. PROCEDURE. 

394 ................ OTHER O.R. PROCEDURES OF THE BLOOD AND BLOOD FORMING ORGANS. 

401 ................ LYMPHOMA & NON-ACUTE LEUKEMIA W OTHER O.R. PROC W CC. 

408 ................ MYELOPROLIF DISORD OR POORLY DIFF NEOPL W OTHER O.R.PROC. 

487 ................ OTHER MULTIPLE SIGNIFICANT TRAUMA. 

488 ................ HIV W EXTENSIVE O.R. PROCEDURE. 

493 ................ LAPAROSCOPIC CHOLECYSTECTOMY W/O C.D.E. W CC. 

496 ................ COMBINED ANTERIOR/POSTERIOR SPINAL FUSION. 

500 ................ BACK & NECK PROCEDURES EXCEPT SPINAL FUSION W/O CC. 

503 ................ KNEE PROCEDURES W/O PDX OF INFECTION. 


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47978 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

COMPOSITION OF LOW-VOLUME QUINTILES FOR FY 2007—Continued 

LTC–DRG Description 

506 ................ FULL THICKNESS BURN W SKIN GRAFT OR INHAL INJ W CC OR SIG TRAUMA. 

515 ................ CARDIAC DEFIBRILLATOR IMPLANT W/O CARDIAC CATH. 

519 ................ CERVICAL SPINAL FUSION W CC. 

533 ................ EXTRACRANIAL PROCEDURES W CC. 

538 ................ LOCAL EXCISION & REMOVAL INT FIX DEVICES EXCEPT HIP & FEMUR W/O CC. 

539 ................ LYMPHOMA & LEUKEMIA W MAJOR O.R. PROCEDURE W CC. 

552 ................ OTHER PERMANENT CARDIAC PACEMAKER IMPLANT W/O MAJOR CV DX PERCUTANEOUS CARDIOVASCULAR PROC 

W DRUG-ELUTING STENT W MAJOR CV. 

557 ................ DX. 

Quintile 5 

1 .................... CRANIOTOMY AGE >17 W CC. 

146 ................ RECTAL RESECTION W CC. 

150 ................ PERITONEAL ADHESIOLYSIS W CC. 

152 ................ MINOR SMALL & LARGE BOWEL PROCEDURES W CC. 

159 ................ HERNIA PROCEDURES EXCEPT INGUINAL & FEMORAL AGE >17 W CC. 

168 ................ MOUTH PROCEDURES W CC. 

191 ................ PANCREAS, LIVER & SHUNT PROCEDURES W CC. 

195 ................ CHOLECYSTECTOMY W C.D.E. W CC. 

200 ................ HEPATOBILIARY DIAGNOSTIC PROCEDURE FOR NON-MALIGNANCY. 

218 ................ LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT, FEMUR AGE >17 W CC. 

230 ................ LOCAL EXCISION & REMOVAL OF INT FIX DEVICES OF HIP & FEMUR. 

232 ................ ARTHROSCOPY. 

257 ................ TOTAL MASTECTOMY FOR MALIGNANCY W CC. 

293* ............... OTHER ENDOCRINE, NUTRIT & METAB O.R. PROC W/O CC. 

341 ................ PENIS PROCEDURES. 

406 ................ MYELOPROLIF DISORD OR POORLY DIFF NEOPL W MAJ O.R. PROC W CC. 

424 ................ O.R. PROCEDURE W PRINCIPAL DIAGNOSES OF MENTAL ILLNESS. 

471 ................ BILATERAL OR MULTIPLE MAJOR JOINT PROCS OF LOWER EXTREMITY. 

476 ................ PROSTATIC O.R. PROCEDURE UNRELATED TO PRINCIPAL DIAGNOSIS. 

482 ................ TRACHEOSTOMY FOR FACE, MOUTH & NECK DIAGNOSES. 

491 ................ MAJOR JOINT & LIMB REATTACHMENT PROCEDURES OF UPPER EXTREMITY. 

497 ................ SPINAL FUSION EXCEPT CERVICAL W CC. 

499 ................ BACK & NECK PROCEDURES EXCEPT SPINAL FUSION W CC. 

504 ................ EXTENSIVE BURNS OR FULL THICKNESS BURNS W MV 96+ HRS W SKIN GRAFT. 

505 ................ EXTENSIVE BURNS OR FULL THICKNESS BURNS W MV 96+ HRS W/O SKIN GRAFT. 

529 ................ VENTRICULAR SHUNT PROCEDURES W CC. 

531 ................ SPINAL PROCEDURES W CC. 

535 ................ CARDIAC DEFIB IMPLANT W CARDIAC CATH W AMI/HF/SHOCK. 

543 ................ CRANIOTOMY W MAJOR DEVICE IMPLANT OR ACUTE COMPLEX CNS PDX. 

544 ................ MAJOR JOINT REPLACEMENT OR REATTACHMENT OF LOWER EXTREMITY. 

545 ................ REVISION OF HIP OR KNEE REPLACEMENT. 

567 ................ STOMACH, ESOPHAGEAL & DUODENAL PROC AGE >17 W CC W MAJOR GI DX. 

568 ................ STOMACH, ESOPHAGEAL & DUODENAL PROC AGE >17 W CC W/O MAJOR GI DX. 

569 ................ MAJOR SMALL & LARGE BOWEL PROCEDURES W CC W MAJOR GI DX. 

570 ................ MAJOR SMALL & LARGE BOWEL PROCEDURES W CC W/O MAJOR GI DX. 

573 ................ MAJOR BLADDER PROCEDURES. 

* One of the original 180 low-volume LTC–DRGs initially assigned to this low-volume quintile; removed from this low-volume quintile in addressing nonmonotonicity (see step 5 below).. 

We note that we will continue to 

monitor the volume (that is, the number 

of LTCH cases) in these low-volume 

quintiles to ensure that our quintile 

assignment results in appropriate 

payment for such cases and does not 

result in an unintended financial 

incentive for LTCHs to inappropriately 

admit these types of cases. 

4. Steps for Determining the FY 2007 

LTC–DRG Relative Weights 

As we noted previously, as was 

proposed, the FY 2007 LTC–DRG 

relative weights in this final rule are 

determined in accordance with the 

methodology established in the August 

30, 2002 LTCH PPS final rule (67 FR 

55989 through 55991). In summary, 

LTCH cases must be grouped in the 

appropriate LTC–DRG, while taking into 

account the low-volume LTC–DRGs as 

described above, before the FY 2007 

LTC–DRG relative weights can be 

determined. After grouping the cases in 

the appropriate LTC–DRG, we 

calculated the relative weights for FY 

2007 in this final rule 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 

LTC–DRG for the effect of short-stay 

outlier cases under § 412.529, as also 

discussed in greater detail below. The 

short-stay adjusted discharges and 

corresponding charges are used to 

calculate ‘‘relative adjusted weights’’ in 

each LTC–DRG using the HSRV method 

described above. 

Below we discuss in detail the steps 

for calculating the FY 2007 LTC–DRG 

relative weights in this final rule. These 

steps are the same as the ones we 

presented in the FY 2007 IPPS proposed 

rule for calculating the proposed FY 

2007 LTC–DRG relative weights. We 

note that, as we stated above in section 

II.F.3.b. of this preamble, we have 

excluded the data of all-inclusive rate 

LTCHs and LTCHs that are paid in 

accordance with demonstration projects 

that had claims in the FY 2005 MedPAR 

file. 


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Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 47979 

Step 1—Remove statistical outliers. 

The first step in the calculation of the 

FY 2007 LTC–DRG relative weights, as 

was proposed, is to remove statistical 

outlier cases. 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 

LTC–DRG. These statistical outliers are 

removed prior to calculating the relative 

weights. As noted above, 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 relative 

weights could result in an inaccurate 

relative weight that does not truly 

reflect relative resource use among the 

LTC–DRGs. 

Step 2—Remove cases with a length 

of stay of 7 days or less. 

The FY 2007 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. As explained above, if we were 

to include stays of 7 days or less in the 

computation of the FY 2007 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, in order to include data from 

these very short-stays. Thus, as 

explained above, in determining the FY 

2007 LTC–DRG relative weights in this 

final rule, as was proposed, we remove 

LTCH cases with a length of stay of 7 

days or less. 

Step 3—Adjust charges for the effects 

of short-stay outliers. 

After removing cases with a length of 

stay of 7 days or less, we are left with 

cases that have a length of stay of greater 

than or equal to 8 days. The next step 

in the calculation of the FY 2007 LTC–

DRG relative weights is to adjust each 

LTCH’s charges per discharge for those 

remaining cases for the effects of shortstay outliers as defined in § 412.529(a). 

(However, we note that even if a case 

was removed in Step 2 (that is, cases 

with a length of stay of 7 days or less), 

it was paid as a short-stay outlier if its 

length of stay was less than or equal to 

five-sixths of the average length of stay 

of the LTC–DRG, in accordance with 

§ 412.529.) 

We make this adjustment by counting 

a short-stay outlier 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 LTC–DRG for 

nonshort-stay outlier cases. This has the 

effect of proportionately reducing the 

impact of the lower charges for the 

short-stay outlier cases in calculating 

the average charge for the LTC–DRG. 

This process produces the same result 

as if the actual charges per discharge of 

a short-stay outlier 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 LTC–DRG. 

As we explained in the FY 2007 IPPS 

proposed rule (71 FR 24059), counting 

short-stay outlier cases as full 

discharges with no adjustment in 

determining the LTC–DRG relative 

weights would lower the LTC–DRG 

relative weight for affected LTC–DRGs 

because the relatively lower charges of 

the short-stay outlier cases would bring 

down the average charge for all cases 

within a proposed LTC–DRG. This 

would result in an ‘‘underpayment’’ for 

nonshort-stay outlier cases and an 

‘‘overpayment’’ for short-stay outlier 

cases. Therefore, in this final rule, as 

was proposed, we adjust for short-stay 

outlier cases under § 412.529 in this 

manner because it results in more 

appropriate payments for all LTCH 

cases. 

Step 4—Calculate the FY 2007 LTC–

DRG relative weights on an iterative 

basis. 

The process of calculating the LTC–

DRG relative weights using the HSRV 

methodology is iterative. First, for each 

LTCH case, we calculate a hospitalspecific relative charge value by 

dividing the short-stay outlier 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 is 

then multiplied by the LTCH’s case-mix 

index to produce an adjusted hospitalspecific relative charge value for the 

case. An initial case-mix index value of 

1.0 is used for each LTCH. 

For each LTC–DRG, the FY 2007 

LTC–DRG relative weight is calculated 

by dividing the average of the adjusted 

hospital-specific relative charge values 

(from above) for the LTC–DRG by the 

overall average hospital-specific relative 

charge value across all cases for all 

LTCHs. Using these recalculated LTC–

DRG relative weights, each LTCH’s 

average relative weight for all of its 

cases (case-mix) is calculated by 

dividing the sum of all the LTCH’s LTC–

DRG relative weights by its total number 

of cases. The LTCHs’ hospital-specific 

relative charge values above are 

multiplied by these hospital-specific 

case-mix indexes. These hospitalspecific case-mix adjusted relative 

charge values are then used to calculate 

a new set of LTC–DRG relative weights 

across all LTCHs. In this final rule, as 

was proposed, this iterative process is 

continued until there is convergence 

between the weights produced at 

adjacent steps, for example, when the 

maximum difference is less than 0.0001. 

Step 5—Adjust the FY 2007 LTC–DRG 

relative weights to account for 

nonmonotonically increasing relative 

weights. 

As explained in section II.B. of this 

preamble, the FY 2007 CMS DRGs, on 

which the FY 2007 LTC–DRGs are 

based, contain ‘‘pairs’’ that are 

differentiated based on the presence or 

absence of CCs. The LTC–DRGs with 

CCs are defined by certain secondary 

diagnoses not related to or inherently a 

part of the disease process identified by 

the principal diagnosis, but the presence 

of additional diagnoses does not 

automatically generate a CC. As we 

discussed in the FY 2006 IPPS final rule 

(70 FR 47336), the value of 

monotonically increasing relative 

weights rises as the resource use 

increases (for example, from 

uncomplicated to more complicated). 

The presence of CCs in a LTC–DRG 

means that cases classified into a 

‘‘without CC’’ LTC–DRG are expected to 

have lower resource use (and lower 

costs). In other words, resource use (and 

costs) are expected to decrease across 

‘‘with CC/without CC’’ pairs of LTC–

DRGs. 

For a case to be assigned to a LTC–

DRG with CCs, more coded information 

is called for (that is, at least one relevant 

secondary diagnosis), than for a case to 

be assigned to a LTC–DRG ‘‘without 

CCs’’ (which is based on only one 

principal diagnosis and no relevant 

secondary diagnoses). Currently, the 

LTCH claims data include both 

accurately coded cases without 

complications and cases that have 

complications (and cost more), but were 

not coded completely. Both types of 

cases are grouped to a LTC–DRG 

‘‘without CCs’’ when only the principal 

diagnosis was coded. Since the LTCH 

PPS was only implemented for cost 

reporting periods beginning on or after 

October 1, 2002 (FY 2003), and LTCHs 

were previously paid under cost-based 

reimbursement, which is not based on 

patient diagnoses, coding by LTCHs for 


bajohnson on PROD1PC67 with RULES2
47980 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

these cases may not have been as 

detailed as possible. 

Thus, in developing the FY 2003 

LTC–DRG relative weights for the LTCH 

PPS based on FY 2001 claims data, as 

we discussed in the August 30, 2002 

LTCH PPS final rule (67 FR 55990), we 

found on occasion that the data 

suggested that cases classified to the 

LTC–DRG ‘‘with CCs’’ of a ‘‘with CC/ 

without CC’’ pair had a lower average 

charge than the corresponding LTC–

DRG ‘‘without CCs.’’ Similarly, as 

discussed in the FY 2006 IPPS final rule 

(70 FR 47336 through 47337), based on 

FY 2004 claims data, we also found on 

occasion that the data suggested that 

cases classified to the LTC–DRG ‘‘with 

CCs’’ of a ‘‘with CC/without CC’’ pair 

have a lower average charge than the 

corresponding LTC–DRG ‘‘without CCs’’

for the FY 2006 LTC–DRG relative 

weights. 

We believe this anomaly may be due 

to coding that may not have fully 

reflected all comorbidities that were 

present. Specifically, LTCHs may have 

failed to code relevant secondary 

diagnoses, which resulted in cases that 

actually had CCs being classified into a 

‘‘without CC’’ LTC–DRG. It would not 

be appropriate to pay a lower amount 

for the ‘‘with CC’’ LTC–DRG because, in 

general, cases classified into a ‘‘with 

CC’’ LTC–DRG are expected to have 

higher resource use (and higher cost) as 

discussed above. Therefore, previously 

when we determined the LTC–DRG 

relative weights in accordance with the 

methodology established in the August 

30, 2002 LTCH PPS final rule (67 FR 

55990) when we implanted the LTCH 

PPS, we grouped both the cases ‘‘with 

CCs’’ and ‘‘without CCs’’ together for the 

purpose of calculating the LTC–DRG 

relative weights. As we stated in that 

same final rule, we will continue to 

employ this methodology to account for 

nonmonotonically increasing relative 

weights until we have adequate data to 

calculate appropriate separate weights 

for these anomalous LTC–DRG pairs. 

We expect that, as was the case when 

we first implemented the IPPS, in most 

instances, this problem will be selfcorrecting, as LTCHs submit more 

completely coded data in the future. 

There are three types of ‘‘with CC’’

and ‘‘without CC’’ pairs that could be 

nonmonotonic; that is, where the 

‘‘without CC’’ LTC–DRG would have a 

higher average charge than the ‘‘with 

CC’’ LTC–DRG. For this final rule, using 

the LTCH cases in the March 2006 

update of the FY 2005 MedPAR file (the 

most recent and complete data available 

at this time), we identified one of the 

three types of nonmonotonic LTC–DRG 

pairs. As we stated in the August 30, 

2002 LTCH PPS final rule (67 FR 

55990), we believe this anomaly may be 

due to coding inaccuracies and expect 

that, as was the case when we first 

implemented the acute care hospital 

IPPS, this problem will be selfcorrecting, as LTCHs submit more 

completely coded data in the future. 

The first category of 

nonmonotonically increasing relative 

weights for LTC–DRG pairs ‘‘with and 

without CCs’’ contains one pair of LTC–

DRGs in which both the LTC–DRG 

‘‘with CCs’’ and the LTC–DRG ‘‘without 

CCs’’ had 25 or more LTCH cases and, 

therefore, did not fall into one of the 5 

low-volume quintiles. For those 

nonmonotonic LTC–DRG pairs, based 

on our established methodology (67 FR 

55983 through 55990), we combined the 

LTCH cases and computed a new 

relative weight based on the caseweighted average of the combined LTCH 

cases of the LTC–DRGs. The caseweighted average charge is determined 

by dividing the total charges for all 

LTCH cases by the total number of 

LTCH cases for the combined LTC–DRG. 

This new relative weight is then 

assigned to both of the LTC–DRGs in the 

pair. In this final rule, for FY 2007, there 

were no LTC–DRGs that fell into this 

category. 

The second category of 

nonmonotonically increasing relative 

weights for LTC–DRG pairs ‘‘with and 

without CCs’’ consists of one pair of 

LTC–DRGs that has fewer than 25 cases, 

and each LTC–DRG is grouped to 

different low-volume quintiles in which 

the ‘‘without CC’’ LTC–DRG is in a 

higher-weighted low-volume quintile 

than the ‘‘with CC’’ LTC–DRG. For those 

pairs, based on our established 

methodology, we combine the LTCH 

cases and determine the case-weighted 

average charge for all LTCH cases. The 

case-weighted average charge is 

determined by dividing the total charges 

for all LTCH cases by the total number 

of LTCH cases for the combined LTC–

DRG. Based on the case-weighted 

average LTCH charge, we determine 

within which low-volume quintile the 

‘‘combined LTC–DRG’’ is grouped. Both 

LTC–DRGs in the pair are then grouped 

into the same low-volume quintile, thus 

having the same relative weight. In this 

final rule, for FY 2007, there were no 

LTC–DRGs that fell into this category. 

The third category of 

nonmonotonically increasing relative 

weights for LTC–DRG pairs ‘‘with and 

without CCs’’ consists of one pair of 

LTC–DRGs where one of the LTC–DRGs 

has fewer than 25 LTCH cases and is 

grouped to a low-volume quintile and 

the other LTC–DRG has 25 or more 

LTCH cases and has its own LTC–DRG 

relative weight, and the LTC–DRG 

‘‘without CCs’’ has the higher relative 

weight. Based on our established 

methodology, as proposed, we removed 

the low-volume LTC–DRG from the lowvolume quintile and combined it with 

the other LTC–DRG for the computation 

of a new relative weight for each of 

these LTC–DRGs. This new relative 

weight is assigned to both LTC–DRGs, 

so they each have the same relative 

weight. In this final rule, for FY 2007, 

5 ‘‘pairs’’ of LTC–DRGs fall into this 

category: LTC–DRGs 94 and 95; LTC–

DRGs 96 and 97; LTC–DRGs 141 and 

142; LTC–DRGs 205 and 206; and LTC–

DRGs 292 and 293. 

Step 6—Determine a FY 2007 LTC–

DRG relative weight for LTC–DRGs with 

no LTCH cases. 

As we stated above, in this final rule, 

as we proposed we determine the 

relative weight for each LTC–DRG using 

total Medicare allowable charges 

reported in the March 2006 update of 

the FY 2005 MedPAR file. Of the 538 

LTC–DRGs for FY 2007, we identified 

183 LTC–DRGs for which there were no 

LTCH cases in the database. That is, 

based on data from the FY 2005 

MedPAR file used in this final rule, no 

patients who would have been classified 

to those LTC–DRGs were treated in 

LTCHs during FY 2005 and, therefore, 

no charge data were reported for those 

LTC–DRGs. Thus, in the process of 

determining the LTC–DRG relative 

weights, we are unable to determine 

weights for these 183 LTC–DRGs using 

the methodology described in Steps 1 

through 5 above. However, because 

patients with a number of the diagnoses 

under these LTC–DRGs may be treated 

at LTCHs beginning in FY 2007, as was 

proposed, for this final rule, we 

assigned relative weights to each of the 

183 ‘‘no volume’’ LTC–DRGs based on 

clinical similarity and relative costliness 

to one of the remaining 355 (538 - 183 

= 355) LTC–DRGs for which we are able 

to determine relative weights, based on 

FY 2005 LTCH claims data. As there are 

currently no LTCH cases in these ‘‘no 

volume’’ LTC–DRGs, as proposed, we 

determined relative weights for the 183 

LTC–DRGs with no LTCH cases in the 

FY 2005 MedPAR file used in this final 

rule by grouping them to the 

appropriate low-volume quintile. This 

methodology is consistent with our 

methodology used in determining 

relative weights to account for the lowvolume LTC–DRGs described above. 

As was proposed, for this final rule, 

our methodology for determining the 

relative weights for the ‘‘no volume’’

LTC–DRGs is as follows: We crosswalk 

the no volume LTC–DRGs by matching 

them to other similar LTC–DRGs for 


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Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 47981 

which there were LTCH cases in the FY 

2005 MedPAR file based on clinical 

similarity and intensity of use of 

resources as determined by 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 assigned the relative 

weight for the applicable low-volume 

quintile to the no volume LTC–DRG if 

the LTC–DRG to which it is crosswalked 

is grouped to one of the low-volume 

quintiles. If the LTC–DRG to which the 

no volume LTC–DRG is crosswalked is 

not one of the LTC–DRGs to be grouped 

to one of the low-volume quintiles, we 

compared the relative weight of the 

LTC–DRG to which the no volume LTC–

DRG is crosswalked to the relative 

weights of each of the five quintiles and 

we assigned the no volume LTC–DRG 

the relative weight of the low-volume 

quintile with the closest weight. For this 

final rule, a list of the no volume FY 

2007 LTC–DRGs and the FY 2007 LTC–

DRG to which it is crosswalked in order 

to determine the appropriate lowvolume quintile for the assignment of a 

relative weight for FY 2007 is shown in 

the chart below. 

NO VOLUME LTC-DRG CROSSWALK AND QUINTILE ASSIGNMENT FOR FY 2007 

LTC–DRG Description 

Crosswalked 

LTC–DRG 

Low-volume 

quintile 

assignment 

2 ...................... CRANIOTOMY AGE >17 W/O CC ............................................................................................. 1 Quintile 5. 

3 ...................... CRANIOTOMY AGE 0–17 .......................................................................................................... 1 Quintile 5. 

6 ...................... CARPAL TUNNEL RELEASE .................................................................................................... 237 Quintile 1. 

26 .................... SEIZURE & HEADACHE AGE 0–17 .......................................................................................... 563 Quintile 2. 

30 .................... TRAUMATIC STUPOR & COMA, COMA <1 HR AGE 0–17 ..................................................... 29 Quintile 1. 

32 .................... CONCUSSION AGE >17 W/O CC ............................................................................................. 31 Quintile 1. 

33 .................... CONCUSSION AGE 0–17 .......................................................................................................... 31 Quintile 1. 

36 .................... RETINAL PROCEDURES .......................................................................................................... 46 Quintile 2. 

37 .................... ORBITAL PROCEDURES .......................................................................................................... 46 Quintile 2. 

38 .................... PRIMARY IRIS PROCEDURES ................................................................................................. 46 Quintile 2. 

39 .................... LENS PROCEDURES WITH OR WITHOUT VITRECTOMY ..................................................... 46 Quintile 2. 

40 .................... EXTRAOCULAR PROCEDURES EXCEPT ORBIT AGE >17 ................................................... 46 Quintile 2. 

41 .................... EXTRAOCULAR PROCEDURES EXCEPT ORBIT AGE 0–17 ................................................. 46 Quintile 2. 

42 .................... INTRAOCULAR PROCEDURES EXCEPT RETINA, IRIS & LENS ........................................... 46 Quintile 2. 

43 .................... HYPHEMA .................................................................................................................................. 45 Quintile 1. 

47 .................... OTHER DISORDERS OF THE EYE AGE >17 W/O CC ........................................................... 45 Quintile 1. 

48 .................... OTHER DISORDERS OF THE EYE AGE 0–17 ........................................................................ 45 Quintile 1. 

49 .................... MAJOR HEAD & NECK PROCEDURES ................................................................................... 64 Quintile 4. 

50 .................... SIALOADENECTOMY ................................................................................................................ 63 Quintile 4. 

51 .................... SALIVARY GLAND PROCEDURES EXCEPT SIALOADENECTOMY ...................................... 63 Quintile 4. 

52 .................... CLEFT LIP & PALATE REPAIR ................................................................................................. 63 Quintile 4. 

53 .................... SINUS & MASTOID PROCEDURES AGE >17 ......................................................................... 63 Quintile 4. 

54 .................... SINUS & MASTOID PROCEDURES AGE 0–17 ....................................................................... 63 Quintile 4. 

56 .................... RHINOPLASTY ........................................................................................................................... 63 Quintile 4. 

57 .................... T&A PROC, EXCEPT TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, AGE >17 .......... 69 Quintile 1. 

58 .................... T&A PROC, EXCEPT TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, AGE 0–17 ......... 69 Quintile 1. 

59 .................... TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, AGE >17 ............................................... 69 Quintile 1. 

60 .................... TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, AGE 0–17 ............................................. 69 Quintile 1. 

61 .................... MYRINGOTOMY W TUBE INSERTION AGE >17 .................................................................... 69 Quintile 1. 

62 .................... MYRINGOTOMY W TUBE INSERTION AGE 0–17 .................................................................. 69 Quintile 1. 

66 .................... EPISTAXIS .................................................................................................................................. 69 Quintile 1. 

70 .................... OTITIS MEDIA & URI AGE 0–17 ............................................................................................... 69 Quintile 1. 

71 .................... LARYNGOTRACHEITIS ............................................................................................................. 97 Quintile 2. 

74 .................... OTHER EAR, NOSE, MOUTH & THROAT DIAGNOSES AGE 0–17 ....................................... 69 Quintile 1. 

81 .................... RESPIRATORY INFECTIONS & INFLAMMATIONS AGE 0–17 ............................................... 69 Quintile 1. 

84 .................... MAJOR CHEST TRAUMA W/O CC ........................................................................................... 93 Quintile 1. 

86 .................... PLEURAL EFFUSION W/O CC .................................................................................................. 102 Quintile 1. 

91 .................... SIMPLE PNEUMONIA & PLEURISY AGE 0–17 ....................................................................... 90 Quintile 2. 

98 .................... BRONCHITIS & ASTHMA AGE 0–17 ........................................................................................ 97 Quintile 2. 

104 .................. CARDIAC VALVE & OTHER MAJOR CARDIOTHORACIC PROC W CARDIAC CATH .......... 110 Quintile 4. 

105 .................. CARDIAC VALVE & OTHER MAJOR CARDIOTHORACIC PROC W/O CARDIAC CATH ...... 110 Quintile 4. 

106 .................. CORONARY BYPASS W PTCA ................................................................................................ 110 Quintile 4. 

108 .................. OTHER CARDIOTHORACIC PROCEDURES ........................................................................... 110 Quintile 4. 

111 .................. MAJOR CARDIOVASCULAR PROCEDURES W/O CC ............................................................ 110 Quintile 4. 

137 .................. CARDIAC CONGENITAL & VALVULAR DISORDERS AGE 0–17 ........................................... 136 Quintile 1. 

147 .................. RECTAL RESECTION W/O CC ................................................................................................. 171 Quintile 3. 

149 .................. MAJOR SMALL & LARGE BOWEL PROCEDURES W/O CC .................................................. 176 Quintile 3. 

151 .................. PERITONEAL ADHESIOLYSIS W/O CC ................................................................................... 160 Quintile 1. 

153 .................. MINOR SMALL & LARGE BOWEL PROCEDURES W/O CC ................................................... 152 Quintile 5. 

155 .................. STOMACH, ESOPHAGEAL & DUODENAL PROCEDURES AGE >17 W/O CC ..................... 567 Quintile 5. 

156 .................. STOMACH, ESOPHAGEAL & DUODENAL PROCEDURES AGE 0–17 .................................. 567 Quintile 5. 

158 .................. ANAL & STOMAL PROCEDURES W/O CC .............................................................................. 157 Quintile 3. 

161 .................. INGUINAL & FEMORAL HERNIA PROCEDURES AGE >17 W CC ......................................... 160 Quintile 1. 

162 .................. INGUINAL & FEMORAL HERNIA PROCEDURES AGE >17 W/O CC ..................................... 160 Quintile 1. 

163 .................. HERNIA PROCEDURES AGE 0–17 .......................................................................................... 160 Quintile 1. 

164 .................. APPENDECTOMY W COMPLICATED PRINCIPAL DIAG W CC ............................................. 171 Quintile 3.

165 .................. APPENDECTOMY W COMPLICATED PRINCIPAL DIAG W/O CC ......................................... 171 Quintile 3. 


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47982 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

NO VOLUME LTC-DRG CROSSWALK AND QUINTILE ASSIGNMENT FOR FY 2007—Continued 

LTC–DRG Description 

Crosswalked 

LTC–DRG 

Low-volume 

quintile 

assignment 

166 .................. APPENDECTOMY W/O COMPLICATED PRINCIPAL DIAG W CC ......................................... 171 Quintile 3. 

167 .................. APPENDECTOMY W/O COMPLICATED PRINCIPAL DIAG W/O CC ...................................... 171 Quintile 3. 

169 .................. MOUTH PROCEDURES W/O CC .............................................................................................. 185 Quintile 2. 

178 .................. UNCOMPLICATED PEPTIC ULCER W/O CC ........................................................................... 160 Quintile 1. 

184 .................. ESOPHAGITIS, GASTROENT & MISC DIGEST DISORDERS AGE 0–17 .............................. 183 Quintile 1. 

186 .................. DENTAL & ORAL DIS EXCEPT EXTRACTIONS & RESTORATIONS, AGE 0–17 .................. 185 Quintile 2. 

187 .................. DENTAL EXTRACTIONS & RESTORATIONS .......................................................................... 185 Quintile 2. 

190 .................. OTHER DIGESTIVE SYSTEM DIAGNOSES AGE 0–17 ........................................................... 189 Quintile 2. 

192 .................. PANCREAS, LIVER & SHUNT PROCEDURES W/O CC ......................................................... 191 Quintile 5. 

194 .................. BILIARY TRACT PROC EXCEPT ONLY CHOLECYST W OR W/O C.D.E. W/O CC .............. 193 Quintile 4. 

196 .................. CHOLECYSTECTOMY W C.D.E. W/O CC ................................................................................ 197 Quintile 4. 

198 .................. CHOLECYSTECTOMY EXCEPT BY LAPAROSCOPE W/O C.D.E. W/O CC .......................... 197 Quintile 4. 

211 .................. HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT AGE >17 W/O CC .......................... 210 Quintile 5. 

212 .................. HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT AGE 0–17 ....................................... 210 Quintile 5. 

219 .................. LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT, FEMUR AGE >17 W/O CC ........ 210 Quintile 5. 

220 .................. LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT, FEMUR AGE 0–17 ..................... 218 Quintile 5. 

229 .................. HAND OR WRIST PROC, EXCEPT MAJOR JOINT PROC, W/O CC ...................................... 237 Quintile 1. 

234 .................. OTHER MUSCULOSKELET SYS & CONN TISS O.R. PROC W/O CC ................................... 237 Quintile 1. 

251 .................. FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT AGE >17.W/O CC .......................... 237 Quintile 1. 

252 .................. FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT AGE 0–17 ....................................... 253 Quintile 2. 

255 .................. FX, SPRN, STRN & DISL OF UPARM,LOWLEG EX FOOT AGE 0–17 ................................... 253 Quintile 2. 

258 .................. TOTAL MASTECTOMY FOR MALIGNANCY W/O CC .............................................................. 274 Quintile 3. 

260 .................. SUBTOTAL MASTECTOMY FOR MALIGNANCY W/O CC ...................................................... 274 Quintile 3. 

267 .................. PERIANAL & PILONIDAL PROCEDURES ................................................................................ 270 Quintile 3. 

275 .................. MALIGNANT BREAST DISORDERS W/O CC .......................................................................... 274 Quintile 3. 

279 .................. CELLULITIS AGE 0–17 .............................................................................................................. 273 Quintile 1.

282 .................. TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE 0–17 .............................................. 281 Quintile 2. 

286 .................. ADRENAL & PITUITARY PROCEDURES ................................................................................. 292 Quintile 4. 

289 .................. PARATHYROID PROCEDURES ................................................................................................ 63 Quintile 4. 

290 .................. THYROID PROCEDURES ......................................................................................................... 63 Quintile 4. 

291 .................. THYROGLOSSAL PROCEDURES ............................................................................................ 63 Quintile 4. 

298 .................. NUTRITIONAL & MISC METABOLIC DISORDERS AGE 0–17 ................................................ 297 Quintile 1. 

303 .................. KIDNEY AND URETER PROCEDURES FOR NEOPLASM ...................................................... 318 Quintile 3. 

305 .................. KIDNEY AND URETER PROCEDURES FOR NON-NEOPLASM W/O CC .............................. 318 Quintile 3. 

307 .................. PROSTATECTOMY W/O CC ..................................................................................................... 306 Quintile 4. 

309 .................. MINOR BLADDER PROCEDURES W/O CC ............................................................................. 308 Quintile 4. 

311 .................. TRANSURETHRAL PROCEDURES W/O CC ........................................................................... 310 Quintile 4. 

313 .................. URETHRAL PROCEDURES, AGE >17 W/O CC ...................................................................... 312 Quintile 3. 

314 .................. URETHRAL PROCEDURES, AGE 0–17 ................................................................................... 312 Quintile 3. 

319 .................. KIDNEY & URINARY TRACT NEOPLASMS W/O CC .............................................................. 318 Quintile 3. 

322 .................. KIDNEY & URINARY TRACT INFECTIONS AGE 0–17 ............................................................ 321 Quintile 1. 

326 .................. KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE >17 W/O CC ................................ 321 Quintile 1. 

327 .................. KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE 0–17 ............................................. 321 Quintile 1. 

328 .................. URETHRAL STRICTURE AGE >17 W CC ................................................................................ 325 Quintile 2. 

329 .................. URETHRAL STRICTURE AGE >17 W/O CC ............................................................................ 325 Quintile 2. 

330 .................. URETHRAL STRICTURE AGE 0–17 ......................................................................................... 325 Quintile 2. 

333 .................. OTHER KIDNEY & URINARY TRACT DIAGNOSES AGE 0–17 .............................................. 332 Quintile 1. 

334 .................. MAJOR MALE PELVIC PROCEDURES W CC ......................................................................... 335 Quintile 1. 

337 .................. TRANSURETHRAL PROSTATECTOMY W/O CC .................................................................... 306 Quintile 4. 

340 .................. TESTES PROCEDURES, NON-MALIGNANCY AGE 0–17 ....................................................... 339 Quintile 3. 

342 .................. CIRCUMCISION AGE >17 ......................................................................................................... 339 Quintile 3. 

343 .................. CIRCUMCISION AGE 0–17 ....................................................................................................... 339 Quintile 3. 

349 .................. BENIGN PROSTATIC HYPERTROPHY W/O CC ..................................................................... 339 Quintile 3. 

351 .................. STERILIZATION, MALE ............................................................................................................. 339 Quintile 3. 

353 .................. PELVIC EVISCERATION, RADICAL HYSTERECTOMY & RADICAL VULVECTOMY ............ 365 Quintile 4. 

354 .................. UTERINE,ADNEXA PROC FOR NON-OVARIAN/ADNEXAL MALIG W CC ............................. 365 Quintile 4. 

355 .................. UTERINE,ADNEXA PROC FOR NON-OVARIAN/ADNEXAL MALIG W/O CC ......................... 365 Quintile 4. 

356 .................. FEMALE REPRODUCTIVE SYSTEM RECONSTRUCTIVE PROCEDURES ........................... 365 Quintile 4. 

357 .................. UTERINE & ADNEXA PROC FOR OVARIAN OR ADNEXAL MALIGNANCY .......................... 365 Quintile 4. 

358 .................. UTERINE & ADNEXA PROC FOR NON-MALIGNANCY W CC ............................................... 365 Quintile 4. 

359 .................. UTERINE & ADNEXA PROC FOR NON-MALIGNANCY W/O CC ............................................ 365 Quintile 4.

360 .................. VAGINA, CERVIX & VULVA PROCEDURES ............................................................................ 365 Quintile 4. 

361 .................. LAPAROSCOPY & INCISIONAL TUBAL INTERRUPTION ....................................................... 383 Quintile 1. 

362 .................. ENDOSCOPIC TUBAL INTERRUPTION ................................................................................... 383 Quintile 1. 

363 .................. D&C, CONIZATION & RADIO-IMPLANT, FOR MALIGNANCY ................................................. 383 Quintile 1. 

364 .................. D&C, CONIZATION EXCEPT FOR MALIGNANCY ................................................................... 383 Quintile 1. 

370 .................. CESAREAN SECTION W CC .................................................................................................... 383 Quintile 1. 

371 .................. CESAREAN SECTION W/O CC ................................................................................................ 383 Quintile 1. 

372 .................. VAGINAL DELIVERY W COMPLICATING DIAGNOSES .......................................................... 383 Quintile 1. 

373 .................. VAGINAL DELIVERY W/O COMPLICATING DIAGNOSES ...................................................... 383 Quintile 1. 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 47983 

NO VOLUME LTC-DRG CROSSWALK AND QUINTILE ASSIGNMENT FOR FY 2007—Continued 

LTC–DRG Description 

Crosswalked 

LTC–DRG 

Low-volume 

quintile 

assignment 

374 .................. VAGINAL DELIVERY W STERILIZATION &/OR D&C .............................................................. 383 Quintile 1. 

375 .................. VAGINAL DELIVERY W O.R. PROC EXCEPT STERIL &/OR D&C ......................................... 383 Quintile 1. 

377 .................. POSTPARTUM & POST ABORTION DIAGNOSES W O.R. PROCEDURE ............................. 383 Quintile 1. 

378 .................. ECTOPIC PREGNANCY ............................................................................................................ 383 Quintile 1. 

379 .................. THREATENED ABORTION ........................................................................................................ 383 Quintile 1. 

380 .................. ABORTION W/O D&C ................................................................................................................ 383 Quintile 1. 

381 .................. ABORTION W D&C, ASPIRATION CURETTAGE OR HYSTEROTOMY ................................. 383 Quintile 1. 

382 .................. FALSE LABOR ........................................................................................................................... 383 Quintile 1. 

384 .................. OTHER ANTEPARTUM DIAGNOSES W/O MEDICAL COMPLICATIONS ............................... 383 Quintile 1. 

385 .................. NEONATES, DIED OR TRANSFERRED TO ANOTHER ACUTE CARE FACILITY ................ 383 Quintile 1. 

386 .................. EXTREME IMMATURITY OR RESPIRATORY DISTRESS SYNDROME, NEONATE ............. 383 Quintile 1. 

387 .................. PREMATURITY W MAJOR PROBLEMS ................................................................................... 383 Quintile 1. 

388 .................. PREMATURITY W/O MAJOR PROBLEMS ............................................................................... 383 Quintile 1. 

389 .................. FULL TERM NEONATE W MAJOR PROBLEMS ...................................................................... 383 Quintile 1. 

390 .................. NEONATE W OTHER SIGNIFICANT PROBLEMS ................................................................... 383 Quintile 1. 

391 .................. NORMAL NEWBORN ................................................................................................................. 383 Quintile 1. 

392 .................. SPLENECTOMY AGE >17 ......................................................................................................... 197 Quintile 4. 

393 .................. SPLENECTOMY AGE 0–17 ....................................................................................................... 197 Quintile 4. 

396 .................. RED BLOOD CELL DISORDERS AGE 0–17 ............................................................................ 399 Quintile 1. 

402 .................. LYMPHOMA & NON-ACUTE LEUKEMIA W OTHER O.R. PROC W/O CC ............................. 395 Quintile 2. 

405 .................. ACUTE LEUKEMIA W/O MAJOR O.R. PROCEDURE AGE 0–17 ............................................ 404 Quintile 3. 

407 .................. MYELOPROLIF DISORD OR POORLY DIFF NEOPL W MAJ O.R.PROC W/O CC ............... 408 Quintile 4. 

411 .................. HISTORY OF MALIGNANCY W/O ENDOSCOPY ..................................................................... 173 Quintile 2. 

412 .................. HISTORY OF MALIGNANCY W ENDOSCOPY ........................................................................ 173 Quintile 2. 

417 .................. SEPTICEMIA AGE 0–17 ............................................................................................................ 576 Quintile 3. 

422 .................. VIRAL ILLNESS & FEVER OF UNKNOWN ORIGIN AGE 0–17 ............................................... 426 Quintile 1. 

433 .................. ALCOHOL/DRUG ABUSE OR DEPENDENCE, LEFT AMA ..................................................... 523 Quintile 1. 

443 .................. OTHER O.R. PROCEDURES FOR INJURIES W/O CC ........................................................... 445 Quintile 2. 

446 .................. TRAUMATIC INJURY AGE 0–17 ............................................................................................... 445 Quintile 2. 

448 .................. ALLERGIC REACTIONS AGE 0–17 .......................................................................................... 447 Quintile 2. 

451 .................. POISONING & TOXIC EFFECTS OF DRUGS AGE 0–17 ........................................................ 449 Quintile 3. 

455 .................. OTHER INJURY, POISONING & TOXIC EFFECT DIAG W/O CC ........................................... 449 Quintile 3. 

481 .................. BONE MARROW TRANSPLANT ............................................................................................... 394 Quintile 4. 

484 .................. CRANIOTOMY FOR MULTIPLE SIGNIFICANT TRAUMA ........................................................ 1 Quintile 5. 

485 .................. LIMB REATTACHMENT, HIP & FEMUR PROC FOR MULTIPLE SIGNIFICANT TRAUMA .... 487 Quintile 4. 

494 .................. LAPAROSCOPIC CHOLECYSTECTOMY W/O C.D.E. W/O CC .............................................. 493 Quintile 4. 

498 .................. SPINAL FUSION EXCEPT CERVICAL W/O CC ....................................................................... 497 Quintile 5. 

507 .................. FULL THICKNESS BURN W SKIN GRFT OR INHAL INJ W/O CC OR SIG TRAUMA ........... 511 Quintile 1. 

518 .................. PERCUTANEOUS CARDIOVASC PROC W/O CORONARY ARTERY STENT OR AMI ........ 125 Quintile 1. 

520 .................. CERVICAL SPINAL FUSION W/O CC ....................................................................................... 497 Quintile 5. 

522 .................. ALCOHOL/DRUG ABUSE OR DEPENDENCE W REHABILITATION THERAPY W/O CC ..... 521 Quintile 2. 

525 .................. OTHER HEART ASSIST SYSTEM IMPLANT ............................................................................ 468 Quintile 5. 

528 .................. INTRACRANIAL VASCULAR PROCEDURES W PDX HEMORRHAGE .................................. 1 Quintile 5. 

530 .................. VENTRICULAR SHUNT PROCEDURES W/O CC .................................................................... 529 Quintile 5. 

534 .................. EXTRACRANIAL PROCEDURES W/O CC ............................................................................... 500 Quintile 4. 

536 .................. CARDIAC DEFIB IMPLANT W CARDIAC CATH W/O AMI/HF/SHOCK ................................... 517 Quintile 4. 

540 .................. LYMPHOMA & LEUKEMIA W MAJOR O.R. PROCEDURE W/O CC ....................................... 399 Quintile 1. 

546 .................. SPINAL FUSION EXC CERV WITH CURVATURE OF THE SPINE OR MALIG ..................... 499 Quintile 5. 

547 .................. CORONARY BYPASS W CARDIAC CATH W MAJOR CV DX ................................................ 517 Quintile 4. 

548 .................. CORONARY BYPASS W CARDIAC CATH W/O MAJOR CV DX ............................................ 517 Quintile 4. 

549 .................. CORONARY BYPASS W/O CARDIAC CATH W MAJOR CV DX ............................................ 517 Quintile 4. 

550 .................. CORONARY BYPASS W/O CARDIAC CATH W/O MAJOR CV DX ......................................... 517 Quintile 4. 

556 .................. PERCUTANEOUS CARDIOVASC PROC W NON-DRUG-ELUTING STENT W/O MAJ CV 

DX.

125 Quintile 1. 

558 .................. PERCUTANEOUS CARDIOVASCULAR PROC W DRUG-ELUTING STENT W/O MAJ CV 

DX.

125 Quintile 1. 

559 .................. ACUTE ISCHEMIC STROKE WITH USE OF THROMBOLYTIC AGENT ................................. 16 Quintile 3. 

577 .................. CAROTID ARTERY STENT PROCEDURE ............................................................................... 533 Quintile 4 

To illustrate this methodology for 

determining the relative weights for the 

183 LTC–DRGs with no LTCH cases, we 

are providing the following examples, 

which refer to the no volume LTC–DRGs 

crosswalk information for FY 2007 

provided in the chart above. 

Example 1: There were no cases in the 

FY 2005 MedPAR file used for this final 

rule for LTC–DRG 3 (Craniotomy Age 0–

17). Since the procedure is similar in 

resource use and the length and 

complexity of the procedures and the 

length of stay are similar, we 

determined that LTC–DRG 1 

(Craniotomy Age >17 with CC), which is 

assigned to low-volume Quintile 5 for 

the purpose of determining the FY 2007 

relative weights, would display similar 

clinical and resource use. Therefore, we 

assigned the same relative weight of 

LTC–DRG 1 of 1.6835 (Quintile 5) for 


bajohnson on PROD1PC67 with RULES2
47984 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

FY 2007 (Table 11 in the Addendum to 

this final rule) to LTC–DRG 3. 

Example 2: There were no LTCH 

cases in the FY 2005 MedPAR file used 

in this final rule for LTC–DRG 91 

(Simple Pneumonia and Pleurisy Age 0–

17). Since the severity of illness in 

patients with pneumonia and pleurisy is 

similar in patients regardless of age, we 

determined that LTC–DRG 90 (Simple 

Pneumonia and Pleurisy Age >17 

Without CC) would display similar 

clinical and resource use characteristics 

and have a similar length of stay to 

LTC–DRG 91. There were over 25 cases 

in LTC–DRG 90 in the FY 2005 MedPAR 

file data used determining the FY 2007 

LTC–DRG relative weights in this final 

rule. Therefore, it would not be assigned 

to a low-volume quintile for the purpose 

of determining the LTC–DRG relative 

weights. However, under our 

established methodology, LTC–DRG 91, 

with no LTCH cases, would need to be 

grouped to a low-volume quintile. We 

determined that the low-volume 

quintile with the closest weight to LTC–

DRG 90 (0.4958) (refer to Table 11 in the 

Addendum to this final rule) would be 

low-volume Quintile 2 (0.5594) (refer to 

Table 11 in the Addendum to this final 

rule). Therefore, we assigned LTC–DRG 

91 a relative weight of 0.5694 for FY 

2007. We note that we will continue to 

monitor the volume (that is, the number 

of LTCH cases) that have few or no 

LTCH cases to ensure that our no 

volume LTC–DRG crosswalking and 

relative weight assignment results in 

appropriate payments for such cases 

and does not result in an unintended 

financial incentive for LTCHs to 

inappropriately admit these types of 

cases. 

Furthermore, as was proposed, we are 

establishing LTC–DRG relative weights 

of 0.0000 for heart, kidney, liver, lung, 

pancreas, and simultaneous pancreas/ 

kidney transplants (LTC–DRGs 103, 302, 

480, 495, 512, and 513, respectively) for 

FY 2007 in this final rule 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. 

Based on our research, we found that 

most LTCHs only perform minor 

surgeries, such as minor small and large 

bowel procedures, to the extent any 

surgeries are performed at all. Given the 

extensive criteria that must be met to 

become certified as a transplant center 

for Medicare, we believe it is unlikely 

that any LTCHs would become certified 

as a transplant center. In fact, in the 

nearly 20 years since the 

implementation of the IPPS, there has 

never been a LTCH that even expressed 

an interest in becoming a transplant 

center. 

However, if in the future a LTCH 

applies for certification as a Medicareapproved transplant center, we believe 

that the application and approval 

procedure would allow sufficient time 

for us to determine appropriate weights 

for the LTC–DRGs affected. At the 

present time, we would only include 

these six transplant LTC–DRGs in the 

GROUPER program for administrative 

purposes. Because we use the same 

GROUPER program for LTCHs as is used 

under the IPPS, removing these LTC–

DRGs would be administratively 

burdensome. 

Again, we note that, as this system is 

dynamic, it is entirely possible that the 

number of LTC–DRGs with a zero 

volume of LTCH cases based on the 

system will vary in the future. We used 

the best most recent available claims 

data in the MedPAR file to identify zero 

volume LTC–DRGs and to determine the 

relative weights in this final rule. 

Table 11 in the Addendum to this 

final rule lists the LTC–DRGs and their 

respective relative weights, geometric 

mean length of stay, and five-sixths of 

the geometric mean length of stay (to 

assist in the determination of short-stay 

outlier payments under § 412.529) for 

FY 2007. 

We also wish to point out that in 

section VI.A.5. of the preamble of this 

rule, we discuss our revision to the 

regulations for grandfathered HwHs, 

grandfathered hospital satellite 

facilities, and grandfathered satellite 

units at §§ 412.22(f), 412.22(h), and 

412.25(e), respectively. In addition, in 

section VI.A.6. of the preamble of this 

final rule, we discuss our revision and 

clarification to the existing policies 

governing the determination of LTCHs’

CCRs and the reconciliation of high-cost 

and short-stay outlier payments under 

the LTCH PPS based on the proposal 

presented in the FY 2007 IPPS proposed 

rule (71 FR 24126 through 24135). 

5. Summary of Public Comments and 

Departmental Responses 

Comment: Numerous commenters 

opposed the proposed changes in the 

LTC–DRG weights, which they noted 

would result in an approximately 1.4 

percent decrease in estimate aggregate 

payments to LTCHs. Several of the 

commenters noted that LTCHs had been 

subject to a number of ‘‘significant 

Medicare payment reductions in recent 

years,’’ including an estimated 4.2 

percent reduction as a result of the 

reweighting of the LTC–DRGs for FY 

2006; a zero update (as opposed to a 3.4 

percent market-basket increase) in the 

Federal rate for RY 2007; an estimated 

3.7 percent decrease caused by the 

revised short-stay outlier payment 

policy for RY 2007; and, most recently, 

the estimated 1.4 percent reduction as a 

result of the proposed reclassification 

and reweighting of the LTC–DRGs for 

FY 2007. The commenters maintained 

that the cumulative effect of these 

established and proposed Medicare 

payment reductions is not sustainable 

for the LTCH industry and will cause 

much ‘‘volatility’’ for LTCH providers, 

and also restrict access to LTCHs for 

patients. 

One commenter provided a chart that 

indicated that if CMS finalizes the 

proposed LTC–DRG relative weights, 

LTCH industry-wide margins would 

approximate 0 percent. Another 

commenter, an association that 

represents large LTCH chains, urged 

CMS to postpone implementation of the 

proposed FY 2007 reweighting of the 

LTC–DRGs until an analysis of the 

impact of this change on payment 

adequacy, as well as other payment 

changes established for RY 2007, is 

conducted. 

Response: While we understand the 

commenters’ concerns with the 

estimated decrease of 1.4 percent in 

LTCH PPS payments as a result of the 

proposed changes in the LTC–DRGs, 

and relative weights for FY 2007, we did 

not propose any changes in the 

methodology used to determine the 

proposed recalibration of the LTC–DRG 

relative weights for FY 2007. (We note 

that based on the final LTCH–DRG 

relative weights for FY 2007 the 

estimate is a 1.3 percent decrease.) The 

proposed update to the LTC–DRG 

relative weights for FY 2007 is based on 

the proposed Version 24.0 of the CMS 

GROUPER (including the proposed 

changes in the DRG classifications 

relative weights and geometric mean 

length of stay) and FY 2005 LTCH 

claims data. For this final rule, we used 

updated data as described previously. In 

the FY 2003 final rule for the LTCH 

PPS, which first implemented the 

payment system, we described in great 

detail, the methodology for the 

development of the LTC–DRG relative 

weights, and we have reiterated these 

steps in every subsequent rulemaking 

cycle. (When we revised our regulations 

at § 412.535, establishing the LTCH PPS 

rate year, while still publishing the 

LTC–DRG updates on the Federal fiscal 

year (October through September) cycle, 

we continued to include a brief writeup of our LTC–DRG update 

methodology in the annual LTCH PPS 

proposed and final rules and a 

comprehensive description of the policy 

in the annual IPPS proposed and final 

rules (67 FR 55984–55995; 68 FR 


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34131–34132; 69 FR 25681; 69 FR 

48989–48999; 70 FR 24177–24178; 70 

FR 37323–37341; and 71 FR 27808).) 

There has been no methodological 

change in the way in which the LTC–

DRG relative weights are computed 

since the implementation of the LTCH 

PPS. The annual determination of the 

LTC–DRG relative weights is datadriven; that is, based on claims data in 

the most current MedPAR files which 

are derived from patient bills submitted 

by LTCHs. 

We agree with the commenters who 

noted that the LTCH industry has 

indeed been impacted by significant 

changes since the start of the LTCH PPS 

for FY 2003. Since we first established 

the LTCH PPS, the unadjusted Federal 

payment rate, which began at 

$34,956.15, increased to $38,086.64 for 

RY 2006. (The zero percent update 

finalized in the RY 2007 LTCH PPS final 

rule (71 FR 27798) resulted in the 

stabilization of this amount for RY 

2007.) From RY 2005 to RY 2006, there 

was a 5.7 percent increase in estimated 

aggregate LTCH PPS payments (70 FR 

24217). The average Medicare payment 

per case for FY 2003 was reported at 

$26,751, while, for RY 2006, it was 

estimated to be $33,208, which is an 

increase of over 24 percent. 

Significantly, there was a 13.8 percent 

increase in estimated Medicare 

payments to LTCHs in RY 2005 alone. 

The results of the first 2 years of this 

‘‘volatility’’ were aggregate industry 

margins estimated at 7.8 percent for FY 

2003, and for FY 2004, preliminary cost 

report data revealed an estimated 

average Medicare margin of 12.7 

percent, as stated in the RY 2007 LTCH 

PPS final rule (71 FR 27819). 

The commenters noted the Medicare 

payment reductions in recent years, 

including the estimated 4.2 percent 

reduction for FY 2006 due to the 

recalibration of the LTC–DRG weights 

and the estimated 1.4 percent decrease 

in aggregate LTCH PPS payments due to 

the proposed update to the LTC–DRG 

relative weights for FY 2007. As noted 

above, the decrease in average case-mix 

based on the proposed LTC–DRG 

relative weights for FY 2007 as 

compared to FY 2006, as well as the 

decrease in average case-mix from FY 

2006 as compared to FY 2005, which 

were estimated to result in an aggregate 

estimated decrease in LTCH PPS 

payments, were data driven. For this 

final rule they remain data driven as 

well. In the FY 2006 IPPS proposed rule 

(70 FR 23667), we noted that we 

continued to observe a significant 

increase of relatively lower charge cases 

being assigned to LTC–DRGs with 

higher relative weights in the prior year. 

The addition of these lower charge cases 

resulted in a decrease in many of the 

LTC–DRG relative weights from FY 

2005 to FY 2006. This decrease in many 

of the LTC–DRG relative weights, in 

turn, resulted in an estimated decrease 

in LTCH PPS payments from FY 2005 to 

FY 2006. As we explained in that same 

rule, contributing to this increased 

number of relatively lower charge cases 

being assigned to LTC–DRGs with 

higher relative weights in the prior year 

were improvements in coding practices, 

which are typically found when moving 

from a reasonable cost-based payment 

system to a PPS. 

Our analyses of data from the March 

2005 update of the FY 2004 MedPAR 

files, which were used to calculate the 

FY 2006 LTC–DRG relative weights, and 

the most recent update of the FY 2005 

MedPAR files which were used to 

determine the proposed and final FY 

2007 LTC–DRG relative weights 

continue to show an increase of 

relatively lower charge cases being 

assigned to LTC–DRGs with higher 

relative weights in the prior year. As we 

explained in the FY 2006 IPPS final rule 

(70 FR 47335) and the FY 2007 IPPS 

proposed rule (71 FR 24413), the impact 

of including cases with relatively lower 

charges into LTC–DRGs that had a 

relatively higher relative weight in the 

previous fiscal year’s GROUPER is a 

decrease in the average relative weight 

for those LTC–DRGs, which, in turn, 

may result in an estimated aggregate 

decrease in LTCH PPS payments. 

The commenters also mentioned the 

zero update to the RY 2007 standard 

Federal rate as one of the ‘‘significant 

Medicare payment reductions in recent 

years.’’ In the RY 2007 LTCH PPS final 

rule (71 FR 27819 through 27827), we 

explained our rationale for establishing 

a zero percent update to the standard 

Federal rate for the 2007 LTCH PPS rate 

year, which was based on the most 

recent estimate in the Rehabilitation, 

Psychiatric and Long-Term Care (RPL) 

market basket offset by an adjustment 

for changes in coding practices that are 

unrelated to case mix, rather than solely 

using the most recent estimate of the 

RPL market basket to update the RY 

2006 Federal rate. This market basket 

offset resulted from a number of factors 

that included our ongoing monitoring 

activities, which prompted us to 

examine the changes in LTCHs’ patient 

case-mix index and margins since the 

inception of the LTCH PPS for FY 2003 

(67 FR 56014). 

First, we noted that there has been 

tremendous growth in the number of 

LTCHs reimbursed by Medicare. 

Specifically, the number of LTCHs 

almost doubled from approximately 200 

LTCHs in FY 2003 to 378 LTCHs at the 

start of FY 2005. In addition, Medicare 

spending for LTCHs has also grown 

rapidly, as noted in MedPAC’s June 

2004 Report to Congress (page 122). 

Rapid increases in LTCH growth and 

Medicare spending under the LTCH 

PPS, in conjunction with the fact that 

over 98 percent of LTCHs are currently 

paid based fully on the Federal rate 

(rather than choosing to be paid under 

a blend of the reasonable cost-based 

(TEFRA) payment amount and the 

LTCH PPS Federal rate payment 

amount), prompted us to examine 

changes in LTCHs’ patient case-mix 

index and margins under the LTCH PPS. 

We believed the zero percent update 

factor for RY 2007, which was based on 

the most recent estimate of the RPL 

market basket at that time, adjusted to 

account for coding changes, was 

supported by our findings regarding the 

case-mix index, Medicare margins, and 

patient census based on the most recent 

complete LTCH data. 

As we explained in considerable 

detail in the RY 2007 final rule for the 

LTCH PPS (71 FR 27818 through 

27824), a LTCH’s case-mix index is 

defined as the case-weighted average 

LTC–DRG relative weight for all its 

discharges in a given period. Changes in 

the case-mix index consist of two 

components: ‘‘real’’ case-mix index 

changes and ‘‘apparent’’ case-mix index 

changes. Real case-mix index increase is 

defined as the increase in the average 

LTC–DRG relative weights resulting 

from the hospital’s treatment of more 

resource intensive patients. Apparent 

case-mix index increase is defined as 

the increase in computed case-mix 

index that is due to changes in coding 

practices (including better 

documentation of the medical record by 

physicians and more complete coding of 

the medical record by coders). Observed 

case-mix index increase is defined as 

real case-mix index increase plus the 

apparent case-mix index increase. 

If LTCH patients have more costly 

impairments, lower functional status, or 

increased comorbidities, and thus 

require more resources in the LTCH, we 

consider this a real change in case-mix. 

Conversely, if LTCH patients have the 

same impairments, functional status, 

and comorbidities but are coded 

differently resulting in higher payment, 

we consider this an apparent change in 

case-mix. We believe that changes in 

payment rates should accurately reflect 

changes in LTCHs’ true cost of treating 

patients (real case-mix index increase), 

and should not be influenced by 

changes in coding practices (apparent 

case-mix index increase). Apparent 

case-mix index increase results in a case 


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being grouped to a LTC–DRG with a 

higher weight than it would be without 

such changes in coding practices, which 

results in a higher payment to the LTCH 

that does not necessarily reflect the true 

cost of treating the patient. Therefore, in 

the RY 2007 LTCH PPS final rule (71 FR 

27798) under the broad discretionary 

authority conferred upon the Secretary 

by section 123 of the BBRA as amended 

by section 307(b) of the BIPA to include 

appropriate adjustments, including 

updates, in the establishment of the 

LTCH PPS, we revised the annual 

update to the LTCH PPS standard 

Federal rate set forth at § 412.523(a)(2) 

for the 2007 LTCH PPS rate year to 

adjust the payment amount for LTCH 

inpatient hospital services to eliminate 

the effect of coding or classification 

changes that do not reflect real changes 

in LTCHs’ case-mix. 

Our determination to specifically 

provide a zero update resulted from data 

analysis by 3M Health Information 

Systems (3M) regarding changes in casemix and coding since the 

implementation of the LTCH PPS, based 

on the most recently available data, 

which compared FY 2003 LTCH claims 

data from the first year of 

implementation of the PPS with FY 

2004 LTCH claims data, and also looked 

at FY 2001 claims data (generated prior 

to the implementation of the LTCH 

PPS). (The FY 2001 data was the same 

LTCH claims data used to develop the 

LTCH PPS.) The analysis indicated, 

among other things, that the average 

annual case-mix index increase from FY 

2001 to FY 2003 was 2.75 percent. Since 

coding of diagnoses was not a factor in 

determining payments under the former 

reasonable cost-based (TEFRA) payment 

system, and since payments were not 

directly tied to diagnosis codes, there 

was no incentive for LTCHs to attempt 

to influence payments through changes 

in coding practices. Therefore, it was 

reasonable to assume that the observed 

2.75 percent change in case-mix in the 

years prior to the implementation of the 

LTCH PPS represent the value for the 

real case-mix index increase (that is, we 

assumed that the 2.75 percent increase 

in case-mix is due to treatment of more 

resource intensive patients, rather than 

to improvements in documentation or 

more complete coding of the medical 

record during this period). Using the 

average annual 2.75 percent observed 

case-mix index increase as a baseline, 

we separated the computed case-mix 

index increase between FY 2003 and FY 

2004 into the real case-mix index 

increase, which is based on the 

treatment of more resource intensive 

patients, and the apparent case-mix 

index increase, due to improvements in 

documentation and coding practices. 

As we stated in the RY 2007 LTCH 

PPS final rule (71 FR 27820), the 

calculated observed case-mix index 

increase between FY 2003 and FY 2004 

was 6.75 percent. Assuming that the real 

case-mix index increase observed (on 

average) from FY 2001 to FY 2003 

remained relatively constant into FY 

2004, then the difference of 4.0 percent 

(6.75 percent minus 2.75 percent) 

represented the apparent case-mix index 

increase that was due to improvements 

in documentation and coding. This was 

considerably higher than the 0.34 

percent behavioral offset originally 

estimated by the CMS Office of the 

Actuary, which was used in the 

development of the FY 2003 LTCH PPS 

standard Federal rate (67 FR 56033). 

Therefore, we believed that it was 

appropriate that the market basket be 

offset by an adjustment to account for 

changes in coding practices that do not 

reflect changes in real case mix. This 

adjustment was implemented to ensure 

that the LTCH PPS payment rates 

continue to reflect, as closely as 

possible, the true costs of treating LTCH 

patients. It was our intent that such an 

adjustment to the most recent estimate 

of the LTCH PPS market basket would 

eliminate the effect of coding or 

classification changes that did not 

reflect real changes in LTCHs’ case-mix 

in prior years. 

Regarding the impact of the revised 

short-stay outlier policy on Medicare 

payments to LTCHs, we continue to 

believe that the revisions we established 

to the short-stay outlier payment 

adjustments in the RY 2007 LTCH PPS 

final rule were highly appropriate and 

that they provide fair and reasonable 

payment for short-stay patients in 

LTCHs, which are required to meet the 

same certification criteria as short-term 

acute care hospitals set forth in section 

1861(e) of the Act and generally have an 

average length of stay of greater than 25 

days. Therefore, our present policy 

under the short-stay outlier policy at 

§ 412.529, effective for discharges 

beginning on or after July 1, 2006, is to 

base Medicare payment on the least of 

100 percent of the estimated costs of the 

discharge, 120 percent of the LTC–DRG 

per diem payment amount multiplied 

by the length of stay, the full LTC–DRG 

payment, or a LTCH PPS payment based 

on a blend of the IPPS-comparable per 

diem payment amount (capped at the 

full IPPS comparable payment amount) 

and a payment based on 120 percent of 

the LTC–DRG per diem amount. 

We believe that this finalized policy 

clearly demonstrates our rationale, 

which is that as the length of a shortstay outlier case increases, the case 

begins to resemble a more ‘‘typical’’

LTCH stay as defined under section 

1886(d)(1)(B)(IV)(I) of the Act and 

envisioned by the statutes authorizing 

the establishment of the LTCH PPS. 

Furthermore, the estimated 3.7 percent 

decrease in payments cited by the 

commenters will only have an impact 

on payments to those LTCHs that 

continue to admit a large number of 

very short-stay patients. We believe that 

the previous short-stay outlier policy, 

under which Medicare paid the least of 

120 percent of the estimated cost of the 

case, 120 percent of the per diem LTC–

DRG multiplied by the length of stay, or 

the full LTC–DRG, inadvertently 

provided an incentive for a LTCH to 

inappropriately admit patients who 

could otherwise have been treated in 

acute care hospitals and paid for under 

the IPPS. Therefore, we believe the 

provisions of the short-stay outlier 

policy that were finalized in the RY 

2007 LTCH PPS final rule (71 FR 27845 

through 27872) will result in fair and 

equitable payment for short-stay 

patients at LTCHs. 

In response to the commenter who 

provided a chart that indicated 

industry-wide margins of approximately 

zero percent because of the proposed 

changes in the LTC–DRG relative 

weights that are anticipated to result 

from the 1.4 percent payment reduction, 

we continue to believe that our case-mix 

analysis (case-mix index) and Medicare 

margins analysis are sound. In the RY 

2007 final rule for the LTCH PPS, we 

calculated ‘‘revenue-weighted’’

Medicare margins, which are the sum of 

hospital inpatient Medicare revenue 

(payments) minus the sum of hospital 

inpatient Medicare expenses (costs) 

divided by the sum of hospital inpatient 

Medicare revenue (payments). This 

margin analysis, which is also utilized 

by MedPAC in its analyses, is used to 

evaluate the overall financial status of 

LTCHs in general. In our analysis of the 

latest available LTCH data, we found 

that LTCH Medicare margins for FY 

2003 (the first year of the LTCH PPS) 

were 7.8 percent, and preliminary data 

for FY 2004 based on the most recent 

HCRIS data revealed an even higher 

Medicare margin of 12.7 percent. 

Moreover, our analysis of LTCHs’

payments and costs per discharge based 

on the latest available cost report data 

supports our adjustment to account for 

changes in coding practices that do not 

reflect changes in real case mix because 

it shows that, while payments (revenue) 

increased approximately 15 percent 

from FY 2002 to FY 2003, costs 


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(expenses) per discharge increased by 

only 8 percent for the same period. 

Thus, payments to LTCHs from FY 

2002 to FY 2003 increased almost twice 

as much as the increase of costs for the 

same period. We also noted that even 

though we established a zero update to 

the Federal payment rate for RY 2007, 

we continue to believe that, based on 

the sizeable Medicare margins among 

LTCHs, the standard rate for the RY 

2007 LTCH PPS will not affect 

beneficiary access to LTCH services 

because LTCHs will continue to be paid 

adequately to reflect the cost of 

resources needed to treat Medicare 

beneficiaries. We also note that 

MedPAC’s March 2006 Report to 

Congress on Medicare Payment Policy 

included similar data on margins and, 

based on its indepth evaluation of 

payment adequacy for LTCHs for 2006, 

MedPAC recommended that there be no 

update to the LTCH PPS Federal rate for 

RY 2007. 

In addition, we do not believe that it 

would be appropriate to ‘‘postpone 

implementation’’ of the proposed 

reweighting of the LTC–DRGs pending 

an analysis of the impact on LTCH 

payment adequacy of this change, as 

well as other payment changes 

established for LTCHs for RY 2007. The 

annual recalibration of the LTC–DRG 

relative weights, which is based on 

patient data, is one of the cornerstones 

of all prospective payment systems. To 

reiterate, we believe that the policies 

finalized for RY 2007, including the 

zero percent update to the standard 

Federal rate and the payment 

adjustment for short-stay outlier cases, 

do not provide any impediment to the 

ability of LTCHs to continue to maintain 

the quality or the availability of 

appropriately delivered LTCH services 

to Medicare beneficiaries. 

Comment: Several comments 

questioned the methodology that we 

used that distinguishes between 

payment ‘‘reductions’’ resulting from 

the zero update to the standard Federal 

rate finalized in the RY 2007 LTCH PPS 

final rule and payment reductions 

resulting from the proposed reweighting 

of the LTC–DRGs for FY 2007. One 

commenter asserted that CMS has 

utilized the same rationale as a basis to 

propose to reduce the FY 2007 LTC–

DRG relative weights that were used to 

apply a zero percent update in the RY 

2007 LTCH PPS final rule. The 

commenters believed CMS has doublecounted the same phenomenon. 

Another commenter stated that, 

because the LTC–DRG relative weights 

are not updated in a budget-neutral 

manner, through the annual 

recalibration of the weights, the LTC–

DRG system will ‘‘self-correct over 

time’’ without the need for any lowering 

of the Federal payment rate. The 

commenter believed that this nonbudget neutral weight recalibration will 

continue to correct for the case-mix 

creep until coding improvement reaches 

a plateau, at which point annual casemix variation will reflect actual 

variations in case-mix intensity. Citing 

our justification of ‘‘apparent’’ as 

opposed to real case-mix increase based 

on FY 2004 LTCH data for the zero 

percent update to the Federal rate for 

RY 2007, the commenter believed that 

CMS has overpenalized LTCHs by a net 

4.2 percent. The commenter 

recommended that CMS work with the 

industry to establish an update system 

that eliminates the possibility of ‘‘over 

reduction’’ due to case-mix creep by one 

of the following options: implementing 

a budget neutral recalibration system 

and address case-mix creep through the 

update; or alternatively, maintaining the 

current non-budget neutral weight 

recalibration system but foregoing any 

future Federal rate update reduction for 

case-mix creep. 

Response: The commenters have 

expressed concern that, if we finalize 

the proposed change in the FY 2007 

LTC–DRG relative weights, the change 

would result in an estimated 1.4 percent 

decrease in payments. Because we have 

already finalized the zero update to the 

RY 2007 standard Federal rate, the 

commenters believe we will have 

reduced payments to LTCHs twice for 

the same phenomenon. We would like 

to remind the commenters that the ‘‘zero 

percent’’ update to the Federal rate for 

RY 2007 did not reduce LTCH PPS 

payments from their previous level. 

Instead, the Federal rate remained at 

$38,086.04 from RY 2006 to RY 2007. 

Furthermore, we disagree and do not 

believe that LTCHs are being penalized 

twice, once through adjustment of the 

standard Federal rate and again due to 

the proposed and finalized recalibration 

of the LTC–DRG relative weights for FY 

2007. 

In the LTCH PPS RY 2007 final rule, 

we addressed a similar allegation by 

commenters that we were ‘‘unfairly 

penalizing’’ LTCHs twice in proposing 

the zero percent update to the standard 

Federal rate as a remedy for 

inappropriate Medicare payments to 

LTCHs resulting from ‘‘case-mix creep’’

(that is, the ‘‘apparent’’ case-mix index 

increase) between FYs 2003 and 2004. 

At that time, several commenters stated 

that CMS had already corrected any 

coding issues from FY 2004 by the 

annual recalibration of the LTC–DRGs 

for FY 2006 based on case-mix changes 

from FYs 2003 and 2004, which resulted 

in an estimated decrease of 4.2 percent 

in payments to LTCHs. 

In the RY 2007 LTCH PPS final rule 

(71 FR 27882), we presented the 

explanation of the distinction between 

the annual reweighting of the LTC–

DRGs, which we expect to result in 

appropriate payments for the 

forthcoming fiscal year’s LTCH 

discharges, and determinations 

regarding the appropriate application of 

adjustments to the market basket 

increase applied to the standard Federal 

rate which was established to account 

for payments made in a prior year that 

were based on improved coding rather 

than increased patient severity (71 FR 

27821). At that time, we reviewed the 

discussion in the FY 2006 IPPS final 

rule (70 FR 47701–47702) in which we 

estimated that a payment reduction of 

¥4.2 percent would result from the FY 

2006 recalibration of the LTC–DRG 

relative weights, which were based on 

LTCH claims data from the FY 2004 

MedPAR file. We stated ‘‘* * * [t]hus 

FY 2004 LTCH claims data, which 

reflected improved coding, were used to 

determine the LTC–DRG relative 

weights used to pay LTCH PPS 

discharges occurring during FY 2006. 

While it is true that the reweighting of 

the LTC–DRGs using FY 2004 LTCH 

claims served to update the relative 

weights based on actual claims data in 

each LTC–DRG, which also reflects 

coding improvements that occurred in 

FY 2004, the recalibration of LTC–DRG 

weights only corrects for any coding 

improvement for the purpose of making 

accurate LTCH PPS payments in FY 

2006.’’ (71 FR 27822) 

However, annual recalibration does 

not serve to account for payments that 

were made based on improved coding 

(rather than patient severity) in prior 

years. The case-mix adjustment to the 

market basket in determining the RY 

2007 Federal rate is meant to reduce 

current payments to account for the 

increase payments that occurred in FY 

2004 that resulted from the CMI 

increase that is attributable to ‘‘casemix’’ creep in that year 71 FR 27822). 

We also explained the rationale and 

computations underlying our update for 

RY 2007 in that same final rule: ‘‘In the 

RY 2007 LTCH PPS proposed rule, we 

proposed to offset the market basket by 

an amount equal to the increase in case 

mix that was due solely to improved 

documentation and coding rather than 

changes in real case mix. At the time of 

the proposed rule, that increase was 

within rounding error of the market 

basket, and therefore resulted in a 

proposed Federal rate for RY 2007 that 

was equal to the RY 2006 Federal rate, 

and not a reduction to the RY 2006 


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47988 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

Federal rate.’’ (71 FR 27821). Therefore, 

this policy determination regarding the 

market basket increase of zero percent 

for RY 2007 was based on changes in 

the LTCHs’ case-mix indices in 

conjunction with a broader analysis of 

trends in the LTCH industry (noted 

most recently by MedPAC in the 

Commission’s March 2006 Report to the 

Congress (page 211)) and in particular, 

driven by a detailed analysis of LTCH 

margins since the implementation of the 

LTCH PPS. As we stated in that same 

final rule, we believe that, in 

determining the Federal rate update for 

RY 2007, it is appropriate to apply an 

adjustment to the most recent estimate 

of the LTCH PPS market basket to 

eliminate the effects of coding and 

classification changes that do not reflect 

changes in real case-mix. This 

adjustment is necessary to account for 

prior year payments that were made 

based on improved coding practices 

(rather than increased patient severity) 

(71 FR 27821). Furthermore, we note 

that FY 2004 LTCH claims data were 

used to determine the adjustment to the 

market basket to account for changes in 

coding practices in establishing the zero 

percent update to the Federal rate for 

RY 2007, while FY 2005 LTCH claims 

data were used to determine the 

proposed and final FY 2007 LTC–DRG 

relative weights. Because LTCH claims 

data from different years were used to 

determine the two adjustments noted by 

the commenters, we further disagree 

that we ‘‘double counted the same 

phenomenon.’’

Regarding our margins analysis, based 

on data from the LTCHs’ cost reports 

received as of December 31, 2005, 

updated LTCH margins analysis for the 

LTCH PPS RY 2007 final rule continued 

to show high Medicare margins among 

LTCHs since the implementation of the 

LTCH PPS in FY 2003. As noted in the 

RY 2007 LTCH PPS final rule, ‘‘[w]e 

calculated ‘revenue-weighted’ Medicare 

margins, which are the sum of hospital 

inpatient Medicare revenue (payments) 

minus the sum of hospital inpatient 

Medicare expenses (costs) divided by 

the sum of hospital inpatient Medicare 

revenue (payments). This margin 

calculation, also utilized by MedPAC in 

its analyses, is used to evaluate the 

overall financial status of LTCHs in 

general. In an analysis of the latest 

available LTCH cost reports, we found 

that LTCH Medicare margins for FY 

2003 (the first year of the LTCH PPS) 

were 7.8 percent and preliminary cost 

report data for FY 2004 based on the 

most recent update to the cost report 

data in HCRIS reveal an even higher 

Medicare margin of 12.7 percent. For 

periods prior to the implementation of 

the LTCH PPS (that is, FY 1999 through 

FY 2002), we found that aggregate 

Medicare margins ranged between a 

minimum of ¥2.3 percent in FY 2000, 

and a maximum of 1.5 percent in FY 

2002.’’ (71 FR 27823). 

We wish to emphasize that, as we 

specified in the RY 2007 LTCH PPS 

proposed rule, the large observed 

increase in LTCH case-mix was not 

accompanied by a corresponding 

increase in Medicare costs. This was 

consistent with our belief expressed 

earlier that a significant part of this 

observed increase in case-mix was 

‘‘apparent’’ and not ‘‘real.’’ In 

conjunction with an increase in real 

case-mix (that is, patient severity), we 

would have expected to see a significant 

increase in costs per discharge, even 

taking into account LTCH operating 

efficiencies, to pay for the resources 

needed to treat sicker patients. 

Consistent with MedPAC’s most recent 

research discussed in its March 2006 

Report to Congress (section 4C), our 

margins analysis indicated that, in spite 

of the estimated real increase in casemix (severity of patients), payments to 

LTCHs under the LTCH PPS are 

generally more than adequate to cover 

the Medicare costs of the inpatient 

hospital services provided to LTCH 

patients. 

Therefore, for the reasons discussed 

above, we disagree with the commenters 

who believe that we ‘‘double counted 

the same phenomenon.’’ To summarize, 

the purpose of the adjustment to the 

market basket which was to account for 

changes in coding practices that 

resulted in a zero percent update to the 

Federal rate for RY 2007 and the 

changes in payments that will result 

from the proposed and final reweighting 

of the LTC–DRGs are different. 

Specifically, the objective of our 

adjustment to the standard Federal rate 

update for RY 2007 was to adjust 

payments to account for prior year 

payments made by the Medicare 

program that were due to changes in 

coding practices, that did not reflect 

actual costs of beneficiary care. 

However, the annual recalibration of the 

relative weights for LTC–DRGs reflects 

the variation in coding practices and 

charges from the previous year and it 

helps ensure that the LTC–DRG relative 

weights in the upcoming fiscal year will 

result in appropriate payments to 

LTCHs for the resources they expend to 

treat patients. This was the case for FY 

2006, when LTC–DRG relative weight 

recalibrations were estimated to result 

in a payment decrease of 4.2 percent 

and it was also the case for the 

estimated 1.4 percent decrease based on 

the proposed LTC–DRG relative weights 

for FY 2007. It is also the case for the 

estimated 1.3 percent decrease in this 

final rule due to the recalibration of the 

LTC–DRG relative weights. 

Therefore, in response to the 

commenter who presented an ‘‘either/ 

or’’ scenario suggesting that we should 

adjust payments based on case-mix 

variation through the present (that is, 

not budget neutral) recalibration of the 

LTC–DRG relative weights but forego 

any future Federal rate update for casemix creep, or we should address ‘‘casemix creep’’ through the annual update 

in the Federal rate but implement a 

budget neutral recalibration system, we 

do not believe that this approach is 

appropriate, given that, as discussed in 

greater detail above, the purposes of the 

case-mix adjustments in each context 

are distinct. It is possible that if coding 

practices stabilize and reach ‘‘a 

plateau,’’ as one of the commenters 

suggested, and case-mix variation only 

reflects real variations in case-mix 

intensity, the ‘‘self-correcting’’

mechanism of the annual recalibrations 

of LTC–DRG relative weights may be a 

reliable indication of actual costs at 

LTCHs by DRG. However, we emphasize 

that there is a distinct difference 

between the payment adjustments that 

could result from data-driven 

determinations that we consider, as 

described earlier, when we promulgate 

our policy regarding the annual 

application of the market basket update 

to the standard Federal rate and the 

data-driven effects of the recalibration of 

the LTC–DRG relative weights. 

Moreover, we do not believe that the 

zero update to the standard Federal rate 

implemented for RY 2007, which was 

intended to adjust for payments that 

were reflective of payments that were 

made based on improved coding rather 

than patient severity in 2004, and the 

reweighting of the relative weights for 

the LTC–DRGs, which would only 

address making appropriate payments 

for FY 2007, have resulted in an ‘‘over 

reduction’’ of payments to LTCHs, or 

overpenalized the LTCH industry. 

As we have stated most recently in 

the RY 2007 LTCH PPS final rule, we 

discussed a potential framework to 

update payments to LTCHs that would 

account for appropriate factors that 

affect efficient delivery of services and 

care to Medicare beneficiaries (71 FR 

27818), and we have solicited comments 

on the presentation of a model for such 

a framework presented in Appendix A 

of that final rule. Presently, however, in 

the absence of a more comprehensive 

update framework, we believe that it is 

necessary and appropriate for us to 

evaluate the need of applying an 


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adjustment to the full market-basket 

increase, based upon the best available 

data and policy considerations. 

Similarly, we believe it is appropriate to 

update the LTC–DRG relative weights 

based on the latest available data 

because the more recent data ensure that 

the LTC DRG relative weights for FY 

2007 best reflect the resources actually 

used in the treatment of LTCH patients. 

Comment: Several commenters 

discussed the impact of policies that we 

proposed under the IPPS for short-term, 

acute care hospitals (that is, the 

adoption of severity-adjusted DRGs; and 

the implementation of HSRVcc (costbased weights) methodology for 

calibration of DRG weights) in their 

evaluation of the proposed 1.4 decrease 

in the LTC–DRG payments based on the 

proposed LTC–DRG changes for FY 

2007. Both commenters urged us not to 

implement the proposed LTC–DRG 

relative weights because they believe 

that the discussion of the severityadjusted DRGs in the proposed rule 

emphasized the fact that the LTC–DRG 

classifications, as they currently exist, 

do not accurately capture the full 

measure of severity for LTCH patients. 

One commenter commissioned a 

study by the Lewin Group that utilized 

claims data from the FY 2005 MedPAR 

file and cost report data from FY 2003 

to simulate the HSRVcc methodology 

set forth in the proposed rule. The 

commenter stated that the result was 

that, rather than a estimated 1.4 percent 

payment reduction, the HSRVcc method 

of determining LTC–DRG relative 

weights resulted in an estimated 1.5 

percent increase in LTCH PPS 

payments. The commenter added that 

this indicates that there can be 

reasonable differences as to what is the 

most accurate method of establishing 

relative weights under PPSs and that the 

Secretary should adjust the LTC–DRG 

weights this year on a budget-neutral 

basis, thus eliminating the estimated 1.4 

percent decrease based on the proposed 

LTC–DRG relative weights. The 

commenter recommended that, although 

the authorizing legislation contemplates 

that CMS use the most recently 

available LTC–DRG weights for an 

annual update, the Secretary could use 

his broad authority to modify the LTC–

DRG payments, as appropriate, and in 

order to accurately reflect current LTCH 

patient care. The commenter believed 

that the FY 2006 LTC–DRG relative 

weights should be maintained for FY 

2007 because they more accurately 

account for the expected resources to be 

used by LTCH patients in FY 2007. 

Another commenter noted that, based 

on the discussion in the FY 2007 

proposed rule, CMS believes that 

severity-adjusted DRGs would improve 

the accuracy of the DRG system under 

the IPPS, and consequently, the 

commenter believed that, for FY 2008, 

severity-adjusted LTC–DRGs could be 

considered because they may better 

account for differences in severity of 

illnesses and associated costs across 

hospitals. This commenter further stated 

that higher weighted LTC–DRGs (and 

the LTCHs that treat them) are more 

vulnerable to the payment reductions 

proposed for FY 2007 based on 

proposed LTC–DRG relative weights 

because payment rates for higher acuity 

LTCH patients will be diluted by the FY 

2005 upcoding of many lower severity 

cases to the higher weighted DRGs. In 

addition, the commenter pointed to the 

revised short-stay outlier policy 

established in the RY 2007 LTCH PPS 

final rule which, they believe, is 

intended to reduce the number of loweracuity patients being treated in LTCHs, 

and stated that those LTCH patients that 

are not short-stay outlier cases will be 

more typical of LTCH patients and, 

therefore, have higher acuity. The same 

commenter also mentioned that the FY 

2005 data that are being proposed to be 

used to reweight the LTC–DRGs for FY 

2007 represent a system ‘‘still in flux’’

because the system is still transitioning 

to full payment under the LTCH PPS 

and only a portion of each case is being 

paid based on LTC–DRGs. For these 

reasons, the commenter urged CMS to 

postpone further LTC–DRG rate 

reductions and instead recommended 

that CMS address coding improvements 

comprehensively in FY 2008 under the 

LTCH PPS in the context of the 

improved severity measures proposed 

under the IPPS for FY 2008 (or earlier). 

Response: We understand that the 

commenters are concerned with the 1.4 

percent decrease in estimated 

aggregated LTCH PPS payments for FY 

2007 due to the proposed reweighting of 

the LTC–DRGs. We also understand that 

the commenters believe that the 

adoption of a severity-adjusted patient 

classification system under the LTCH 

PPS applied to the LTC–DRGs and the 

use of cost-based weights (HSRVcc) 

methodology could result in a different 

estimated aggregate payment change for 

FY 2007. However, as we discussed in 

greater detail below, we do not agree 

that the FY 2006 relative weights would 

more accurately represent resource use 

by LTCH patients for FY 2007 and that 

it would be necessary or appropriate to 

postpone the finalization of the annual 

reweighting of the LTC–DRGs. The 

current (FY 2006) LTC–DRG relative 

weights were determined based on FY 

2004 LTCH claims data from the 

MedPAR files. For FY 2007, we 

proposed to use our existing relative 

weight methodology (established when 

the LTCH PPS was implemented for FY 

2003) and FY 2005 LTCH claims data 

from the MEDPAR files to recalibrate 

the LTC–DRG relative weights, as these 

were currently the most recent complete 

LTCH claims data. As was proposed, for 

this final rule, we are using the March 

2006 update of the FY 2005 MedPAR 

files because this is currently the most 

recent and complete LTCH claims data. 

We believe that the FY 2005 data are the 

best LTCH data available that reflect 

LTCHs’ current treatment practice and 

coding patterns. Therefore, because the 

FY 2005 LTCH claims data better 

reflects current LTCH behavior than the 

FY 2004 LTCH claims data that was 

used to determine the FY 2006 LTC–

DRG relative weights, we believe that 

using this updated (FY 2005) LTCH 

claims data with our existing relative 

weight methodology will result in LTC–

DRG relative weights for FY 2007 that 

will best reflect the resources actually 

utilized by LTCHs in treating their 

Medicare patients. 

With respect to the accuracy of the 

current LTCH–DRG system, we note the 

following. For FY 2003, we decided to 

adopt the current LTC–DRG system 

stating, ‘‘the LTC–CMS–DRG system is a 

system that is familiar to hospitals 

because it is based on the current DRG 

system under the acute care hospital 

inpatient prospective payment system. 

We believe that the familiarity of the 

LTC–CMS–DRG model may best 

facilitate the transition from the 

reasonable cost-based system to the 

prospective payment system as well as 

providing continuity in payment 

methodology across related sites of care 

(for example, an acute care 

hospitalization for a patient with a 

chronic condition)’’ (67 FR 55966). 

However, we have noted that we 

believed that there may be significant 

advantages in the use of severityadjusted LTC–DRGs. In fact, when we 

were developing the LTCH PPS for FY 

2003, we seriously considered using a 

specially modified version of the APR–

DRGs (67 FR 55966–55967). At that 

time, we stated: 

‘‘The LTC–APR–DRGs, a condensed 

version of 3M’s all-patient refined DRGs 

(APR–DRGs) for acute care hospitals, 

was developed by 3M Health 

Information Systems, for exclusive use 

in LTCHs. The LTC–APR–DRG system 

was designed to reflect the clinical 

characteristics of LTCH patients. This 

case-mix classification model contains 

26 base LTC–APR–DRGs, subdivided by 

4 severity of illness levels to yield 104 

classification levels. In this system, the 


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patient’s secondary diagnoses, their 

interaction, and their clinical impact on 

the primary diagnosis determine the 

severity level assigned to each of the 26 

LTC–APR–DRGs’’ (67 FR 55966). 

When we decided to use the same 

patient classification system as the IPPS, 

following a comprehensive analysis of 

both the LTC–APR–DRGs and the 

existing DRG system (modified by the 

use of quintiles for low volume DRGs) 

for the particular purposes of patient 

classification at LTCHs, we indicated 

that we believed that either 

classification system would result in 

appropriate payments for LTCHs under 

the PPS. However, we noted several 

issues to consider concerning the LTC–

APR–DRG system, including—

‘‘* * * its complexity, its clinical 

subjectivity, and its utility as it relates 

to other Medicare prospective payment 

systems. The LTC–APR–DRG model 

provides a clinical description of the 

population of LTCHs, patients 

exhibiting a range of severity of illness 

with multiple comorbidities as 

indicated by secondary diagnoses. The 

clinical interaction of the primary 

diagnosis with these comorbidities 

determines the severity level of the 

primary diagnoses, resulting in the final 

assignment to a LTC–APR–DRG by the 

GROUPER software designed for this 

system’’ (67 FR 55966). 

We further noted that ‘‘* * * 

determining whether particular 

comorbidities increase the cost of a case 

for a LTCH patient is complicated by the 

nature of the clinical characteristics of 

these patients. More specifically, many 

LTCH patients have numerous 

conditions that may not all be relevant 

to the cost of care for a particular 

discharge. Although the patient actually 

has a specific condition, including this 

condition among secondary diagnoses 

coded under the LTC–APR–DRG system 

may assign an inaccurate severity level 

to the primary diagnosis and result in 

inappropriate LTC–APR–DRG payment. 

We also believe that reliance on existing 

comorbidity information submitted on 

LTCH bills could result in significant 

variation in the assignment of the 

specific LTC–APR–DRGs’’ (67 FR 

55967). 

We concluded our explanation in the 

FY 2003 final rule for the LTCH PPS by 

stating that ‘‘[e]ven though we are using 

LTC–DRGs in the LTCH prospective 

payment system in this final rule, we 

may have the opportunity to propose a 

severity-adjusted patient classification 

for LTCHs in the future, particularly if 

the acute care hospital inpatient 

prospective payment system moves in 

this direction’’ (67 FR 55967). As we 

noted in the FY 2007 IPPS proposed 

rule, if and when a severity-adjusted 

patient classification system is adopted 

under the IPPS, we would need to 

consider whether to propose revisions 

to the patient classification system used 

under the LTCH PPS. Any proposed 

changes to the patient classification 

system would be done through notice 

and comment rulemaking (71 FR 

24051). Subsequently, in 2005, MedPAC 

recommended we refine the entire 

inpatient acute care CMS DRG system to 

take into account severity of illness and 

apply HSRV weights to DRGs. However, 

we believe that it is advantageous to the 

LTCH community to wait for CMS to 

first finalize its policies regarding any 

refinements to the DRG system for the 

IPPS so that we can fully analyze what 

the effects of such changes would be on 

LTCH PPS payments. To the extent any 

changes for severity-adjusted DRGs for 

the IPPS system have been finalized, an 

analysis could then be performed to 

determine whether it is appropriate to 

propose the same severity-adjusted 

patient classification for LTCHs. As we 

stated in the FY 2007 IPPS proposed 

rule: 

‘‘At that time, we would need to 

consider whether to propose revisions 

to the patient classification system 

under the LTCH PPS. Any proposed 

changes to the patient classification 

system would be done through notice 

and comment rulemaking’’ (71 FR 

24051). 

The commenters cited the virtues of 

the severity-adjusted DRGs and one 

commenter commissioned the above 

described study to assess the validity of 

our proposed update to the LTC–DRG 

relative weights for FY 2007. In 

response to these comments, we 

reiterate that, while we understand that 

applying the severity-adjusted DRGs 

under the LTCH PPS could have an 

impact on setting relative weights used 

in determining LTCH PPS payments, we 

would consider their use in the LTCH 

PPS after we evaluate any DRG 

refinements for the IPPS, as noted 

above. 

We note that while severity-adjusted 

DRGs had been proposed under the 

IPPS system for FY 2008 (or earlier), we 

did not propose to revise the current 

patient classification system used under 

the LTC PPS. Because, as we explained 

above, we believe any refinement due to 

severity-adjusted DRGs for the IPPS 

system would need to be evaluated to 

determine whether it is appropriate to 

use the same severity-adjusted DRGs for 

LTCHs, we will, at that time, take into 

consideration such issues as the impact 

of treating higher acuity patients. 

We have noted that some commenters 

believe it is not appropriate that LTCHs 

be impacted by decreasing payments 

because of the upcoding of lower acuity 

patients to higher weighted LTC–DRGs, 

as discussed in the previous responses. 

However, as we discussed in the FY 

2007 IPPS proposed rule (71 FR 24413), 

many of the LTC–DRG relative weights 

proposed for FY 2007 are lower than the 

current (FY 2006) LTC–DRG relative 

weight because based on the latest 

available LTCH claims data, we 

continue to observe an increase in the 

number of relatively lower charge cases 

being assigned to LTC–DRGs with 

higher relative weights in prior years. 

As explained previously, we believe 

that using updated (FY 2005) LTCH 

claims data will result in LTC–DRG 

relative weights for FY 2007 that best 

reflect the resources actually utilized by 

LTCHs in treating their Medicare 

patients and thereby act to ensure 

appropriate LTCH PPS payments in FY 

2007. The commenter is correct in 

noting that it was our intention, when 

we revised the short-stay outlier policy 

described above, to reduce the number 

or type of short-stay patients being 

treated in LTCHs that do not utilize the 

resources of ‘‘typical’’ LTCHs. Many of 

these very short stay cases require more 

appropriate treatment at another 

hospital setting, such as an acute care 

hospital. Therefore, we are not 

convinced that reducing the number of 

short stay patients treated at LTCHs will 

necessarily result in higher LTC–DRG 

weights in all LTC–DRGs or even in 

higher weighted LTC–DRGs. 

Moreover, since the implementation 

of the LTCH PPS in FY 2003, we have 

accounted for very short-stay and shortstay outliers cases in our LTC–DRG 

relative weight methodology. 

Specifically, we have removed cases 

with a length of stay of 7 days or less 

because we believed that they could 

‘‘significantly bias payments against 

inlier cases’’ (67 FR 55989). In addition, 

the methodology includes a step to 

adjust charges for the effects of shortstay outliers by ‘‘counting a short-stay 

outlier 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 

LTC–DRG.’’ Without this adjustment, 

we maintained at that time that we 

believed that ‘‘the relatively lower 

charges of the short-stay outlier cases 

bring down the average charge for all 

cases within a LTC–DRG * * * [and] 

result in an ‘underpayment’ to nonshortstay outlier cases * * *’’ (67 FR 55990). 

Therefore, we do not believe that the 

changes that we have made in the shortstay outlier policy in the RY 2007 LTCH 

PPS final rule will affect the DRG 

weights because our methodology has 


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always accounted for this potential 

effect so that a reduction in short-stay 

outlier cases will not necessarily result 

in a significant change to the DRG 

weights. 

During the previous 4 years, while we 

phased in to full payments under the 

LTCH PPS, we have reweighted the 

LTC–DRGs, with the result that for the 

first year, there was an estimated 

negligible increase in average payments 

based upon the reweighting of the LTC–

DRGs (FY 2004 + 0.4 percent) and a 

negligible decrease in estimated 

payments based on the LTC–DRG 

update in FY 2005 (FY 2005, ¥0.5 

percent). For the subsequent 2 years, 

there were decreases (FY 2006, ¥4.2 

percent; proposed FY 2007, ¥1.4 

percent). Although the LTCH PPS has 

been evolving, we believe that using the 

updated (FY 2005) LTCH claims data 

with our existing relative weight 

methodology will result in LTC–DRG 

relative weights for FY 2007 that will 

best reflect the resources actually 

utilized by LTCHs in treating its 

Medicare patients since the FY 2005 

data is the best LTCH data available that 

reflects LTCHs’ current treatment 

practice and coding patterns. Therefore, 

we do not find it either necessary or 

appropriate to postpone the FY 2007 

update of the LTC–DRG relative weights 

until we consider the adoption of a 

classification system with ‘‘improved 

severity measures.’’

Comment: Numerous commenters 

suggested that CMS forgo the proposed 

approximately 1.4 percent decrease in 

estimated aggregate LTCH PPS 

payments and, instead, establish a 

policy of budget neutrality for the 

annual updates of the LTC–DRG relative 

weights. The commenters believed a 

policy of budget neutrality would 

mitigate the estimated LTCH PPS 

payment reductions that CMS estimates 

would result from the proposed changes 

to the LTC–DRGs and relative weights 

for FY 2007. MedPAC also endorsed 

adopting a policy of budget neutrality 

for the annual recalibration of the LTC–

DRG weights and noted that the 

adoption of the budget neutrality 

process that CMS uses in recalibrating 

the annual weights for the IPPS for the 

LTCH would avoid the estimated 

decrease in payments of 1.4 percent for 

FY 2007. 

One commenter asserted that the 

absence of a budget neutrality 

adjustment for the annual recalibration 

of the LTC–DRGs provides a negative 

incentive for efficiency, because 

assigning cases that appropriately use 

fewer hospital resources to a particular 

LTC–DRG will result in a lower weight 

for that LTC–DRG. Therefore, the 

commenter urged CMS not to 

implement the proposed reweighting for 

FY 2007 prior to a full analysis of the 

impact of the proposed reweighting 

along with other payment policy 

changes provided in the RY 2007 LTCH 

PPS on the overall adequacy of 

payments to LTCHs. In addition, the 

commenters expressed eagerness to 

review the recommendations currently 

under development by RTI International 

for patient and facility criteria for 

LTCHs. Several commenters further 

suggested that no additional 

reimbursement reductions under the 

LTCH PPS should be imposed until the 

RTI report is complete and the industry 

works with CMS to implement its 

findings. 

Response: We understand that the 

commenters are concerned with the 

estimated decrease in payments under 

LTCH PPS based upon the changes in 

the LTC DRGs and relative weights 

proposed for FY 2007. However, as 

discussed above, we are not postponing 

the proposed FY 2007 reclassification 

and recalibration of the LTC–DRGs. In 

addition, the payment policies that were 

finalized in the RY 2007 LTCH PPS final 

rule, such as the zero update to the 

standard Federal rate and the revised 

short-stay outlier policy, will be 

effective for LTCH discharges beginning 

on July 1, 2007, as established in that 

rule. 

We further acknowledge that the 

commenters and also MedPAC are 

urging us to establish a budget 

neutrality requirement for the annual 

reclassification and recalibration of the 

LTC–DRGs so that, in future years, the 

LTCH PPS would avoid an estimated 

decrease in aggregate payments such as 

the estimated 1.3 percent based on the 

LTC–DRG weights that we are finalizing 

for FY 2007. 

In the responses to comments 

addressed above, we have noted several 

reasons for the annual fluctuations in 

LTC–DRG relative weights that resulted 

in an estimated increase in aggregate 

payments for FY 2004, a negligible 

estimated decrease in aggregate 

payments for FY 2005, and decreases in 

aggregate payments for FYs 2006 and 

2007. We reiterate that the LTCH PPS 

has existed since FY 2003, and we 

believe that several factors are occurring 

that affect the changes to the relative 

weights, including actual improvements 

in coding so that cases are appropriately 

assigned to LTC–DRGs. Each year, we 

recalibrate the LTC–DRG relative 

weights based on the most recent 

available LTCH claims data, which 

reflect current LTCH patient mix and 

coding practices. The annual 

recalibration of the LTC–DRG relative 

weights to which LTCH cases are 

assigned will appropriately reflect more 

or less resource use than the previous 

year’s LTC–DRG relative weights. 

We understand the concerns 

expressed by the commenters regarding 

this fiscal year’s estimated decrease in 

payments based upon the proposed (and 

finalized) FY 2007 reweighting of the 

LTC–DRGs. However, we remind the 

commenters that establishing a budgetneutrality policy for the LTC–DRG 

weights would have precluded the 

increase in payments that occurred 

during FY 2004 as well as any increase 

that an analysis of future data may 

warrant. 

Under the IPPS, there is a statutory 

requirement in section 1886(d)(4)(C)(iii) 

of the Act that requires that, beginning 

with FY 1991, reclassification and 

recalibration changes be made in a 

manner that assures that the aggregate 

payments are neither greater than nor 

less than the aggregate payments that 

would have been made without the 

changes. However, there is no statutory 

or regulatory requirement that the 

annual update to the LTC–DRG 

classifications and relative weights be 

done in a budget neutral manner. In 

addition, after FY 2003, the year that the 

LTCH PPS was implemented, there was 

no statutory requirement for budget 

neutrality for any component of the 

LTCH PPS. 

However, as we have already noted, 

the LTCH PPS, having been first 

implemented for cost reporting periods 

beginning on or after the start of FY 

2003, will soon end its transition period 

and payment will be based solely on the 

Federal rate with cost reporting periods 

beginning in FY 2007. In the RY 2007 

LTCH PPS final rule, we provided that 

we would reevaluate all payment 

adjustments that were originally 

considered for the LTCH PPS prior to its 

implementation and also determine the 

appropriateness of a one-time 

prospective adjustment to the standard 

Federal rate (§ 412.523(d)(3)) so that the 

effect of any significant differences 

between actual payments and estimated 

payments for the first year of the LTCH 

PPS would not be perpetuated in the 

PPS for future years. Given the 

considerable discretion granted to the 

Secretary under the BBRA of 1999 and 

the BIPA of 2000 to develop the LTCH 

PPS, it is possible, however, that at the 

same time, the Secretary would consider 

using his broad authority to establish a 

policy of budget neutrality for the 

annual update of the LTC–DRG 

classifications and relative weights. As 

noted above, currently the best available 

LTCH data (FY 2005) are from the 

second full year of the PPS, and LTCHs 


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may still be modifying their behavior to 

the change in payment methodology. If, 

upon reevaluation of our payment 

policies based on future LTCH data as 

the data become available, we find that 

it would be appropriate to propose 

making the updates to the LTC–DRGs 

and relative weights in a budget neutral 

manner, the public will have the 

opportunity to submit comments on any 

proposed change during the rulemaking 

process. 

The commenters mentioned their 

eagerness to review the 

recommendations currently being 

developed by RTI regarding the 

feasibility of patient and facility level 

admissions criteria for LTCHs. We 

anticipate that RTI will submit its final 

report and recommendations during RY 

2007. We place considerable importance 

on RTI’s work, and we will encourage 

a dialogue with the public based on the 

report. We note that, while we believe 

the report will have a substantial impact 

on future Medicare policy for LTCHs, 

we still believe that the retention of 

many of the specific payment 

adjustment features of the LTCH PPS 

presently in place and the development 

of additional or revised adjustments 

may still be both necessary and 

appropriate for purposes of protecting 

the integrity of the Medicare trust fund. 

Comment: Several commenters 

believed that the changes to the LTC–

DRG relative weights will have a more 

significant impact on high case-mix 

providers than on low-case mix 

providers. One commenter referred to a 

LTCH which, as a high acuity provider, 

will experience an approximate 5 

percent drop in total case mix index. 

This commenter requested that CMS 

make a weighted average calculation 

available when it publishes the impacts 

of changes in the relative weights. The 

commenter further suggested that CMS 

produce an impact statement focusing 

on changes across all DRGs that will 

enable providers to understand the 

impacts on their individual LTCHs. 

Response: We believe we published a 

comprehensive description of the 

impact of the reweighting of the LTC–

DRGs for FY 2007 in the proposed rule 

(71 FR 24413). Specifically, in section 

VII, Effects of Other Proposed Policy 

Changes, in subsection A, under the 

heading, Effects of LTC–DRG 

Reclassifications and Relative Weights 

for LTCHs, we included a detailed 

analysis of the impact that would result 

from our proposals. 

In that section, we stated: ‘‘When we 

compared the GROUPER Version 23.0 

(FY 2006) LTC–DRG relative weights to 

the proposed GROUPER Version 24.0 

(FY 2007) proposed LTC–DRG relative 

weights, we found that approximately 

62 percent of the LTC–DRGs would 

have a higher relative weight under 

Version 23.0, while the remaining 

approximately 38 percent of the LTC–

DRGs would have a higher relative 

weight under Version 24.0. We also 

found that, based on FY 2005 LTCH 

cases, the GROUPER Version 23.0 LTC–

DRG relative weights were, on average, 

approximately 3.1 percent higher than 

the proposed GROUPER Version 24.0 

LTC–DRG relative weights. In addition, 

based on an analysis of the most recent 

available LTCH claims data from the FY 

2005 MedPAR file, we continue to 

observe that the average proposed LTC–

DRG relative weight decreases due to an 

increase of relatively lower charge cases 

being assigned to LTC–DRGs with 

higher relative weights in the prior year. 

Contributing to this increase in these 

relatively lower charge cases being 

assigned to proposed LTC–DRGs with 

higher relative weights in the prior year 

are improvements in coding practices, 

which are typical when moving from a 

reasonable cost-based payment system 

to a PPS. The impact of including 

additional cases with relatively lower 

charges in LTC–DRGs that had a 

relatively higher relative weight in the 

GROUPER Version 23.0 (FY 2006) is a 

decrease in the average relative weight 

for those LTC–DRGs in the proposed 

GROUPER Version 24.0. As noted above 

in section II.F. of the preamble to this 

proposed rule, LTCHs are a specialized 

provider type that typically do not treat 

a broad spectrum of patients in their 

facilities with many different diagnoses. 

While there are 526 valid proposed 

GROUPER Version 24.0 LTC–DRGs, 191 

LTC–DRGs have no LTCH cases. In 

addition, another 173 LTC–DRGs are 

categorized as ‘low volume’ (that is, 

have less than 25 cases annually). 

Consequently, only about 162 LTC–

DRGs are used by most LTCHs on a 

‘regular basis’ (that is, nationally LTCHs 

discharge, in total, an average of 25 or 

more of these cases annually). 

Of these 162 LTC–DRGs that are used 

on a regular basis, we found that 

approximately 60 percent of the LTC–

DRGs would have higher relative 

weights under GROUPER Version 23.0 

in comparison to proposed GROUPER 

Version 24.0, and the remaining 40 

percent of the 162 LTC–DRGs that are 

used on a ‘regular basis’ would have 

higher relative weights under proposed 

GROUPER Version 24 in comparison to 

GROUPER Version 23.0. In addition, 

about 25 percent of the 162 LTC–DRGs 

that are used on a ‘regular basis’ would 

experience a decrease in the average 

charge per case as compared to the 

average charge per case in that DRG 

based on FY 2004 data, which generally 

results in a lower relative weight. 

Moreover, of the 162 LTC–DRGs that are 

used on a ‘regular basis,’ approximately 

63 percent of those LTC–DRGs would 

experience a change in the average 

charge per case from FY 2004 LTCH 

data as compared to FY 2005 LTCH data 

that is less than the increase in overall 

average LTCH charges across all LTC–

DRGs from FY 2004 to FY 2005 of about 

8.3 percent. Accordingly, those LTC–

DRGs would also have a proposed 

reduction in their relative weight as 

compared to the relative weight in FY 

2006. For those LTC–DRGs in which the 

average charge within the LTC–DRG 

increase is less than 8.3 percent, the 

proposed relative weights for those 

LTC–DRGs would decrease because the 

average charge for each of those LTC–

DRGs is being divided by a larger 

number (that is, the average charge 

across all LTC–DRGs). For the reasons 

discussed above, we believe that the 

proposed changes in the LTC–DRG 

relative weights, which include a 

significant number of LTC–DRGs with 

lower proposed relative weights, would 

result in approximately a 1.4 percent 

decrease in estimated aggregate LTCH 

PPS payments’’ (71 FR 24413). 

The above paragraphs, published in 

the FY 2007 IPPS proposed rule, clearly 

indicated the impact of the reweighting 

of the LTC–DRGs. All of the impact 

percentages listed are ‘‘weighted 

averages,’’ as was the proposed 

estimated 1.4 percent decrease in 

aggregate LTCH PPS payments. That is, 

all LTCH cases in the December 2005 

update of the FY 2005 MedPAR file 

were used to determine the LTC–DRG 

impact figures presented in the FY 2007 

IPPS proposed rule. Therefore, the latest 

data on the types of patients treated 

across all LTCHs were used to 

determine the impact and not just the 

proposed changes to the LTC–DRG 

weights. The proposed and final FY 

2007 reweighting of the LTC–DRGs may 

indeed have a more significant impact 

on a high acuity provider because many 

of the proposed and final LTC–DRG 

weights in relatively high weighted 

LTC–DRGs would decrease compared to 

their current values. However, we also 

note that Medicare payments for several 

of the highest acuity LTC–DRGs have 

yielded substantial margins. For 

example, an analysis of MedPAR data 

from FY 2004 indicated that, for LTC–

DRG 475 (Ventilator Support) with a 

relative weight of 2.1358 for FY 2004, 

average aggregate (dollar weighted) 

margins for all providers was 21.09 

percent, and for LTC–DRG 87 

(Pulmonary Edema/Respiratory 


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Support) with a relative weight of 

1.6513 for FY 2004, average aggregate 

margins were 26.93 percent. Even for 

cases requiring somewhat less resource 

intensity, such as LTC–DRG 416 

(Septicemia) with a relative weight of 

0.9191 for FY 2004, which is also one 

of the diagnoses most frequently found 

in LTCHs, the aggregate margin is 11.54 

percent and for LTC–DRG 249 (After 

Care Musculoskeletal) with a relative 

weight of 0.7829 for FY 2004, the 

margin is 9.69 percent. Therefore, we 

believe that the reweighting of the LTC–

DRGs for FY 2007, even for those highacuity providers who experience a more 

significant impact, should not impede 

the efficient and effective delivery of 

care to Medicare beneficiaries, because, 

as described above, several of the 

highest-acuity LTC–DRGs have yielded 

substantial margins. Furthermore, even 

though the recalibration of the LTC–

DRG relative weights will result in a 

decrease in the relative weight for some 

high-acuity LTC–DRGs, because the 

recalibration is based on the most recent 

available LTCH claims data (FY 2005), 

it ensures the most accurate payments 

for FY 2007 based on current LTCH 

treatment and coding practices. 

In response to the commenter who 

requested impacts that reflected a 

weighted average calculation, as noted 

above, the impact of the proposed 

changes to the LTC–DRGs for FY 2007 

presented in the FY 2007 IPPS proposed 

rule (71 FR 24413) are based on a 

weighted average calculation. That is, 

all FY 2005 LTCH cases in the 

December 2005 update of the MedPAR 

data were used to determine the impact 

figures presented in the proposed rule. 

This means that only the proposed 

changes to the relative weights for LTC–

DRGs that had LTCH cases in those 

DRGs based on the FY 2005 LTCH data 

contributed to the impact. This 

continues to be true for the impact of 

the final LTC_DRG weights which are 

based on the most recent update of the 

FY 2005 MedPAR data. It also means 

that, for example, LTCH cases in LTC–

DRG 475 represent approximately 12 

percent of all LTCH cases in FY 2005 

and therefore, 12 percent of the impact 

presented in the proposed rule was due 

to the proposed change in the LTC–DRG 

weight for LTC–DRG 475. We believe 

that the commenter may have 

mistakenly believed that we measured 

the impact of the proposed LTC–DRG 

changes based on the changes proposed 

for each LTC–DRG without accounting 

for the volume of LTCH cases treated in 

each LTC–DRG. In addition, we note 

that if a provider is eager to determine 

the specific impact of the annual 

proposed LTC–DRG reweighting on an 

individual LTCH or a particular weight, 

the provider needs only to compare an 

application of the LTC–DRG weights 

published in the previous year’s final 

rule (Table 11) of its cases to the 

proposed LTC–DRG relative weights 

that are published in the current year’s 

proposed rule (Table 11; 71 FR 24395–

24403) as applied to the same set of 

cases. 

Comment: Several commenters 

maintained that the proposed 1.4 

percent decrease in aggregate payments 

to LTCHs due to the proposed LTC–DRG 

reclassification and recalibration for FY 

2007, in addition to payment cuts 

established for RY 2007 represent a 

‘‘misinterpretation’’ of MedPAC’s 

recommendation in its March 2006 

Report to the Congress for a zero update 

for LTCHs. MedPAC cited Medicare 

margins for 2004 of 9.0 for the LTCH 

industry and projected 7.8 percent 

margins for 2006, but the commenters 

believed that these projections did not 

factor in the impact of the ‘‘25 percent 

policy’’ for co-located LTCHs or the 

estimated payment reductions 

associated with the revised short-stay 

outlier policy. 

Response: As we have noted 

elsewhere in earlier responses to 

comments, the estimated 1.4 percent 

decrease aggregate in LTCH PPS 

payments due to the proposed LTC–

DRG reclassification and recalibration 

for FY 2007 is a data-driven result of the 

annual recalibration of the relative 

weights for LTC–DRGs based on the 

latest available LTCH claims data from 

the MedPAR files (FY 2005). Therefore, 

for FY 2007, based on the updated LTC–

DRGs classifications and relative 

weights, estimated payments to LTCHs 

will be 1.3 percent less than they would 

have been based on the prior fiscal 

year’s (that is, FY 2006) classifications 

and relative weights for the same LTCH 

cases. Similarly, LTCH claims data from 

the FY 2006 MedPAR files will be used 

to determine the proposed LTC–DRG 

relative weights for FY 2008, and the 

resulting aggregate LTCH PPS payments, 

absent a regulatory or statutory change 

implementing recalibration of relative 

weights in a budget neutral manner, 

may either decrease or increase, based 

upon the FY 2006 data and DRG 

classification changes. In setting the 

annual relative weights for the LTC–

DRG system for FY 2007, we have 

followed the requirements established 

with the implementation of the LTCH 

PPS in FY 2003 (67 FR 55984–55995). 

Although the proposed recalibrated 

LTC–DRG relative weights were 

estimated to result in 1.4 percent 

decrease in LTCH PPS payments for FY 

2007 (and based on final policies 

established in this final rule, the 

updated LTC–DRGs for FY 2007 are 

estimated to result in a 1.3 percent 

decrease in aggregate LTCH PPS 

payments for FY 2007, as noted above), 

we do not believe that this adjustment 

is relevant to MedPAC’s 

recommendation for the zero percent 

update to the LTCH PPS Federal rate for 

RY 2007. 

The annual LTC-DRG update is 

separate from the Federal rate update; 

specifically, their purposes are different 

and independent. The standard Federal 

base rate is an estimate of the national 

average cost per case which is adjusted 

by the LTC-DRG relative weights to 

reflect the resource consumption of the 

particular case; that is, a case with a 

relative weight of 2.0 is twice as costly/ 

uses twice the resources as a case with 

a relative weight of 1.0. The LTC-DRG 

relative weights are recalibrated 

annually based on the most recent 

available LTCH data to reflect resources 

used by LTCHs in treating each type of 

case. The update to the Federal rate is 

to adjust the Federal rate to account for 

various adjustments to that rate, 

including inflation. 

MedPAC’s data analysis, in its March 

2006 Report to the Congress, indicated 

that the average Medicare margin for 

LTCHs was 9.0 percent for FY 2005 and 

was projected at 7.8 percent for 2006. 

(As we stated in our RY 2007 LTCH PPS 

final rule, MedPAC also noted that 

‘‘LTCH HwHs were found to have 

higher margins than freestanding LTCHs 

in RY 2005’’ (71 FR 27823).) Based on 

its analysis, MedPAC stated that ‘‘* * * 

evidence from the indicators we have 

examined suggests that LTCHs can 

accommodate the cost of caring for 

Medicare beneficiaries in 2007 without 

an increase in the base rate’’ (p. 218). 

Consistent with MedPAC’s 

recommendation, after incorporating an 

adjustment to account for changes in 

coding practices that did not reflect 

‘‘real’’ case-mix, we finalized a zero 

percent update for FY 2007 (71 FR 

27819). As stated earlier, this 

adjustment is not a function of, or 

related to, the update to the relative 

weights for LTC–DRGs. 

The commenters’ also reference the 

25-percent threshold payment 

adjustment for co-located LTCHs 

(§ 412.534) established beginning in FY 

2005 and the newly revised short stay 

outlier payment policy (§ 412.529) 

beginning in RY 2007. We believe that 

the commenters are seeking to connect 

these adjustments, which are also 

estimated to result in a decrease in 

aggregate LTCH PPS payments in the 

absence of a change in admission 


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practices by LTCHs to the estimated 

impact of the updated LTC–DRG 

relative weights. However, the policies 

cited by the commenters are not related 

to the impact of the updating of the 

LTCH–DRG relative weights, but each 

independently, furthers the goal of 

establishing fair and reasonable 

Medicare payments under the LTCH 

PPS. 

The HwH ‘‘25 percent rule,’’ that is, 

the special payment provisions for 

LTCH HwHs and satellites, was 

established at § 412.534 in the FY 2005 

IPPS final rule. Under that policy, we 

provide a payment adjustment for those 

patients discharged from co-located 

LTCHs (that is, HwHs and satellites) 

admitted from host hospitals that 

exceeded a specified threshold 

percentage (in most cases, 25 percent). 

Medicare patients who reach high-cost 

outlier status in the host hospital are 

excluded from the count of the 

percentage of patients admitted directly 

from the host. As we discussed in the 

FY 2005 IPPS final rule, when we 

implemented the ‘‘25 percent rule,’’ we 

were unable to estimate the impact of 

this policy because we anticipated 

behavioral changes by both the host and 

the co-located LTCHs resulting from the 

provision that exempted high-cost 

outliers from the percentage threshold 

calculation (69 FR 49771). 

MedPAC further addressed this issue 

in the March 2006 Report, where it 

noted that it ‘‘* * * cannot foresee how 

HwHs/ behavior will change in response 

to this rule. CMS has discussed 

scenarios (CMS 2005). For example, 

patients admitted to an HwHs from the 

host hospital after becoming an outlier 

are not counted in the limit, thus HwHs 

may admit more outlier cases under this 

rule. Alternatively, host hospitals may 

discharge fewer patients to their HwHs 

because of constraints from the 25 

percent rule, in which case HwHs’

volume might fall. In cities where there 

is another LTCH, an acute care hospital 

might discharge patients to a different 

long-term care hospital than the one on 

its grounds. The Office of Inspector 

General or the QIOs may want to 

monitor acute care hospitals’ and HwHs’

behavior in response to the 25 percent 

rule. Because we have no evidence of 

how HwHs will react, we have not 

modeled margins incorporating this 

policy change.’’ (p. 218) 

Because the policy at § 412.534 

exempts patients admitted from the host 

hospital if they had already achieved 

high-cost outlier status under the IPPS, 

from the LTCHs’ percentage threshold 

calculation (as noted above), we believe 

that even with some adjustments 

resulting in a decrease in payments to 

some co-located LTCHs, Medicare 

payments to co-located LTCHs on 

average will continue to exceed the 

Medicare costs of the inpatient hospital 

services provided to its patients, even 

with a zero percent update to the 

Federal rate for RY 2007 (71 FR 27823). 

Furthermore, we believe that the 25- 

percent threshold policy and the short 

stay outlier payment revision that that 

we have established, first for co-located 

LTCHs at § 412.534 for FY 2004 and the 

revisions to the short-stay outlier 

policies at § 412.529 that we finalized 

for RY 2007, each have a firm and 

consistent basis in our general policy 

considerations under the LTCH PPS. 

As we noted in the RY 2007 final rule 

for the LTCH PPS, we do not believe 

that the change to the short-stay outlier 

policy will result in an adverse impact 

on LTCHs. As a result of the change to 

the short-stay outlier payment formula, 

we believe that LTCHs will have an 

incentive to significantly reduce the 

number of very short-stay cases that 

they admit. We believe that, by paying 

appropriately for short-stay outlier cases 

and by removing the financial incentive 

for LTCHs to admit those very short stay 

cases that could otherwise receive 

appropriate treatment at an acute care 

hospital (and paid under the IPPS), 

LTCHs will change their admission 

patterns for these patients. We further 

believe that payment decreases to 

LTCHs resulting from this policy would 

only occur if LTCHs were to continue to 

admit the same number of short-stay 

outlier patients with very short lengths 

of stay. We believe this policy is needed 

to assure that payments for short-stay 

outlier cases are appropriate. 

Therefore, we disagree with the 

commenter that we have 

‘‘misinterpreted’’ MedPAC’s 

recommendation of a zero percent 

update for 2007 in our proposed update 

to the LTC-DRGs for FY 2007. We 

maintain that the rationale for each of 

the policy features mentioned by the 

commenter, when evaluated 

independently, is clear and reasonable. 

In addition, they are independent of the 

DRG recalibration that occurs every year 

based on an established formula. We 

strongly disagree with the allegations 

that their implementation represents a 

‘‘misinterpretation’’ of MedPAC’s 

margin analysis and recommendation 

(discussed above) in the March 2006 

Report to the Congress. As discussed 

above, this update is not based on 

MedPAC’s analysis and we believe that 

updating the LTC–DRG relative weights 

for FY 2007 based on FY 2005 LTCH 

claims data will result in more 

appropriate LTCH PPS payments since 

the relative resource intensity of each 

LTC–DRG (that is, the relative weight) 

will be determined from the most recent 

available LTCH data (FY 2005) 

reflecting LTCHs’ current practice and 

treatment patterns. 

Comment: Several commenters, 

including MedPAC, recommended that 

we adopt severity-adjusted DRGs as the 

patient classification system for the 

LTCH PPS. In particular, MedPAC 

analyzed FY 2004 CMS LTCH data 

using both standardized charges and 

standardized hospital-specific costs 

(removing the effect of local wages) 

using Version 23 (FY 2006) of the 

GROUPER and stated that, on a 

preliminary basis, CS DRGs are 

relatively homogeneous in resource use 

for the kinds of cases treated in LTCHs. 

They believed that this indicates that 

the CS DRGs proposed for IPPS 

hospitals may also ‘‘be promising for 

LTCHs.’’

Response: We are aware of the 

heightened interest in severity-adjusted 

DRGs by the provider community, and 

in section II.C.6.of this final rule, we 

discuss the revisions that we are making 

to the DRG classifications structure for 

the IPPS and our expectations for 

adopting severity adjustments for DRGs 

under the IPPS in FY 2008. We 

appreciate the data analysis that 

MedPAC produced to demonstrate the 

potential utility of CS DRGs for 

classifying patients being treated in 

LTCHs. It is possible that the modified 

version of the APR DRGs or another 

severity-adjusted patient classification 

system may account for differences in 

severity of illness and associated costs 

among hospitals. In section II.C. of this 

preamble, we discuss the issues that we 

are dealing with respect to the adoption 

of a severity adjusted DRG system. Once 

we have addressed those issues under 

the IPPS, we would need to consider 

whether it is appropriate to propose 

similar revisions to the patient 

classification system under the LTCH 

PPS. As stated in the FY 2007 IPPS 

proposed rule, we would emphasize 

that any proposed changes to the patient 

classification system for LTCHs would 

be done through notice and comment 

rulemaking. 

G. 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 


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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 the process must apply to 

a new medical service or technology 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.’’

The regulations implementing this 

provision establish three criteria for new 

medical services and technologies to 

receive an additional payment. First, 

§ 412.87(b)(2) defines when a specific 

medical service or technology will be 

considered new for purposes of new 

medical service or technology add-on 

payments. The statutory provision 

contemplated the special payment 

treatment for new medical services or 

technologies until such time as data are 

available to reflect the cost of the 

technology in the DRG weights through 

recalibration. There is a lag of 2 to 3 

years from the point a new medical 

service or technology is first introduced 

on the market and when data reflecting 

the use of the medical service or 

technology are used to calculate the 

DRG weights. For example, data from 

discharges occurring during FY 2005 are 

used to calculate the FY 2007 DRG 

weights in this final rule. Section 

412.87(b)(2) 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 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 with FDA approval, unless there 

was some documented delay in bringing 

the product onto the market after that 

approval (for instance, component 

production or drug production had been 

postponed until FDA approval due to 

shelf life concerns or manufacturing 

issues). After the DRGs have been 

recalibrated to reflect the costs of an 

otherwise new medical service or 

technology, the special add-on payment 

for new medical services or technology 

ceases (§ 412.87(b)(2)). For example, an 

approved new technology that received 

FDA approval in October 2005 and 

entered the market at that time may be 

eligible to receive add-on payments as a 

new technology until FY 2008 

(discharges occurring before October 1, 

2007), when data reflecting the costs of 

the technology would be used to 

recalibrate the DRG weights. Because 

the FY 2008 DRG weights will be 

calculated using FY 2006 MedPAR data, 

the costs of such a new technology 

would likely be reflected in the FY 2008 

DRG weights. 

Section 412.87(b)(3) further provides 

that, to receive special payment 

treatment, new medical services or 

technologies must be inadequately paid 

otherwise under the DRG system. To 

assess whether technologies would be 

inadequately paid under the DRGs, we 

establish thresholds to evaluate 

applicants for new technology add-on 

payments. In the FY 2004 IPPS final 

rule (68 FR 45385, August 1, 2003), we 

established the threshold at the 

geometric mean standardized charge for 

all cases in the DRG plus 75 percent of 

1 standard deviation above the 

geometric mean standardized charge 

(based on the logarithmic values of the 

charges and transformed back to 

charges) for all cases in the DRG to 

which the new medical service or 

technology is assigned (or the caseweighted average of all relevant DRGs, 

if the new medical service or technology 

occurs in many different DRGs). Table 

10 in the Addendum to the FY 2004 

IPPS final rule (68 FR 45648) listed the 

qualifying threshold by DRG, based on 

the discharge data that we used to 

calculate the FY 2004 DRG weights. 

However, section 503(b)(1) of Pub. L. 

108–173 amended section 

1886(d)(5)(K)(ii)(I) of the Act to provide 

for ‘‘applying 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 1 standard 

deviation for the diagnosis-related group 

involved.’’ The provisions of section 

503(b)(1) apply to classification for 

fiscal years beginning with FY 2005. We 

updated Table 10 from the Federal 

Register document that corrected the FY 

2004 final rule (68 FR 57753, October 6, 

2003), which contained the thresholds 

that we used to evaluate applications for 

new service or technology add-on 

payments for FY 2005, using the section 

503(b)(1) measures stated above, and 

posted these new thresholds on our Web 

site at: http://www.cms.hhs.gov/ 

AcuteInpatientPPS/08_newtech.asp. In 

the FY 2005 IPPS final rule (in Table 10 

of the Addendum), we included the 

final thresholds that were being used to 

evaluate applicants for new technology 

add-on payments for FY 2006. (Refer to 

section IV.D. of the preamble to the FY 

2005 IPPS final rule (69 FR 49084, 

August 11, 2004) for a discussion of a 

revision of the regulations to 

incorporate the change made by section 

503(b)(1) of Pub. L. 108–173.) Table 10 

of the Addendum to the FY 2006 final 

rule (70 FR 47680) contained the final 

thresholds that are being used to 

evaluate applications for new 

technology add-on payments for FY 

2007. 

Section 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. (Refer 

to the September 7, 2001 final rule (66 

FR 46902) for a complete discussion of 

this criterion.) 

The new medical service or 

technology add-on payment policy 

provides additional payments for cases 

with high costs involving eligible new 

medical services or technologies while 

preserving some of the incentives under 

the average-based payment system. The 

payment mechanism is based on the 

cost to hospitals for the new medical 

service or technology. Under § 412.88, 

Medicare pays a marginal cost factor of 

50 percent for the costs of a new 

medical service or technology in excess 

of the full DRG payment. If the actual 

costs of a new medical service or 

technology case exceed the DRG 

payment by more than the 50-percent 

marginal cost factor of the new medical 

service or technology, Medicare 

payment is limited to the DRG payment 

plus 50 percent of the estimated costs of 

the new technology. 

The report language accompanying 

section 533 of Pub. L. 106–554 indicated 

Congressional intent that the Secretary 

implement the new mechanism on a 

budget neutral basis (H.R. Conf. Rep. 

No. 106–1033, 106th Cong., 2nd Sess. at 

897 (2000)). Section 1886(d)(4)(C)(iii) of 

the Act requires that the adjustments to 

annual DRG classifications and relative 

weights must be made in a manner that 

ensures that aggregate payments to 

hospitals are not affected. Therefore, in 

the past, we accounted for projected 

payments under the new medical 


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service and technology provision during 

the upcoming fiscal year at the same 

time we estimated the payment effect of 

changes to the 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. 

Section 1886(d)(5)(K)(ii)(III) of the 

Act, as amended by section 503(d)(2) of 

Pub. L. 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, 

add-on payments for new medical 

services or technologies for FY 2005 and 

later years have not been budget neutral. 

Applicants for add-on payments for 

new medical services or technologies for 

FY 2008 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 the medical service or 

technology meets the high-cost 

threshold, no later than October 15, 

2006. Applicants must submit a 

complete database no later than 

December 30, 2006. Complete 

application information, along with 

final deadlines for submitting a full 

application, will be available at our Web 

site: 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 2008, the Web 

site will also list the tracking forms 

completed by each applicant. 

2. Public Input Before Publication of a 

Notice of Proposed Rulemaking on AddOn Payments 

Section 1886(d)(5)(K)(viii) of the Act, 

as amended by section 503(b)(2) of Pub. 

L. 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 

technology represents a substantial 

clinical improvement. 

• 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 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 2007 before 

publication of the FY 2007 IPPS 

proposed rule, we published a notice in 

the Federal Register on December 23, 

2005 (70 FR 76315) and held a town hall 

meeting at the CMS Headquarters Office 

in Baltimore, MD, on February 16, 2006. 

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 discussions of the substantial 

clinical improvement criterion for each 

of the FY 2007 new medical service and 

technology add-on payment 

applications before the publication of 

the FY 2007 IPPS proposed rule. 

Approximately 35 participants 

registered and attended the town hall 

meeting in person, while additional 

participants listened over an open 

telephone line. The participants focused 

on presenting data on the substantial 

clinical improvement aspect of their 

products, as well as the need for 

additional payments to ensure access to 

Medicare beneficiaries. In addition, we 

received written comments regarding 

the substantial clinical improvement 

criterion for the applicants. We 

considered these comments in our 

evaluation of each new application for 

FY 2007 in the proposed rule and in this 

final rule. We have summarized these 

comments or, if applicable, indicated 

that no comments were received, at the 

end of the discussion of the individual 

applications. 

We received two general comments 

about application of the newness and 

substantial clinical improvement 

criteria. 

Comment: One commenter 

encouraged CMS to amend the 

definition of substantial clinical 

improvement for the IPPS new 

technology provision to conform to the 

OPPS definition of substantial clinical 

improvement used in 2001. Specifically, 

AdvaMed requested that after 

‘‘decreased pain, bleeding, or other 

quantifiable symptom,’’ CMS should 

insert the following language: ‘‘such as 

convenience, durability, ease of 

operation or make other improvements 

in quality of life.’’

Response: We believe we addressed 

this concern in the FY 2006 IPPS final 

rule (70 FR 47360). We use similar 

standards to evaluate substantial 

clinical improvement in the IPPS and 

OPPS and, in both systems, we employ 

identical language to explain and 

elaborate on the kinds of considerations 

that are taken into account in 

determining whether a new technology 

represents a substantial clinical 

improvement. We do not believe a 

change to the regulations text is 

necessary. 

Comment: One commenter suggested 

that CMS should not use ‘‘substantial 

similarity’’ to evaluate newness without 

also determining whether the product is 

a substantial clinical improvement. The 

commenter argued that CMS is applying 

a concept that is not defined in 

regulations. If CMS applies the concept 

as part of determining whether a 

product is new without evaluating 

substantial clinical improvement, the 

commenter recommended that CMS 

should define substantial similarity 

through notice and comment 

rulemaking. 

Response: We addressed this 

comment in the FY 2006 IPPS final rule 

(70 FR 47350 through 47351). We refer 

readers to that final rule for a detailed 

response to this comment. 

Section 1886(d)(5)(K)(ix) of the Act, as 

added by section 503(c) of Pub. L. 108–

173, requires that, before establishing 

any add-on payment for a new medical 

service or technology, the Secretary 

shall seek to identify one or more DRGs 

associated with the new technology, 

based on similar clinical or anatomical 

characteristics and the costs of the 

technology and assign the new 

technology into a DRG where the 

average costs of care most closely 

approximate the costs of care using the 

new technology. No add-on payment 

will be made if the new technology is 

assigned to a DRG that most closely 

approximates its costs. 

At the time an application for new 

technology add-on payments is 

submitted, the DRGs associated with the 

new technology are identified. We only 

determine that a new DRG assignment is 

necessary or a new technology add-on 


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payment is appropriate when the 

payment under these currently assigned 

DRGs is not adequate and the 

technology otherwise meets the 

newness, cost, and substantial clinical 

improvement criteria. 

In this final rule, we evaluate whether 

new technology add-on payments will 

continue in FY 2007 for the three 

technologies that currently receive such 

payments. In addition, we present our 

evaluations of three applications for 

add-on payments in FY 2007. 

Comment: One commenter stated that 

section 503 of Pub. L. 108–173 provided 

new funding for new technology add-on 

payments by no longer requiring that 

these payments be budget neutral. The 

commenter stated that this provision 

was enacted to ensure that the IPPS 

would better account for new drugs, 

devices, and services. However, the 

commenter believed that CMS continues 

to resist approval of new technologies 

and considers only a few technologies a 

year for add-on payments. 

Another commenter called upon CMS 

to be more willing to indicate its 

preliminary views regarding whether a 

new technology application meets the 

criteria for add-on payments in the 

proposed rule. The commenter 

expressed particular concern that CMS 

had not given a strong indication of 

whether any of the initial new 

technology applications would meet the 

substantial clinical improvement 

criterion and noted that doing so would 

enhance stakeholder dialogue with CMS 

on the evaluation of the new technology 

criteria during the comment period. 

Another commenter believed that 

CMS’ definition of new technology is 

contrary to the statute. The commenter 

explained that CMS uses the FDA 

approval date to determine newness 

while the statute clearly requires that 

new technology add-on payments begin 

on the date an ICD–9–CM code is 

issued. The commenter urged CMS to 

use the date an ICD–9–CM code is 

issued to determine whether a 

technology is new instead of the FDA 

approval date. 

Response: With respect to the 

comment that CMS resists approval of 

new technologies and considers only a 

few technologies a year for add-on 

payments, we note that we encourage 

companies with new-technologies that 

believe that they may meet the new 

technology criteria to apply for add-on 

payments. In our view, we have not 

resisted approving new technologies or 

been overly stringent in our application 

of the criteria. Our review of new 

technology focuses on the merits of the 

application and the requirements under 

the statute. The experience of our 

review process indicates that a 

significant number of new technologies 

have met the criteria. In fact, we have 

approved over 50 percent (6 of 11) of 

applications where we had to apply 

judgment about whether the technology 

met the criteria for an add-on payment. 

From FY 2003 to FY 2006, we received 

a total of 25 applications, but only 21 

were unique (four applicants applied 

twice in subsequent years for the same 

technology). Of the applications that we 

received, 8 were already beyond the 

timeline to be considered new, 1 had 

not received FDA approval, and 1 did 

not meet the cost criterion. In our view, 

we denied these applications using 

objective criteria and without having to 

apply any subjective judgment. Of the 

remaining 11 applications, 6 were 

approved for new technology add-on 

payment, while the other 5 were not 

approved because we determined that 

these applications were not 

substantially different from older 

technologies or did not meet the 

substantial clinical improvement 

criterion. Therefore, to date, we have 

approved over 50 percent of 

applications where we needed to apply 

judgment about whether a new 

technology met the criteria for an addon payment. These statistics obviously 

reflect the recent experience of new 

technology applications, and, 

depending on the ability of applications 

to meet the criteria in the future, will 

likely change. We note that the merits 

of each application determine whether 

it should be approved. The aggregate 

statistics reflect the ability of applicants 

to satisfy the criteria, and should not be 

construed as a measure of the 

appropriateness of the review process. 

We also note that over the years, the 

cost criterion has been lowered, giving 

applicants a lower threshold to meet the 

cost criterion. We encourage and 

welcome additional applications in 

future years so that we can continue to 

make payments for those technologies 

that meet the criteria and warrant new 

technology add-on payments. 

With respect to the comment that 

CMS should be more willing to indicate 

our preliminary views regarding 

whether a new technology meets the 

criteria for an add-on payment, we 

provided our initial concerns regarding 

the two pending applications in the 

proposed rule. For the C-Port System, 

we described our concerns about both 

the newness (‘‘various forms of surgical 

staples and clips have been used for 

more than a decade in a wide range of 

surgical procedures’’) and substantial 

clinical improvement (‘‘the applicant 

submitted evidence suggesting that 

device does not always produce reliable 

anastomoses’’) criteria and also 

indicated that the device appears to 

meet the cost threshold (71 FR 24071). 

Similarly, for the X STOP Interspinous 

Process Decompression System, we 

indicated our belief that ‘‘the device 

satisfies the newness and cost threshold 

criteria’’ and described our concerns 

about substantial clinical improvement 

(71 FR 24072). As a result of 

information provided in the proposed 

rule, the applicants were afforded the 

opportunity to address the specific 

concerns we raised. For example, the 

applicant for the C-Port system was 

able to address our concerns about 

similarity to predicate devices to allow 

us to determine that the device meets 

the newness criterion. Similarly, the 

applicant for X STOP was able to 

address the concerns we raised in the 

proposed rule about whether the device 

meets the substantial clinical 

improvement criterion during the 

comment period. 

Finally, with respect to the comment 

that CMS should use the issuance of an 

ICD–9–CM code as the date on which 

‘‘newness’’ would begin, we have 

addressed this issue several times 

before, including in the FY 2005 IPPS 

final rule (69 FR 49002) and the FY 

2006 IPPS final rule (70 FR 47343). 

Comment: One commenter proposed 

that CMS allow manufacturers to apply 

for a new technology add-on payment 

on an ongoing basis and recommended 

that the agency issue quarterly updates 

announcing the approval of new 

technology add-on payments, similar to 

the outpatient setting. 

Response: Section 1886(d)(5)(K)(i) of 

the Act requires that new technology 

add-on payments be established after 

notice and opportunity for public 

comments (in the publication required 

by subsection (e)(5) for a fiscal year or 

otherwise). In addition, pursuant to 

section 1886(d)(5)(K)(viii) of the Act, we 

are also required to hold an annual town 

hall meeting prior to the IPPS proposed 

rule to obtain public input about 

whether a new technology meets the 

substantial clinical improvement 

criterion. Given the requirements in the 

statute, it is not feasible to process 

applications on a quarterly basis. 

Comment: Some commenters 

expressed disappointment that CMS has 

not increased the payment rate for new 

technology add-on payments from a 

maximum of 50 percent to a maximum 

of 80 percent of the marginal cost factor 

of the new medical service or 

technology, consistent with the outlier 

payment methodology. The commenters 

stated that increasing the marginal cost 

factor from 50 percent to 80 percent 


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would offer some stability and 

consistency for hospitals thus enabling 

hospitals to more easily provide their 

patients access to new technologies. 

Other commenters noted that CMS 

has approved so few technologies for 

new technology add-on payments that it 

would make more sense to compensate 

hospitals with a full add-on payment by 

paying on a cost basis using the average 

sales price plus six percent for FDA 

approved drugs and biologicals and list 

price plus a percentage for devices. The 

commenters believed that such a 

payment methodology would ensure 

that, ‘‘providers recoup their costs, 

Medicare pays a fair rate, and that 

payment is harmonized across treatment 

settings.’’ Finally, one commenter 

requested that CMS provide clear 

guidance and greater transparency as to 

how determinations of newness will be 

made for a technology that already has 

an ICD–9–CM code but is later approved 

by the FDA for a new indication. 

Response: We did not propose any 

changes to the marginal cost factor in 

the proposed rule. Furthermore, we 

continue to believe that a 50-percent 

marginal cost factor is appropriate for 

the reasons described in detail in the 

new technology final rule (66 FR 46919, 

September 7, 2001). 

Also, we have already discussed the 

situation in which a technology is 

described under an existing ICD–9–CM 

code, but subsequently receives 

approval for a new indication from the 

FDA. That discussion can be found in 

the September 7, 2001 new technology 

final rule (66 FR 46915) and in the FY 

2005 IPPS final rule (69 FR 49011) 

concerning InFUSE Bone Graft for tibia 

fractures. 

Comment: Several commenters stated 

that CMS did not address how the 

proposed changes to the DRGs would 

affect new technology add-on payments. 

Another commenter stated that it is 

essential that CMS maintain new 

technology add-on payments for FY 

2007 and beyond. Another commenter 

recommended that CMS broaden the 

new technology criteria to ensure that 

new technologies are accounted for 

within a cost-based DRG system. 

Response: Although we are adopting 

a system of cost relative weights in this 

final rule (section III.C. of this 

preamble), we will continue to apply 

the cost criterion using standardized 

charges consistent with the statute. The 

statute requires that we apply ‘‘a 

threshold specified by the Secretary that 

is the lesser of 75 percent of the 

standardized payment amount 

(increased to reflect the difference 

between costs and charges) or 75 

percent of one standard deviation for 

the diagnosis-related group involved.’’

Changes to the DRG system to better 

recognize severity in the DRG will also 

have no effect on our application of the 

new technology criteria. Any changes to 

the DRG system will merely result in us 

calculating different thresholds for the 

revised DRGs. In addition, once a 

technology is approved for new 

technology add-on payments, we will 

continue to use the ICD–9–CM code to 

identify the technology for determining 

when new technology add-on payments 

are appropriate. 

Finally, section 1886(d)(5)(K) and (L) 

of the Act establishes a process of 

identifying and ensuring adequate 

payment for new medical services and 

technologies. Because no changes have 

been made to this section of the statute, 

we will continue to make new 

technology add-on payments for FY 

2007 and beyond for those technologies 

that meet the criteria. 

Comment: One commenter 

recommended that, because CMS 

proposed to implement a cost-based 

weight DRG system, CMS should 

reconsider whether applicants for FY 

2007 new technology add-on payments 

meet the cost criterion based on a 

revised data set. 

Response: As stated above, Table 10 

of the Addendum to the FY 2006 IPPS 

final rule (70 FR 47680) contained the 

final thresholds that are being used to 

evaluate applications for new 

technology add-on payments for FY 

2007. We use the thresholds contained 

in Table 10 that were published in the 

previous year’s final rule (that is, FY 

2006) to determine whether a 

technology is inadequately paid for the 

next fiscal year (that is, FY 2007). We 

publish Table 10 in the proposed rule in 

order to give the public notice and the 

opportunity to submit comments before 

we finalize the thresholds in the final 

rule. Also, it is necessary for applicants 

to have the thresholds from Table 10 

during the application process so that 

both the applicants and CMS can 

establish if the applicant’s technology 

meets the cost criterion. Further, as we 

note above, we believe that the statute 

requires us to establish the cost 

thresholds using charges. 

Comment: One commenter noted that 

section 503 of Pub. L. 108–173 included 

a provision to expand the inpatient new 

technology add-on payment to include a 

broader range of technologies. The 

commenter added that this legislation 

was made to ensure that adequate 

payments were made to hospitals until 

hospital charges include the costs for 

these technologies. The commenter 

explained that CMS’ narrow 

interpretation has created a situation 

where few, if any, products can qualify 

for new technology add-on payments 

and a process that is opaque and thus, 

costly, especially for small companies, 

to apply for add-on payments. The 

commenter requested that CMS provide 

greater opportunity for technologies to 

qualify for add-on payments to ensure 

patient access to new technologies as 

Congress intended. 

Response: Section 503 of Pub. L. 108–

173 amended the law to: (1) require that 

we establish diagnosis and procedure 

codes annually on April 1 as well as 

October 1; (2) change the application of 

the cost threshold; (3) require a process 

for obtaining public input on new 

technology applications prior to the 

proposed rule; and (4) eliminate the 

budget neutrality requirement for new 

technology add-on payments. We 

believe that we have implemented 

section 503 as Congress intended. 

As we discussed in the FY 2006 IPPS 

final rule (70 FR 47344), we do not 

believe that our criteria present an 

inordinately cumbersome burden for 

small companies that want to apply for 

new technology add-on payments. We 

have received applications for FY 2007 

from relatively small companies 

compared to some of the companies that 

have applied in the past. Further, we 

have already been approached by other 

small companies seeking new 

technology add-on payments for FY 

2008. We encourage potential applicants 

to contact us before their technology is 

available on the market if they have 

questions about the new technology 

application process. 

Comment: One commenter requested 

that it be given the opportunity to work 

closely with CMS to help refine the 

regulatory framework under which CMS 

evaluates new innovative treatments for 

Medicare beneficiaries. The commenter 

suggested ideas such as creating a 

pathway for small companies under 

FDA review to elect to meet with CMS 

to discuss coverage, payment, and 

coding issues. In addition, the 

commenter recommended that CMS 

establish a committee and annual public 

workshop to assist emerging 

technologies and small companies with 

the new technology add-on payment 

process. 

Response: We have been committed to 

providing ample opportunity for 

applicants and other interested parties 

to make their views known to us 

throughout the application process, at 

the annual public meeting, and during 

the comment period on the proposed 

rule. We encourage interested parties to 

contact CMS staff for more information 

about the new technology add-on 

application process. Interested parties 


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may contact Tiffany Swygert at (410) 

786–4642 or Michael Treitel at (410) 

786–4552. 

Comment: One commenter requested 

that CMS broaden the definition of 

substantial clinical improvement. The 

commenter explained that, in the 

outpatient setting, CMS views as a 

separate factor ‘‘improvements in the 

medical technology itself that are so 

significant that we may wish to 

recognize them for separate payment 

even though they do not directly result 

in substantial clinical improvements.’’

For example, technological 

advancements may result in 

improvement of a product’s 

‘‘convenience, durability [or] ease of 

operation such as the strength of 

materials, increased battery life, [and] 

miniaturization.’’ The commenter 

suggested that CMS could recognize 

these additional improvements along 

with others when evaluating substantial 

clinical improvement in the inpatient 

setting. 

Response: The commenter’s specific 

reference to language that was included 

in the November 2, 2001 OPPS final rule 

was taken out of context. The language 

quoted above by the commenter from 

that OPPS final rule stated that CMS 

‘‘may,’’ under the OPPS, recognize 

technologies for separate payment even 

though they do not directly result in 

substantial clinical improvements. To 

date, under the OPPS, we have only 

applied the explicit substantial clinical 

improvement criteria to pass-through 

device category applications. In the 

OPPS context, CMS has not found any 

applications for technologies ‘‘that are 

so significant that we may wish to 

recognize them for separate payment (as 

opposed to packaged payments) even 

though they do not result in substantial 

clinical improvements’’ (67 FR 66783). 

In fact, the historical OPPS experience 

has indicated that, in general, highly 

significant advances in medical 

technology from characteristics such as 

longer battery life commonly result in 

substantial clinical improvements that 

may be appropriately evaluated 

according to the substantial clinical 

improvement criteria alone. We have 

not made a determination to apply these 

standards within the IPPS. However, as 

noted in the FY 2005 IPPS final rule (69 

FR 49021), we will continue to consider 

whether to employ specific factors such 

as those identified for the OPPS in the 

IPPS. 

Comment: One commenter urged 

CMS not to use the FDA section 510(k) 

approval process as a bar to a 

determination of meeting the newness 

criterion because the ‘‘predicate’’

devices identified through the section 

510(k) approval process are not 

necessarily substantially similar to the 

new technology; rather the approval 

indicates that the new device is at least 

as safe and effective as its predicate(s). 

Response: We appreciate the 

commenter’s concern and agree that the 

mere existence of a predicate device(s) 

identified in the FDA section 510(k) 

approval process should not 

automatically preclude a product from 

meeting the newness criterion. 

Although we may consider the predicate 

devices that are listed in the FDA 

section 510(k) approval, we will 

evaluate whether a new technology is 

substantially similar to existing 

products on a case-by-case basis. We 

refer readers to the discussion in the FY 

2006 final rule (70 FR 47350–47352) for 

more detailed information on 

substantial similarity. 

3. FY 2007 Status of Technologies 

Approved for FY 2006 Add-On 

Payments 

a. Kinetra Implantable Neurostimulator 

(Kinetra) for Deep Brain Stimulation 

Medtronic, Inc. submitted an 

application for approval of the Kinetra

implantable neurostimulator device for 

new technology add-on payments for FY 

2005. In the IPPS final rule for FY 2005 

(69 FR 49019, August 11, 2004), we 

approved Kinetra for new technology 

add-on payments. 

As noted above, the period for which 

technologies are eligible to receive new 

technology add-on payments is 2 to 3 

years after the product becomes 

available on the market and data 

reflecting the cost of the technology are 

reflected in the DRG weights. This 

technology received FDA approval on 

December 16, 2003. Therefore, the 

technology will be beyond the 2- to 3- 

year period during which it can be 

considered new during FY 2007. 

Therefore, we proposed in the FY 2007 

IPPS proposed rule (71 FR 24070), to 

discontinue add-on payments for the 

Kinetra rechargeable, implantable 

neurostimulator device for FY 2007. 

The manufacturer submitted a request 

that we consider a higher-paying DRG 

assignment for dual array 

neurostimulator pulse generator cases. 

We have taken this request into 

consideration and have reviewed the FY 

2005 Medicare charge data for cases that 

use implantable neurostimulator for 

deep brain stimulation. Our findings 

and a full discussion of this issue can 

be found in section II.D.2.a. of the 

preamble of this final rule. 

Comment: A number of commenters 

were concerned that the expiration of 

the new technology add-on payment for 

Kinetra will lead to inadequate 

payments for full system Kinetra

implants. One commenter requested 

that CMS reconsider its decision to end 

payments for the Kinetra implantable 

neurostimulator. Other commenters 

thanked CMS for its efforts in granting 

add-on payments for the Kinetra

during the last 2 years. 

Response: As noted above, the 

Kinetra technology will be beyond the 

2-year to 3-year period during which it 

can be considered new during FY 2007. 

Therefore, we are finalizing our 

proposal from the FY 2007 IPPS 

proposed rule (71 FR 24070) to 

discontinue add-on payments for the 

Kinetra rechargeable implantable 

neurostimulator for FY 2007. 

b. Endovascular Graft Repair of the 

Thoracic Aorta 

W. L. Gore & Associates, Inc. 

submitted an application for 

consideration of its Endovascular Graft 

Repair of the Thoracic Aorta (GORE 

TAG) for new technology add-on 

payments for FY 2006. The 

manufacturer argued that endovascular 

stent-grafting of the descending thoracic 

aorta provides a less invasive alternative 

to the traditional open surgical 

approach required for the management 

of descending thoracic aortic 

aneurysms. The GORE TAG device is a 

tubular stent-graft mounted on a 

catheter-based delivery system, and it 

replaces the synthetic graft normally 

sutured in place during open surgery. 

The device was initially identified using 

ICD–9–CM procedure code 39.79 (Other 

endovascular repair (of aneurysm) of 

other vessels). The applicant also 

requested a unique ICD–9–CM 

procedure code. As noted in Table 6B of 

the FY 2006 IPPS final rule (70 FR 

47637), new procedure code 39.73 

(Endovascular implantation of graft in 

thoracic aorta) was assigned to this 

technology. 

In the FY 2006 IPPS final rule (70 FR 

47356), we approved the GORE TAG 

device for new technology add-on 

payment for FY 2006. We noted that any 

substantially similar device that is FDAapproved before or during FY 2006 that 

uses the same ICD–9–CM procedure 

code as GORE TAG and is assigned to 

the same DRGs as those approved for 

new technology add-on payments may 

also receive the new technology add-on 

payment associated with this 

technology in FY 2006. 

FDA approved GORE TAG on March 

23, 2005. The technology remains 

within the 2- to 3-year period during 

which it can be considered new. 

Therefore, as we proposed (71 FR 

24070), we are continuing add-on 


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payments for the endovascular graft 

repair of the thoracic aorta for FY 2007. 

Comment: Some commenters 

supported our proposal to continue new 

technology add-on payments for GORE 

TAG for FY 2007. 

Response: We thank the commenters 

for their support and, as noted above, 

we are continuing new technology addon payments for GORE TAG for FY 

2007. 

c. Restore Rechargeable Implantable 

Neurostimulator 

Medtronic Neurological submitted an 

application for new technology add-on 

payments for its Restore Rechargeable 

Implantable Neurostimulator for FY 

2006. The Restore Rechargeable 

Implantable Neurostimulator is 

designed to deliver electrical 

stimulation to the spinal cord to block 

the sensation of pain. The technology 

standard for neurostimulators uses 

internal sealed batteries as the power 

source to generate the electrical current. 

These internal batteries have finite lives, 

and require replacement when their 

power has been completely discharged. 

According to the manufacturer, the 

Restore Rechargeable Implantable 

Neurostimulator ‘‘represents the next 

generation of neurostimulator 

technology, allowing the physician to 

set the voltage parameters in such a way 

that fully meets the patient’s 

requirements to achieve adequate pain 

relief without fear of premature 

depletion of the battery.’’ The applicant 

stated that the expected life of the 

Restore rechargeable battery is 9 years, 

compared to an average life of 3 years 

for conventional neurostimulator 

batteries. We approved new technology 

add-on payments for all rechargeable, 

implantable neurostimulators for FY 

2006. Cases involving these devices, 

made by any manufacturer, are 

identified by the presence of newly 

created ICD–9–CM code 86.98 (Insertion 

or replacement of dual array 

rechargeable neurostimulator pulse 

generator). 

As noted above, the period for which 

technologies are eligible to receive new 

technology add-on payments is 2 to 3 

years after the product becomes 

available on the market and data 

reflecting the cost of the technology are 

reflected in the DRG weights. The FDA 

approved the Restore Rechargeable 

Implantable Neurostimulator in 2005. 

However, as noted above and in the FY 

2006 IPPS final rule (70 FR 47358), at 

least one similar product was approved 

by the FDA as early as April 2004. 

Nevertheless, consistent with current 

policy (70 FR 47362) and decisions for 

prior products (that is, bone 

morphogenetic products and CRT–D 

devices), as we proposed (71 FR 24070 

through 24071), we are continuing new 

technology add-on payments for 

rechargeable, implantable 

neurostimulators in FY 2007 because 

the product will be beyond the 3-year 

period only in the latter 6 months of the 

fiscal year. 

Comment: Some commenters 

supported our decision to continue addon payments for the Restore

Rechargeable Implantable 

Neurostimulator. 

Response: We appreciate the 

commenters’ support and as noted 

above, we are continuing new 

technology add-on payments for 

Restore Rechargeable Implantable 

Neurostimulator for FY 2007. 

4. FY 2007 Applications for New 

Technology Add-On Payments 

a. C-Port Distal Anastomosis System 

Cardica, Inc. submitted an application 

for new technology add-on payments for 

FY 2007 for its Cardica C-Port Distal 

Anastomosis System. The manufacturer 

stated that the C-Port System is 

indicated for all patients requiring a 

vein as a conduit during a coronary 

bypass operation for bypassing a 

coronary artery stenosis or occlusion. 

The manufacturer contended that the CPort System is specifically designed to 

create a reliable and consistent end-toside anastomosis between a conduit, 

such as a venous graft, and a small 

arterial vessel during the bypass 

surgery. The device consists of eight 

stainless steel clips and a delivery 

system. Once the vein graft has been 

loaded into the device and the device 

positioned against the target vessel, the 

anastomosis is created by pushing a 

single button. Cardica, Inc. stated the 

main purpose of the device is to replace 

a conventional hand-sewn, distal 

anastomosis with an automated, 

compliant, mechanical anastomosis. 

We received the following public 

comments at the new technology town 

hall meeting regarding whether this 

technology meets the substantial 

clinical improvement criteria: 

Comment: The manufacturer argued 

that this technology meets the 

substantial clinical improvement 

criterion because: 

• It achieves higher patency rates at 6 

months compared to conventional handsewn anastomoses. 

• Use of the device will result in less 

surgeon-to-surgeon variability in the 

quality of the anastomosis compared to 

hand sewing. 

• The device leads to reduced 

operative time. 

• The product allows for the creation 

of an anastomosis during minimally 

invasive surgery. 

In addition, we received written 

comments expressing support for 

approval of new technology add-on 

payments for the C-Port System. These 

commenters noted that—

• The device allows the anastomosis 

to be completed quickly, reducing 

patient complications during surgery 

from ischemia. 

• The device will allow for smaller 

incisions during heart surgery and 

physicians will not have to position 

their hands in the chest cavity in order 

to hand-sew the anastomosis. 

• The rapidly deployed anastomosis 

clamp provides patients with a surgical 

alternative where one would otherwise 

not be available due to the 

comorbidities associated with the more 

invasive CABG procedures. 

Response: We appreciate the time and 

effort the applicant took to present at 

the town hall meeting. We indicated in 

the proposed rule that we would 

consider the information presented in 

the written comments and at the town 

hall meeting, and invoted interested 

parties to submit objective data that 

would support the assertions presented 

above by the commenters. 

The C-Port System was granted 

section 510(k) approval from the FDA 

on November 10, 2005. While the device 

appeared to meet the criteria for being 

considered new based on its FDA 

approval date, we were concerned that 

various forms of surgical staples and 

clips have been used for more than a 

decade in a wide range of surgical 

procedures. In fact, the FDA found that 

the C-Port System ‘‘is substantially 

equivalent to the predicate devices with 

regard to indications, device 

characteristics, method of use, labeling 

and materials.’’ Thus, given its 

similarity to other devices currently on 

the market, we were concerned that the 

C-Port System may not qualify as new. 

In the FY 2007 IPPS proposed rule, we 

solicited specific comments on whether 

this device is new and how it could be 

distinguished from predicate devices 

that perform the same or a similar 

function. 

We received the following public 

comments in response to the proposed 

rule. 

Comment: The manufacturer 

commented that the C-Port System 

meets the newness criterion for the 

following reasons: 

• The FDA section 510(k) approval 

process identifies predicate devices as 

having ‘‘a similar, not necessarily 

identical use and function.’’


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• There is no other ‘‘fully-integrated 

anastomotic system cleared by the FDA 

for the creation of an anastomosis 

between a blood vessel graft and a target 

coronary artery.’’ There are no ‘‘clip or 

staple-based automated distal coronary 

anastomotic devices such as [C-Port] 

approved by the FDA.’’ The 

manufacturer argued that while the 

devices they identified in the FDA 

section 510(k) approval process are 

similar to C-Port system, none of them 

are identical. 

• C-Port was FDA approved in 

November 2005, thus enabling the 

device to still qualify as new based on 

its FDA approval date. 

• There is no clinical precedence for 

the use of a stapling device in creating 

distal coronary anastomoses, and there 

are no ICD–9 CM codes for stapling 

devices—the lack of the procedure code 

means that CMS does not have charge 

data for C-Port and that the device’s 

costs are not reflected in the current 

DRG weights. 

• CMS approved Kinetra in 2004 

and stated that the Kinetra device was 

not ‘‘significantly different in terms of 

how it achieves its desired clinical 

results from its predecessor Soletra.’’

The manufacturer believed that the 

approval of Kinetra sets precedence for 

C-Port approval. 

Response: We appreciate the 

manufacturer’s clarification of the 

questions we posed in the proposed rule 

about whether the C-Port would meet 

the newness criterion. The additional 

information submitted has allowed us to 

determine that the C-Port meets the 

newness criterion. 

In response to the commenter’s 

statement about Kinetra, we indicated 

that Soletra and Kinetra achieve the 

desired clinical result through the same 

stimulation mechanism. However, we 

did not find Soletra and Kinetra to be 

substantially similar products. We noted 

that Soletra controls symptoms only on 

one side of a patient’s body, while 

Kinetra provides bilateral control of 

neurological symptoms through a single 

device. We determined in the FY 2005 

IPPS final rule (69 FR 49019) that 

Kinetra represented a substantial 

clinical improvement over the previous 

Soletra device. 

In the proposed rule, we also noted 

that there is currently no ICD–9–CM 

code used to identify how the 

anastomosis is performed. The surgical 

technique used to graft the bypass to the 

arterial vessel is part of the surgical 

procedure itself and is not separately 

identified in our current coding 

structure. Although there is not an 

explicit code to identify C-Port, the 

hospital’s charge for the device will be 

included on its bill. The hospital is 

permitted to charge for all items and 

services it furnishes irrespective of 

whether a particular item is identified 

by an explicit ICD–9–CM code. The 

charges included on hospital bills for 

the device will be part of the relative 

weight calculation 2 years later (that is, 

FY 2005 hospital charge data are used 

to set the FY 2007 relative weights). 

Comment: The manufacturer of CPort urged CMS to differentiate 

between ‘‘distinct procedures involving 

the creation of anastomosis’’ by creating 

the following codes: (a) Anastomosis, 

manual; and (b) anastomosis, 

automated, using single or multiple clip 

array deployment technology. The 

manufacturer commented that a new 

code should be created for C-Port

because the C-Port Distal Anastomosis 

procedure is not a typical part of the 

bypass procedure code and the use of 

the C-Port system requires training and 

proctoring for physicians and OR staff to 

use the equipment because the C-Port

system comprises new steps and 

preparation in the bypass procedure. 

Finally, the manufacturer stated that 

CMS set a precedent for the creation of 

a new code by creating a code for a 

drug-eluting stent even though ICD–9–

CM procedure codes already existed for 

stent procedures and by creating a new 

code to distinguish single versus dual 

channel-pulse generator devices 

(Kinetra by Medtronic). 

Response: While the use of the CPort device may represent a difference 

in technique of creating a distal 

anastomosis, we do not agree that it is 

a distinct procedure. Historically, we 

have subdivided procedures involving 

the insertion of specific devices that are 

designed to achieve a specific 

therapeutic purpose, but we have not 

assigned a code for specific tools used 

to perform surgery. Kinetra, a stent and 

a pacemaker, is an example of a device 

that is implanted in a patient to treat an 

illness that is appropriately assigned a 

code. To date, we have not used a code 

to identify a specific type of surgical 

tool such as a scalpel, saw, or clamp. 

Similarly, we view C-Port as a surgical 

tool (albeit far more sophisticated or 

innovative than those just mentioned) 

that should also not be recognized by its 

own ICD–9–CM code. 

The applicant made several 

arguments in support of the device 

meeting the cost criterion. Cardica, Inc. 

estimated that the cost of each device 

will be approximately $1,200. The 

applicant assumed a hospital markup of 

100 percent, with an average use of 2.5 

C-Port devices per case. Therefore, it 

estimated that the total average charge 

per patient will be $6,000. The C-Port

System would be used when a coronary 

artery bypass graft is performed. Thus, 

we assessed whether it meets the cost 

criterion in relation to the threshold for 

DRGs 106 (Coronary Bypass with 

Percutaneous Transluminal Coronary 

Angioplasty), 547 (Coronary Bypass 

with Cardiac Catheter with Major CV 

Diagnosis), 548 (Coronary Bypass with 

Cardiac Catheter without Major CV 

Diagnosis), 549 (Coronary Bypass 

without Cardiac Catheter with Major CV 

Diagnosis), and 550 (Coronary Bypass 

without Cardiac Catheter without Major 

CV Diagnosis). We note that the data 

analysis for this technology is slightly 

unusual, as the DRGs to which the 

technology would have been assigned in 

FY 2005 (the MedPAR data we are 

currently using) are DRGs 107 and 109. 

These DRGs were terminated in FY 

2006, and 4 new coronary bypass DRGs 

were created for these cases (DRGs 547, 

548, 549, and 550). The manufacturer 

provided estimates showing a caseweighted threshold for DRGs 106, 547, 

548, 549 and 550 of $75,373. The 

applicant projected a 20-percent market 

penetration for the device in FY 2007 or 

its use in approximately 23,000 cases 

across the 5 DRGs. The applicant 

submitted data showing average 

standardized charges for cases using the 

C-Port System of $80,887. Therefore, 

the applicant argued that the device 

meets the cost threshold for a new 

technology add-on payment. Our 

internal data analysis of the technology, 

using the FY 2005 MedPAR data and 

Table 10 thresholds for FY 2005, shows 

a case-weighted threshold of $68,416. 

We identified cases using coronary 

bypass procedure codes 36.10, 36.11, 

36.12, 36.13 and 36.14, and concluded 

that the case-weighted average 

standardized charge for these bypass 

cases was $79,394. Thus, our internal 

data also suggested that the device 

meets the cost threshold. 

As we discussed in the proposed rule, 

the applicant made several arguments in 

support of the device meeting the 

substantial clinical improvement 

criterion. The manufacturer argued that 

the C-Port creates a reliable and fully 

compliant end-to-side anastomosis 

between a vein graft and a coronary 

artery, in less time than is required to 

create a hand-sewn distal anastomosis. 

The applicant also stated that the CPort System integrates deployment of 

the anastomotic clips and creation of the 

arteriotomy, thus enabling deployment 

to occur without occlusion of blood 

flow through the target vessel. However, 

we note that the applicant submitted 

evidence suggesting that the device does 

not always produce reliable 


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anastomoses; specifically, a study of 130 

patients receiving 132 devices reported 

13 incomplete anastomoses in 12 

patients, and the study also noted that 

additional manual stitches were 

required in the majority of the patients 

studied. Therefore, we were concerned 

that these studies suggested that the CPort System may not represent a 

substantial clinical improvement over 

the traditional hand-sewn technique. At 

the town hall meeting, the applicant 

noted that these results were associated 

with inexperience preparing the target 

vessel, vein thickness assessment, 

proper device alignment and 

anastomosis site selection rather than 

problems with the device itself. The 

applicant believed that these problems 

will become infrequent as surgeons have 

more experience with the device. In the 

FY 2007 IPPS proposed rule, we 

solicited further information from 

commenters that would suggest how the 

product meets the substantial clinical 

improvement criterion. 

We received the following comment 

in response to the proposed rule. 

Comment: The manufacturer 

submitted the following comments to be 

considered in our evaluation of whether 

C-Port met the substantial clinical 

improvement criterion: 

• Intraoperative anastomotic failures 

with the hand-sewn technique occur in 

approximately 10 percent of patients. 

Falk, et al., evaluated vein graft patency 

using a meta-analysis of 28 published 

studies with over 28,000 grafts and 

found that occlusion within 30 days 

occurs in about 12 percent of vein grafts 

while occlusion within 6 months occurs 

in 20 percent. 

• The C-Port device may mitigate 

some of the negative factors found in 

hand-sewn anastomoses that impact 

vein graft patency. Post-operative vein 

graft patency rates using the hand-sewn 

technique were 88 percent at 30 days 

and 80 percent at 6 months (data 

obtained from historical controls); 

whereas patency rates using the C-Port

device were 99 percent at discharge and 

96 percent at 6 months. 

• In the greater than 1-year followup 

group, none of the patients in the 

pivotal C-Port study required a 

reintervention. 

• The ‘‘10 percent failure rate’’ cited 

in a C-Port publication referred to a 

failure in surgeons using the device (due 

to lack of experience using it), not a 

failure of the device itself. 

Response: We are concerned that 

information presented by the applicant 

does not demonstrate that this 

technology is a sufficient improvement 

over hand-sewing the distal 

anastomosis. Although patency rates 

using the C-Port device were 

reportedly higher than those found 

using the hand-sewn technique (99 

percent at discharge and 96 percent at 

6 months compared to 88 percent at 30 

days and 80 percent at 6 months), we 

also found that the data on the handsewn patency rates was derived from a 

meta-analysis of over 28,000 bypass 

grafts to different coronary vessels, 

many of which may have been 

comparatively poor candidates for 

bypass grafting, suggesting a possible 

selection bias in the arteries in the CPort study. We believe that a clinical 

study demonstrating substantial clinical 

improvement in outcomes is necessary 

for this technology because the 

comparison is of the CABG procedure 

using the C-Port device to the handsewn technique. In some cases, our 

approval of a technology was based on 

a clinical assessment that at least one of 

the criteria for evaluating substantial 

clinical improvement listed in the new 

technology final rule (66 FR 46914) was 

met. For example, our approval of the 

Restore rechargeable neurostimulator 

was based on evidence that showed it 

decreased the ‘‘rate of subsequent * * * 

therapeutic interventions’’ by avoiding a 

surgery to replace a battery. Similarly, 

we approved GORE TAG because it 

‘‘offers a treatment option for patient 

population unresponsive to, or 

ineligible for, currently available 

treatments.’’ In these cases, we were less 

reliant on a clinical study to 

demonstrate improvement over an 

existing technology than our clinical 

judgment that the product achieved its 

intended purposes which itself is a 

substantial clinical improvement. With 

C-Port or with a hand-sewn 

anastomosis, the treatment is the same 

(a CABG for coronary artery vessel 

disease). Thus, clinical studies 

demonstrating an improvement in 

CABG outcomes using the C-Port

device relative to the hand-sewn 

technique are critical to approving the 

device for new technology add-on 

payments. 

Given the relatively high rates of 

success of both the hand sewn and the 

automated technique, we were not able 

to determine that the C-Port device is 

a substantial clinical improvement over 

the traditional hand-sewn technique. 

Accordingly, after consideration of the 

comments received, we are not 

approving the C-Port Distal 

Anastomosis System for FY 2007 new 

technology add-on payment. 

There are several potential criteria 

listed in the new technology final rule 

that C-Port could potentially meet. For 

instance, it is possible that C-Port will 

reduce recovery time or lead to more 

rapid beneficial resolution of the disease 

process treatment. Given the potential 

benefits of C-Port, it is likely that we 

would approve the technology for addon payments with a study that more 

definitively demonstrates substantial 

clinical improvement. For instance, our 

main concern with the study presented 

was that the control group and the study 

population used to demonstrate 

substantial clinical improvement may 

not have been directly comparable. If 

there was a study that showed similar 

improvements in patency rates between 

the control group and a study 

population where the patients were 

directly comparable in their coronary 

artery vessel disease, we believe it 

would be more likely to demonstrate 

that the substantial clinical 

improvement criterion was met. 

b. NovoSeven for Intracerebral 

Hemorrhage 

The Pinnacle Health Group in 

conjunction with Novo Nordisk Inc. (the 

manufacturer) submitted an application 

for new technology add-on payments for 

FY 2007 for NovoSeven for 

Intracerebral Hemorrhage. However, the 

applicant withdrew its application for 

new technology add-on payment on 

June 07, 2006. 

We received the following public 

comments regarding this application for 

new technology add-on payments in 

response to the FY 2007 IPPS proposed 

rule. 

Comment: One commenter supported 

approving new technology add-on 

payments for NovoSeven. The 

commenter believed that the availability 

of an add-on payment would help 

facilitate patient access to this important 

and costly therapy. 

Response: We appreciate the 

commenter’s response to the proposed 

rule. We note that, during the comment 

period, the applicant withdrew its 

application from consideration for new 

technology add-on payments for FY 

2007. 

We appreciate the applicant for its 

submittal of an application for new 

technology add-on payments and 

encourage a resubmission of an 

application upon FDA approval of its 

technology. 

c. X STOP Interspinous Process 

Decompression System 

St. Francis Medical Technologies 

submitted an application for new 

technology add-on payments for the X 

STOP Interspinous Process 

Decompression System for FY 2007. 

Lumbar spinal stenosis describes a 

condition that occurs when the spaces 

between bones in the spine become 


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narrowed due to arthritis and other agerelated conditions. This narrowing, or 

stenosis, causes nerves coming from the 

spinal cord to be compressed, thereby 

causing symptoms including pain, 

numbness, and weakness. It particularly 

causes symptoms when the spine is in 

extension, as occurs when a patient 

stands fully upright or leans back. The 

X STOP device is inserted between the 

spinous processes of adjacent vertebrae 

in order to provide a minimally invasive 

alternative to conservative treatment 

(exercise and physical therapy) and 

invasive surgery (spinal fusion). It 

works by limiting the spine extension 

that compresses the nerve roots while 

still preserving as much motion as 

possible. The device is inserted in a 

relatively simple, primarily outpatient 

procedure using local anesthesia. 

However, in some circumstances, the 

physician may prefer to admit the 

patient for an inpatient stay. The 

manufacturer described the device as 

providing ‘‘a new minimally invasive, 

stand-alone alternative treatment for 

lumbar spinal stenosis.’’

The X STOP Interspinous Process 

Decompression system received premarket approval from the FDA on 

November 21, 2005. The device is 

currently described by ICD–9–CM code 

84.58 (Implantation of Interspinous 

process decompression device) 

(excluding: fusion of spine (codes 81.00 

through 81.08, and 81.30 through 

81.39)). This ICD–9–CM code went into 

effect on October 1, 2005. 

The manufacturer provided data in 

support of the device meeting the cost 

threshold criterion. The applicant stated 

that there would be an average of 1.6 

units used per case. Each unit costs 

$5,500; therefore, the technology is 

expected to cost $8,800 per case. The 

device is currently assigned to DRGs 

499 (Back and Neck Procedures Except 

Spinal Fusion with CC) and 500 (Back 

and Neck Procedures Except Spinal 

Fusion without CC). The manufacturer 

projected that there would be 

approximately 424 patients eligible to 

receive the device in DRG 499 in FY 

2007, while there may be approximately 

1,700 patients who receive the device in 

DRG 500. The manufacturer also 

provided data for cases involved in the 

clinical trials. The average standardized 

charge for the cases in FY 2004 was 

$24,065. The weighted threshold for 

DRGs 499 and 500 is $20,096. However, 

the manufacturer argued that because 

significantly less than 20 percent of 

patients receiving the X STOP 

experienced complications or had 

comorbidities, the threshold should be 

calculated by estimating that 20 percent 

of patients would be assigned to DRG 

499 and 80 percent would to DRG 500. 

The manufacturer stated in its 

application that, using this 

methodology, the applicable threshold 

should be $19,796. Using either 

calculation, it appears that the 

technology meets the cost threshold for 

new technology add-on payments. 

The applicant also submitted 

information in support of its claim of 

meeting the substantial clinical 

improvement criterion. The 

manufacturer stated that the X STOP 

device is placed between the spinous 

processes to limit extension of the 

symptomatic level(s), yet allowing 

flexion, axial rotation, and lateral 

bending (that is, the device limits 

pressure on the spinal nerves and the 

resulting pain symptoms when the 

patient is in an upright position or leans 

backward while also preserving the 

patient’s ability to turn side-to-side, 

bend forward, and to turn to either 

side). The applicant contended that this 

technology provides an alternative with 

improved clinical outcomes to 

conservative and surgical treatments. 

The manufacturer further stated that the 

device may offer a new alternative to 

lumbar spinal decompression 

procedures such as laminectomy and 

laminotomy. Additional information 

included in the application suggested 

that the device preserves spinal motion 

and is superior to a spinal 

decompression procedure that requires 

concomitant fusion (with or without 

instrumentation). The applicant argued 

that the advantages over spinal 

decompression include reduced risk, 

shorter hospital stay, and earlier 

improvement in pain and function. The 

manufacturer further contended that 

disease progression at adjacent levels is 

minimal following X STOP 

implantation compared to the known 

risk associated with surgical 

decompression and concomitant fusion. 

The applicant stated that the X STOP is 

comparable to traditional surgical 

decompression of lumbar spinal 

stenosis with respect to improved 

quality of life postoperatively. 

According to the applicant, the device 

provides advantages over nonoperative 

care, including better symptom relief, 

improved function, and increased 

patient satisfaction. 

We received the following public 

comments through the new technology 

town hall meeting process regarding this 

application for add-on payments. 

Comment: The applicant asserted that 

the X STOP Interspinous Process 

Decompression system has the 

following advantages: 

• It retains spinal anatomy and all 

spinal structures. 

• The device allows for increased 

function and less pain after 

implantation as evidenced by 

radiographic measures that showed 

increases in the spinal canal area by 18 

percent, diameter by 9 percent, and 

subarticular diameter (the route that the 

nerves exit the spine) by 50 percent. In 

lateral view: area increased by 25 

percent and width by 41 percent. 

• The X STOP is a reversible 

procedure that causes no damage to 

facets or disks. 

• The device allows for a treatment 

option for patients that cannot undergo 

surgeries with general anesthesia. 

• The rate of complications 

associated with implantation of the 

device is below 1 percent. 

Response: In the proposed rule, we 

indicated that we would evaluate these 

assertions as we further considered this 

application for new technology add-on 

payments for the final rule. We also 

noted that the study that the applicant 

summarized at the town hall meeting for 

the X STOP used a randomized study 

that targeted lumbar spinal stenosis 

patients with mild to moderate 

symptoms. The control group did not 

require operative care. In the proposed 

rule, we solicited information from the 

comments that demonstrates how the 

study populations showed substantial 

clinical improvement compared to the 

control group. 

We believe that the device satisfies 

the newness and cost threshold criteria 

for new technology add-on payments. 

However, in the FY 2007 IPPS proposed 

rule, we expressed our concern that the 

information included with the 

application may raise issues about 

substantial clinical improvement. 

During the FDA approval process, the 

Center for Devices and Radiological 

Health (CDRH) Advisory Panel voted 

against premarket approval (PMA) in 

August 2004 because of concerns about 

proper patient selection as well as the 

lack of objective endpoints, especially 

radiographic endpoints. The Panel also 

mentioned the overall low clinical 

efficacy rate in the study population. 

The device subsequently received PMA 

approval, but only on the condition that 

it be used in the context of a long term 

(5 year) follow-up study. In the 

proposed rule, we solicited information 

from commenters that addressed the 

concerns raised by the CDRH Advisory 

Panel or other information bearing on 

the issue of whether this product meets 

the substantial clinical improvement 

criterion. 

We note that the town hall meeting 

produced contradictory information 

regarding whether this procedure is 

generally performed in inpatient or 


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outpatient settings. The presenter 

indicated that over 90 percent of his 

patients were treated as outpatients. The 

manufacturer noted that 90 percent of 

non-U.S. patients and approximately 

two-thirds of U.S. patients since FDA 

approval have been treated in inpatient 

settings. While the setting where the 

procedure is typically performed has no 

bearing on whether the product 

represents a substantial clinical 

improvement, we noted that we believe 

the physician should select the most 

appropriate site to perform the 

procedure based on the clinical needs of 

the patient. 

We received the following comments 

in response to the FY 2007 IPPS 

proposed rule. 

Comment: The manufacturer 

commented that the contradictory 

information we noted in the proposed 

rule about whether the procedure in 

general performed in the outpatient or 

inpatient setting was likely the result of 

the presenter at the town hall meeting 

misspeaking when he said that the 

device was used in the outpatient 

setting about 90 percent of the time. 

Although the device may be used with 

local anesthesia, the manufacturer 

predicted that many clinicians attending 

to Medicare patients will choose general 

anesthesia and will use the procedure in 

an inpatient setting. The manufacturer 

stated that the X STOP device is 

currently used in the inpatient setting 

about 90 percent of the time. 

Response: We appreciate the 

commenter’s clarification of this point. 

As we indicated in the proposed rule, 

the site of service has no bearing on 

whether we will determine the 

technology to be a substantial clinical 

improvement. However, given the 

similarity in the criteria we apply in the 

two settings for determining substantial 

clinical improvement, we note that a 

decision to approve a device for 

inpatient new technology add-on 

payment may have implications for 

outpatient new technology pass-through 

payment. 

Comment: In response to our request 

for additional information supporting 

that the X STOP device meets the 

substantial clinical improvement 

criterion, the manufacturer reiterated 

many of the comments that it submitted 

through the new technology town hall 

meeting process. Mainly, the commenter 

stated that X STOP offers an alternative 

to surgery that is associated with fewer 

and less severe complications, is a 

reversible procedure, and offers a faster 

recovery time than more invasive 

surgery. The commenter also stated that 

X STOP meets the criterion when 

compared to other disease management 

modalities for lumbar spinal stenosis 

patients, as evidenced by symptom 

relief, physical functioning, treatment 

satisfaction, and health-related quality 

of life, and that use of X STOP results 

in—

• Comparable treatment efficacy 

when compared to laminectomy 

• Lower rates of intraoperative 

complications compared to surgical 

decompression with or without 

concomitant fusion 

• Lower reoperation rates for 

unresolved stenosis systems compared 

to other surgical treatments. 

In addition, the manufacturer stated 

that it addressed the issues that the 

Advisory Panel to the FDA cited as 

reasons for voting against approving X 

STOP. Those issues were in regards to 

proper patient selection, a lack of 

objective endpoints, especially 

radiographic endpoints and an overall 

low clinical efficacy rate in the study 

population. The manufacturer claimed 

that it addressed the concerns of the 

Advisory Panel by submitting additional 

data and analyses to the FDA that—

• Identified patients with LSS and 

moderately impaired physical function 

at baseline as the appropriate 

indication. 

• Supplemented ‘‘the showing of the 

mechanism of effect on the spine in 

cadavers with in vivo clinical 

radiographic data.’’

• Addressed the issue of low clinical 

efficacy rates, by showing that the 

success rates using X STOP were 

comparable to those of more invasive 

procedures that are covered by 

Medicare. 

The manufacturer further noted that 

the Advisory Panel wrote in its 

Summary of Safety and Effectiveness 

document that ‘‘the X STOP device met 

the primary clinical study endpoint for 

success, exceeding the success rate of 

the control in every statistical analysis.’’

Finally, the manufacturer noted that the 

FDA requirement that X STOP’s 

approval was conditioned on a 5-year 

followup study was not uncommon for 

spinal implant devices and that, over 

the past 10 years, all nine spinal 

implant FDA approvals have had 

similar conditional requirements. The 

manufacturer also commented that CMS 

approved the INFUSE Bone Graft device 

and noted that the FDA required a 6- 

year followup study as a condition of its 

approval of that device. 

Several commenters who were 

individual physicians who have had 

experience using the X STOP device 

indicated that X STOP provides an 

alternative to more invasive surgery 

such as a laminectomy after 

conservative treatment has failed. All of 

the commenters supported approving 

the device for new technology add-on 

payment. In addition to commenters’

support that the device is minimally 

invasive and has short operative and 

recovery time, some of the commenters 

mentioned other positive outcomes that 

the X STOP procedure—

• Increases foraminal height and 

produces minimal reversal of the 

lordosis, as measured by post operative 

x-rays; 

• Reduced the pain reported by 

patients by half in some cases; 

• Provided alleviation of neurogenic 

claudication symptoms; and 

• Benefited patients with significant 

comorbidities, including cardiothoracic 

problems, specifically chronic 

obstructive pulmonary disease or 

coronary artery disease 

In addition, some commenters noted 

that the X STOP device can very easily 

be implanted in the outpatient setting 

(assuming appropriate patientselection), thus allowing high inpatient 

costs to be avoided. 

Response: We appreciate the 

commenters’ submittal of comments in 

support of X STOP. With respect to 

substantial clinical improvement, we 

continue to be concerned that the FDA 

Advisory Panel noted the overall low 

clinical efficacy rate in the study 

population and only approved the 

technology conditional on a 5 year 

followup study. Nevertheless, we note 

that the FDA did approve the 

technology, meaning that it is safe and 

effective (that is, it achieves its intended 

purpose). Further, we note that the 

applicant was able to address the FDA 

concern about lack of objective 

endpoints by the showing of the 

mechanism of effect on the spine in 

cadavers with in vivo clinical 

radiographic data. That is, the applicant 

was able to show that the X STOP 

device limits spine extension that 

compresses the nerve. Thus, we believe 

that the technology has promise for 

providing a less invasive alternative to 

procedures such as laminectomy or 

fusion for patients that have failed 

conservative treatment (exercise, 

physical therapy and medication). The 

X STOP system represents a new level 

of treatment on the continuum of care 

for patients with lumbar spinal stenosis 

that previously did not exist. 

Accordingly, after consideration of 

the comments received, we are 

approving the X STOP Interspinous 

Process Decompression System for new 

technology add-on payment for FY 

2007. However, we remain interested in 

seeing whether the clinical evidence 

from the 5-year followup study required 

by the FDA demonstrates that X STOP 


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continues to be effective. Cases 

involving X STOP will be identified by 

ICD–9–CM code 84.58 (Implantation of 

interspinous process decompression 

device). These cases are generally 

included in DRG 499 (Back and Neck 

Procedures Except Spinal Fusion with 

CC) and DRG 500 (Back and Neck 

Procedures Except Spinal Fusion 

without CC). As noted in the proposed 

rule, the manufacturer submitted data to 

support its estimated cost per case 

involving the X STOP procedure of 

$8,800. Accordingly, we are finalizing a 

maximum add-on payment of $4,400 for 

cases that involve this technology. 

5. Interim and Final Cost Threshold 

Tables Due to Changes to Wage Index 

and Budget Neutrality Factors 

Table 10 of the IPPS proposed and 

final rules contains the cost thresholds 

that are used to determine whether a 

technology meets the criteria for new 

technology add-on payments. We are 

publishing an interim Table 10 in this 

final rule. We use the national adjusted 

operating standardized amounts in 

calculating the cost threshold. As noted 

in section III. and in the Addendum to 

this final rule, the final national 

adjusted operating standardized 

amounts will be published subsequent 

to this final rule when the wage index 

and budget neutrality factors are 

finalized for FY 2007. Therefore, we 

will also publish a revised version of 

Table 10, containing the final thresholds 

for FY 2008 between August 1 and 

October 1. 

III. Changes to the Hospital Wage Index 

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 definitions of statistical areas 

established by the Office of Management 

and Budget (OMB). A discussion of the 

FY 2007 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 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 2007 is 

discussed in section II.B. of the 

Addendum to this final rule. 

As discussed below in section III.G. 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 the wage index. 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 2007 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, 2006 

(the FY 2007 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). OMB defines a CBSA, beginning 

in 2003, as ‘‘a geographic entity 

associated with at least one core of 

10,000 or more population, plus 

adjacent territory that has a high degree 

of social and economic integration with 

the core as measured by commuting 

ties.’’ The standards designate and 

define two categories of CBSAs: 

Metropolitan Statistical Areas (MSAs) 

and Micropolitan Statistical Areas (65 

FR 82235). 

According to OMB, MSAs are based 

on urbanized areas of 50,000 or more 

population, and Micropolitan Statistical 

Areas (referred to in this discussion as 

Micropolitan Areas) are based on urban 

clusters with a population of at least 

10,000 but less than 50,000. Counties 

that do not fall within CBSAs are 

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

OMB defined MSAs around areas with 

a minimum core population of 50,000, 

and smaller areas were ‘‘Outside 

MSAs.’’

The general concept of the CBSAs is 

that of an area containing a recognized 

population nucleus and adjacent 

communities that have a high degree of 

integration with that nucleus. The 

purpose of the standards is to provide 

nationally consistent definitions for 

collecting, tabulating, and publishing 

Federal statistics for a set of geographic 

areas. CBSAs include adjacent counties 

that have a minimum of 25 percent 

commuting to the central counties of the 

area. (This is an increase over the 

minimum commuting threshold of 15 

percent for outlying counties applied in 

the previous MSA definition.) We 

consider CBSAs that are MSAs to be 

urban, and CBSAs that are Micropolitan 

Statistical Areas as well as areas outside 

of CBSAs to be rural. In addition, where 

an MSA has been divided into 

Metropolitan Division to comprise the 

labor market areas for purposes of 

calculating the wage index (69 FR 

49029). 

The revised CBSAs established by 

OMB comprised MSAs and 

Micropolitan Areas based on Census 

2000 data. (A copy of the announcement 

may be obtained at the following 

Internet address: http:// 

www.whitehouse.gov/omb/bulletins/ 

fy04/b04–03.html.) The revised 

definitions recognize 49 MSAs and 565 

Micropolitan Areas, and extensively 

changed the composition of many of the 

MSAs that existed prior to the revisions. 

The revised area designations resulted 

in a higher wage index for some areas 

and a lower wage index for others. 

Further, some hospitals that were 

previously classified as urban are now 

in rural areas. Given the significant 

payment impacts upon some hospitals 

because of these changes, we provided 

a transition period to the new labor 

market areas in the FY 2005 IPPS final 

rule (69 FR 49027 through 49034). As 

part of that transition, we allowed urban 

hospitals that became rural under the 

new definitions to maintain their 

assignment to the MSA where they were 

previously located for the 3-year period 

of FY 2005, FY 2006, and FY 2007. 


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Specifically, these hospitals were 

assigned the wage index of the urban 

area to which they previously belonged. 

(For purposes of the wage index 

computation, the wage data of these 

hospitals remained assigned to the 

statewide rural area in which they are 

located.) The hospitals receiving this 

transition will not be considered urban 

hospitals; rather, they will maintain 

their status as rural hospitals. Thus, the 

hospital would not be eligible, for 

example, for a large urban add-on 

payment under the capital PPS. In other 

words, it is the wage index, but not the 

urban or rural status, of these hospitals 

that is being affected by this transition. 

The higher wage indices that these 

hospitals are receiving are also being 

taken into consideration in determining 

whether they qualify for the outmigration adjustment discussed in 

section III.I. of this preamble and the 

amount of any adjustment. 

FY 2007 will be the third year of this 

transition period. We will continue to 

assign the wage index for the urban area 

in which the hospital was previously 

located through FY 2007. In order to 

ensure this provision remains budget 

neutral, we will continue to adjust the 

standardized amount by a transition 

budget neutrality factor to account for 

these hospitals. Doing so is consistent 

with the requirement of section 

1886(d)(3)(E) of the Act that any 

‘‘adjustments or updates [to the 

adjustment for different area wage 

levels] * * * shall be made in a manner 

that assures that aggregate payments 

* * * are not greater or less than those 

that would have been made in the year 

without such adjustment.’’

Beginning in FY 2008, these hospitals 

will receive their statewide rural wage 

index, although they will be eligible to 

apply for reclassification by the MGCRB 

both during this transition period and in 

subsequent years. These hospitals will 

be considered rural for reclassification 

purposes. 

Consistent with the FY 2005 and FY 

2006 IPPS final rules, as we did 

beginning in FY 2006, for FY 2007 we 

are providing that hospitals receive 100 

percent of their wage index based upon 

the CBSA configurations. Specifically, 

we will determine for each hospital a 

wage index for FY 2007 employing wage 

index data from FY 2003 hospital cost 

reports and using the CBSA labor 

market definitions. 

C. Occupational Mix Adjustment to the 

FY 2007 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. 

Comment: Some commenters 

expressed concern about the 

occupational mix adjustment relative to 

the proposed implementation of 

changes to the DRG system. A few stated 

that the purpose of the occupational mix 

adjustment is to ensure that hospitals 

are not paid through both the wage 

index and the resource-based DRG 

system for the additional resources 

needed for certain procedures. The 

commenters suggested that the 

occupational mix adjustment is not 

necessary if a robust severity-adjusted 

DRG system is implemented. Other 

commenters indicated that CMS should 

consider deferring the implementation 

of the proposed hospital-specific cost 

weighting methodology and severity 

DRGs until at least FY 2008 to alleviate 

the burden on hospitals that will be 

negatively affected by a redistribution of 

Medicare payments under the new 

occupational mix adjustment. 

Response: We remind the commenters 

that an occupational mix adjustment to 

the wage index is required under 

section 1886(d)(3)(E) of the Act. 

Although we understand the 

commenters’ concerns that some 

hospitals may be negatively affected by 

the new occupational mix adjustment, 

we also believe that it is important for 

us to move forward with implementing 

changes in the DRG system that would 

recognize that some more complex cases 

may require a higher DRG payment 

because the services are provided by 

more highly skilled workers. 

Comment: A few commenters 

opposed the occupational mix 

adjustment. One commenter believed 

that the initial application of the 

occupational mix adjustment had 

unintended results, benefiting fewer 

rural hospitals and more large urban 

hospitals than anticipated. The 

commenter stated that this problem has 

been compounded by the additional 

pressure from the decision in Bellevue 

Hosp. Center v. Leavitt, 443 F.3d 163 

(2nd Cir. 2006), and, therefore, 

recommended that CMS approach 

Congress about repealing the mandate 

for the occupational mix adjustment. 

Another commenter indicated that the 

occupational mix survey is confusing 

and burdensome to hospitals. 

Response: As held in Bellevue Hosp. 

Center v. Leavitt, 443 F.3d 163 (2nd Cir. 

2006), adjusting the wage index for 

occupational mix is required by 

Congress. Therefore, commenters who 

believe that the occupational mix 

should be eliminated would need to 

approach the Congress with such 

concerns. As for the initial application 

of the occupational mix, we believe the 

unexpected outcomes may have been 

due to a combination of factors, 

including the newness of the survey and 

changing trends in hospital 

employment. We have modified the 

survey for 2006, and these modifications 

should reduce the risk of reporting and 

measurement errors. These 

modifications are based largely on 

suggestions we received from MedPAC 

and the hospital community. We 

understand the commenter’s concern 

that completing the survey causes a 

burden to hospitals; however, the 

statute requires us to collect data on 

occupational mix every 3 years. In 

response to similar concerns expressed 

for the 2003 survey, we streamlined the 

2006 survey and clarified the 

instructions in an effort to reduce the 

burden. We will continue to work with 

hospitals and associations to explore 

ways to improve the survey to ensure 

the accuracy of the occupational mix 

adjustment while reducing the reporting 

burden for hospitals. 

1. Development of Data for the FY 2007 

Occupational Mix Adjustment 

In our initial FY 2007 IPPS proposed 

rule (71 FR 23996), we discussed our 

proposals for calculating the proposed 

FY 2007 occupational mix adjustment. 

We proposed to use the same CMS Wage 

Index Occupational Mix Survey and 

Bureau of Labor Statistics (BLS) data 

that we used for the FY 2005 and FY 

2006 wage indices, with a few 

exceptions. We also proposed to adjust 

10 percent of the FY 2007 wage index 

by a factor reflecting occupational mix. 

However on April 3, 2006, in Bellevue 

Hosp. Center v. Leavitt, 443 F.3d 163 

(2nd Cir. 2006) the Court of Appeals for 

the Second Circuit (the Court) ordered 

CMS to apply the occupational mix 

adjustment to 100 percent of the wage 

index effective for FY 2007. The Court 

ordered CMS to ‘‘immediately * * * 

collect data that are sufficiently robust 

to permit full application of the 


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occupational mix adjustment.’’ The 

Court also ordered that all ‘‘data 

collection and measurement and any 

other preparations necessary for full 

application be completed by September 

30, 2006, at which time the agency is to 

immediately apply the adjustment in 

full.’’ For more information, we refer the 

readers to Bellevue Hosp. Center v. 

Leavitt, 443 F.3d 163, 179 (2nd Cir. 

2006). 

To comply with the Court’s order, on 

April 21, 2006, we issued a JointSignature Memorandum (JSM–06412) to 

all Medicare fiscal intermediaries 

announcing our plans to collect new 

occupational mix data from hospitals. 

The Joint-Signature Memorandum is 

available on the CMS Web site at: http:// 

www.cms.hhs.gov/AcuteInpatientPPS. 

Click on ‘‘Wage Index Files’’ and the 

link is titled: 2006 Occupational Mix 

Survey—Interim Data Collection—CMS 

Memo to Fiscal Intermediaries. 

On May 17, 2006, we also published 

in the Federal Register (71 FR 28644) a 

second proposed rule that proposed to 

revise the methodology for calculating 

the occupational mix adjustment by 

applying the occupational mix 

adjustment to 100 percent of the wage 

index using the new occupational mix 

data collected from hospitals. The 

second proposed rule also proposed to 

modify hospitals’ procedures for 

withdrawing requests to reclassify for 

the FY 2007 wage index and for 

supplementing the FY 2008 

reclassification application with official 

data used to develop the FY 2007 wage 

index. In addition, we proposed to 

replace in full the descriptions of the 

data and methodology that would be 

used in calculating the occupational 

mix adjustment discussed in the initial 

FY 2007 IPPS proposed rule. 

As stated earlier, section 1886(d)(3)(E) 

of the Act requires us to conduct a new 

survey at least once every 3 years. On 

October 14, 2005, we published a notice 

in the Federal Register (70 FR 60092) 

proposing to use a new survey, the 2006 

Medicare Wage Index Occupational Mix 

Survey (the 2006 survey) to apply an 

occupational mix adjustment to the FY 

2008 wage index. In the proposed 2006 

survey, we included several 

modifications based on the comments 

and recommendations we received on 

the 2003 survey, including (1) allowing 

hospitals to report their own average 

hourly wage rather than using BLS data; 

(2) extending the prospective survey 

period; and (3) reducing the number of 

occupational categories but refining the 

subcategories for registered nurses. 

We made the changes to the 

occupational categories in response to 

MedPAC comments to the FY 2005 IPPS 

final rule (69 FR 49036). Specifically, 

MedPAC recommended that CMS assess 

whether including subcategories of 

registered nurses would result in a more 

accurate occupational mix adjustment. 

MedPAC believed that including all 

registered nurses in a single category 

may obscure significant wage 

differences among the subcategories of 

registered nurses, for example, the 

wages of surgical registered nurses and 

floor registered nurses may differ. Also, 

to offset additional reporting burden for 

hospitals, MedPAC recommended that 

CMS should combine the general 

service categories that account for only 

a small percentage of a hospital’s total 

hours with the ‘‘all other occupations’’

category because most of the 

occupational mix adjustment is 

correlated with the nursing general 

service category. 

In addition, in response to the public 

comments on the October 14, 2005 

notice, we modified the 2006 survey. On 

February 10, 2006, we published a 

Federal Register notice (71 FR 7047) 

that solicited comments and announced 

our intent to seek OMB approval on the 

revised occupational mix survey (Form 

CMS–10079 (2006)). 

The revised 2006 survey provides for 

the collection of hospital-specific wages 

and hours data, a 6-month prospective 

reporting period (that is, January 1, 

2006, through June 30, 2006), the 

transfer of each general service category 

that comprised less than 4 percent of 

total hospital employees in the 2003 

survey to the ‘‘all other occupations’’

category (the revised survey focuses 

only on the mix of nursing occupations), 

additional clarification of the 

definitions for the occupational 

categories, an expansion of the 

registered nurse category to include 

functional subcategories, and the 

exclusion of average hourly rate data 

associated with advance practice nurses. 

The 2006 survey includes only two 

general occupational categories: Nursing 

and ‘‘all other occupations.’’ The 

nursing category has four subcategories: 

registered nurses, licensed practical 

nurses, aides, orderlies, attendants, and 

medical assistants. The registered nurse 

subcategory includes two functional 

subcategories: management personnel 

and staff nurses or clinicians. As 

indicated above, the 2006 survey 

provides for a 6-month data collection 

period, from January 1, 2006 through 

June 30, 2006. However, we allowed 

flexibility for the reporting period begin 

and end dates to accommodate some 

hospitals’ bi-weekly payroll and 

reporting systems. That is, the 6-month 

reporting period must begin on or after 

December 25, 2005, and must end before 

July 9, 2006. 

To comply with the order of the court 

in Bellevue Hosp. Center v. Leavitt, as 

discussed above, we proposed to collect 

new survey data, instead of using the 

2003 survey data proposed in the FY 

2007 IPPS proposed rule, to calculate 

the occupational mix adjustment for the 

FY 2007 wage index. Because hospitals 

were already collecting data for the 

revised 2006 survey, we proposed to use 

the first 3 months of that data (that is, 

from January 1, 2006, through March 31, 

2006) to calculate the FY 2007 

occupational mix adjustment. In order 

to allow sufficient time for hospitals, 

fiscal intermediaries, and CMS to 

collect, review, and correct the new 

data, and for CMS to perform required 

analyses and apply the new data in 

calculating the FY 2007 occupational 

mix adjustment, we determined that it 

would be impossible for us to apply the 

full 6 months of data by October 1, 

2006. 

Comment: Several commenters stated 

that hospitals were sometimes unsure of 

the placement of certain employees on 

the survey. For example, hospitals were 

uncertain as to the category that would 

include surgical technicians and 

paramedics who are employed by the 

hospital and who usually work in the 

emergency department. The 

commenters urged CMS to evaluate 

where these employees should be 

placed on the survey for future 

collections. 

The commenters also stated that they 

agreed with CMS’ efforts to ensure 

consistent reporting by specifying the 

cost centers for collecting nursing 

personnel data. They agreed that the 

cost centers included on the survey are 

where the majority of nurses are 

employed within hospitals. The 

commenters added that the use of the 

cost centers significantly reduces the 

burden for hospitals by allowing them 

to focus on only the listed cost centers. 

However, the commenters urged CMS to 

consider refining the list of cost centers 

for future collections. The commenters 

advised that every hospital has a 

different method for attributing costs to 

cost centers; therefore, some hospitals 

may have a few cost centers that contain 

a significant number of nursing 

personnel that were not included in the 

current survey. 

The commenters recommended that 

CMS work with the hospital community 

to explore potential changes to the 

survey occupational categories and cost 

centers. Even if they are warranted, the 

commenters suggested that CMS should 

not make any changes to the ongoing 

survey collection, as it would 


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necessitate the resubmission of the 1st 

quarter 2006 data to ensure that both 1st 

and 2nd quarters could be used for the 

FY 2008 and the FY 2009 occupational 

mix adjustment. 

Response: We appreciate the 

assistance we have already received 

from the hospital community in 

developing the 2006 occupational mix 

survey. On May 25, 2006, in response to 

questions from hospitals and 

associations, we distributed 

supplemental instructions to the 

intermediaries, hospitals (via the 

intermediaries), and national hospital 

associations (and posted the 

instructions on our Web site) to clarify 

the placement of nursing and 

nonnursing personnel on the 

occupational mix survey. We will 

continue to work with MedPAC and the 

hospital community to determine if 

changes to the occupational categories 

and cost centers included on the survey 

are reasonable and necessary for future 

collections. We agree with not changing 

the instructions for the 2006 survey. As 

the commenters indicated, to change the 

survey with the 1st quarter data 

collection already completed would 

require substantial rework on the part of 

hospitals, fiscal intermediaries, and 

CMS. 

Comment: A few commenters 

expressed concern that hospitals in 

States with mandatory nurse-staffing 

ratios for inpatient facilities and 

hospitals that use higher levels of 

registered nurses to improve the quality 

of care will be adversely affected by the 

occupational mix adjustment. One 

commenter stated that the current 

survey is designed to benefit parts of the 

country that make greater use of lesser 

skilled nurses and allied health 

professionals, and to reduce payment in 

areas that make greater use of registered 

nurses in nursing positions. The 

commenter speculated that the 

occupational mix adjustment will likely 

reduce the payments for its hospitals, 

thus reducing the quality of care they 

can provide to Medicare beneficiaries. 

Another commenter indicated that the 

wage index and occupational mix 

adjustments penalize hospitals that 

invest in quality and efficiency at the 

same time that Congress is trying to 

improve quality and efficiency under 

the Medicare program. The commenter 

stated that the effect of these 

adjustments on hospitals that use higher 

levels of registered nurses reduces or 

eliminates the annual Medicare 

inflation increase provided to address 

the increasing costs these hospitals 

incur. The commenter further indicated 

that this reduction would not be a 

savings to the program, but rather it 

would be a redistribution of Medicare 

payments to hospitals that have not 

been as efficient or as focused on 

improving the quality of care. 

Response: As stated earlier, the statute 

requires implementation of an 

occupational mix adjustment to the 

wage index. In addition, the purpose of 

the occupational mix adjustment is to 

control the effect of a hospital’s 

employment mix on its average hourly 

wage for the wage index. The 

adjustment standardizes the 

employment mix for hospitals so that 

the wage index more accurately 

compares wage rates among labor 

market areas for a constant mix of labor. 

As the commenters noted, the 

occupational mix adjustment would 

lower the wage index for an area 

employing a mix of more highly paid 

and skilled labor than the national 

average. Although we understand the 

commenters’ concerns regarding the 

effect of the occupational mix on their 

areas’ Medicare payments, we disagree 

that the wage index and occupational 

mix adjustments penalize hospitals that 

invest in quality and efficiency. We note 

that CMS is moving toward adoption of 

a severity-based DRG system that will 

better recognize severity of illness and 

provide improved payments to those 

hospitals that need more highly skilled 

labor to care for more severely ill 

patients. Even under the current system, 

the labor costs incurred by hospitals 

that provide more highly skilled 

services are currently reflected in the 

hospital’s DRG payments and illustrated 

through a higher case mix index. 

Reflecting the costs associated with 

more highly skilled labor in both the 

case mix and the wage index is 

essentially counting them twice. 

To comply with the order of the court 

in Bellevue Hosp. Center v. Leavitt, as a 

final policy, we are adopting our 

proposal to use the new 1st quarter 2006 

survey data to calculate the 

occupational mix adjustment for the FY 

2007 wage index. 

2. Timeline for the Collection, Review, 

and Correction of the Occupational Mix 

Data 

The Joint-Signature Memorandum 

(JSM–06412) that we issued on April 21, 

2006, instructed all fiscal intermediaries 

to immediately alert the hospitals they 

service to the changes in the schedule 

for submitting the occupational mix 

data files. 

The Joint-Signature Memorandum 

provided hospitals and fiscal 

intermediaries with the revised 

schedule for the occupational mix 

survey data that would be used in the 

FY 2007 wage index. The schedule 

included deadlines for—

• Hospitals to submit occupational 

mix data. The deadline was June 1, 

2006. 

• Fiscal intermediary review of the 

submitted data. The deadline was June 

22, 2006. 

• Availability of the submitted data 

on the CMS Web site. The deadline was 

June 29, 2006. 

• Hospitals to submit requests to their 

fiscal intermediaries for corrections to 

their interim occupational mix data. The 

deadline was July 13, 2006. 

• Fiscal intermediaries to submit 

corrected interim occupational mix 

survey data for the January 1, 2006, 

through March 31, 2006 period. The 

deadline was July 27, 2006. 

We noted that it was critical that 

hospitals provide information according 

to the dates provided in the schedule in 

order to be able to appeal any disputed 

calculations at a later point to the 

Provider Review Reimbursement Board 

(PRRB). The final deadline for the fiscal 

intermediaries to make occupational 

mix data available to CMS was July 27, 

2006. These data would reflect fiscal 

intermediary review and the resolution 

of any errors or adjustments between the 

hospitals and fiscal intermediary. Once 

these data are available on the CMS Web 

site, changes to a hospital’s 

occupational mix data would be 

allowed only in those very limited 

situations involving an error by the 

fiscal intermediary or CMS that the 

hospital could not have known about 

before its review of the final 

occupational mix data file. Specifically, 

neither the fiscal intermediary nor CMS 

would approve the following types of 

requests: 

• Requests for occupational mix data 

corrections that were submitted too late 

to be included in the data transmitted to 

CMS by fiscal intermediaries on or 

before July 27, 2006. 

• Requests for correction of errors 

that were not, but could have been, 

identified during the hospital’s review 

of the June 29, 2006 occupational mix 

file. 

Verified corrections to the 

occupational mix received by the fiscal 

intermediaries and CMS (that is, by July 

13, 2006) would be incorporated into 

the final wage index for FY 2007, to be 

effective October 1, 2006. 

We created the process described 

above to resolve all substantive 

occupational mix correction disputes 

before we finalize the wage and 

occupational mix data for the FY 2007 

payment rates. Accordingly, hospitals 

that did not meet the procedural 

deadlines set forth above will not be 


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afforded a later opportunity to submit 

occupational mix data corrections or to 

dispute the fiscal intermediary’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 PRRB, 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 also refer the reader 

to the FY 2000 IPPS final rule (64 FR 

41513) for a discussion of the 

parameters for appealing to the PRRB 

for wage index data corrections. 

We believe the occupational mix data 

correction process described above 

provided hospitals with the opportunity 

to bring errors in their occupational mix 

data to the fiscal intermediary’s 

attention. 

Because hospitals had access to the 

final occupational mix data by June 29, 

2006, we believe they had the 

opportunity to detect any data entry or 

tabulation errors made by the fiscal 

intermediary or CMS before the 

development and publication of the 

final FY 2007 wage index and the 

implementation of the FY 2007 wage 

index on October 1, 2006. We believe 

that if hospitals availed themselves of 

the opportunities afforded to provide 

and make corrections to the 

occupational mix data, the wage index 

implemented on October 1, 2006, will 

be accurate. In the event that errors are 

identified by hospitals and brought to 

our attention after July 13, 2006, we will 

only make mid-year changes to the wage 

index in accordance with § 412.64(k). 

For a detailed discussion, see section 

III.J. of this preamble. 

Comment: One commenter stated that 

the 6-month reporting period for the 

2006 survey, originally planned for the 

FY 2008 wage index, is an improvement 

over the 2003 survey process. However, 

the commenter urged CMS to initiate a 

survey with a full-year reporting period 

for the FY 2009 wage index. 

Response: We appreciate the 

commenter’s recognition of our efforts 

to improve the occupational mix survey 

process. We also appreciate the 

commenter’s suggestion for expanding 

the survey reporting period to a full year 

for the FY 2009 wage index. While we 

appreciate the willingness expressed in 

the comment to collect a complete year 

of data in order to achieve more 

accurate survey results, we note that 

hospitals are currently obligated to 

collect data for the period April 1, 2006, 

to June 30, 2006, by August 31 in order 

for us to use 6 months of data to apply 

the occupational mix adjustment for FY 

2008. If we were to use a full year of 

2006 survey data to apply an 

occupational mix adjustment for FY 

2009, hospitals would have to submit 

data for the last 6 months of calendar 

year 2006. Hospitals have already been 

required to submit occupational mix 

survey data for two different 3-month 

periods in 2006. At this time, we believe 

it would be burdensome to require a 

third occupational mix data collection 

from hospitals for 2006 in order to apply 

the adjustment based on a full year of 

data for FY 2009. We also note that 

collecting a full year of calendar year 

2007 data, from January 1, 2007, 

through December 31, 2007, would not 

provide enough time for a thorough 

review and correction period before the 

FY 2009 proposed rule would be 

published in April 2008. Our normal 

wage index review and correction 

process before the proposed rule 

publication begins in early October and 

ends in late February. This would mean 

that hospitals and intermediaries would 

have only approximately 2 months, 

from January to late February, to review 

and correct a year’s worth of 

occupational mix data. We believe that 

such an abbreviated review and 

correction period would not be in the 

hospitals’ best interest. However, we 

will consider expanding the survey 

reporting period to a full year for a 

future collection. 

Comment: Some commenters 

expressed concern that the 3-month 

survey period for FY 2007 will lead to 

inaccurate results for several reasons: 

Having no advance notice of the 

expedited data collection; some 

hospitals had not yet begun, or had just 

begun, to plan for the 2006 survey data 

collection and had little or no resources 

available to complete the survey for all 

or part of the 3-month time period; the 

new survey, though improved over the 

previous survey, is more complicated 

and requires more effort to complete; 

due to the short timeframe for 

developing and submitting the data (4 

months), some normal review processes 

had to be eliminated by hospitals; not 

enough time was allowed for the types 

of corrections that can be made during 

the annual wage index survey process; 

due to the infrequent collection of the 

occupational mix data, many hospitals 

may underestimate its importance; there 

was not enough time for hospital groups 

to review the data for individual 

hospitals in the area, a process that 

often raises questions that leads to more 

accurate data. 

Response: We understand the 

commenters’ concerns about the 

potential for inaccurate occupational 

mix survey data to be used due to the 

abbreviated data collection and 

reporting periods. However, CMS has 

established a process that we believe 

will maximize the opportunity for 

accurate occupational mix data to be 

used to adjust area wage indices. 

Hospitals were required to submit 

occupational mix survey data to their 

fiscal intermediaries by June 1, 2006. 

CMS provided fiscal intermediaries 

with a desk review program to assist in 

identifying erroneous or aberrant data. 

Fiscal intermediaries then had 3 weeks 

(or until June 22) to review the data and 

submit it to CMS. CMS made the 

occupational mix survey data available 

on the CMS Web site on June 29 to 

facilitate review by hospitals, fiscal 

intermediaries, and others. The June 29 

posting of occupational survey data 

resulted in hospitals, State hospital 

associations, wage index consultants, 

and others identifying errors and other 

aberrant data. These parties then 

initiated action to correct the 

occupational mix survey data by the 

July 13 deadline. While there is no 

additional time available to correct the 

survey data for the FY 2007 wage index, 

we will, however, allow hospitals to 

submit any additional revisions and 

corrections to both 3-month periods of 

data for the FY 2008 wage index. We 

strongly encourage hospitals to take full 

advantage of the FY 2008 wage index 

correction process. Hospitals will be 

notified early in the Fall of 2006 

regarding the revision/correction 

process for the FY 2008 wage index for 

both the cost report wage data and the 

2006 occupational mix survey data. 

3. Calculation of the Occupational Mix 

Adjustment 

In the May 17, 2006 proposed rule, we 

proposed a series of steps to be used in 

calculating the FY 2007 occupational 

mix adjustment factor. In this final rule, 

we are adopting the proposed steps with 

one minor exception. In response to 

comments (discussed below), we have 

made an adjustment to step 7 so that the 

percentage of worker salaries 

attributable to the nursing category is 

based on salaries and not on hours. For 

2007, we will calculate 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 (registered nurse 

management personnel and registered 

nurse staff nurses or clinicians are 

treated as separate nursing 


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subcategories). Repeat this computation 

for each of the five nursing 

subcategories: Registered nurse 

management personnel, registered nurse 

staff nurses or clinicians, licensed 

practical nurses; nursing aides, 

orderlies, and attendants; and 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 five 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 

hospital employs a less costly mix of 

nursing employees), the occupational 

mix adjustment factor would be 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 

would be 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. 

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. 

Comment: MedPAC and a few other 

commenters noted that Step 7 of CMS’

proposed calculation for the 

occupational mix adjustment uses the 

occupational mix survey’s paid hours to 

determine the portion of the salaries and 

wage-related costs to adjust for 

occupational mix (that is, the total 

nursing portion) and the portion to 

remain unadjusted (that is, the all other 

occupations portion). One of the 

commenters stated that this approach 

was reasonable using the 2003 survey 

data because hospital-specific paid 

salaries data were not collected. 

However, the commenter also noted that 

the actual share of wages for either the 

nursing category or the all other 

occupations category could differ using 

an allocation that is based on paid hours 

compared to paid salaries. The 

commenters suggested that, since the 

2006 survey provides for the collection 

of paid salaries data, CMS should use 

paid salaries instead of paid hours to 

more accurately determine the wage 

costs that should be adjusted for 

occupational mix and those that should 

not. 

Response: As discussed above, we 

evaluated the commenters’

recommendation and agree that it is 

reasonable to use the occupational mix 

survey salaries instead of hours in 

computing the portion of a hospital’s 

salaries and wage-related costs to adjust 

for occupational mix and the portion to 

remain unadjusted. Accordingly, we 

revised Step 7 of the final calculation 

for the occupational mix adjustment to 

reflect this change. 

We received no other comments on 

the steps used in calculating the 

occupational mix adjustment. As a final 

policy, we are adopting the proposed 

calculation, with the change to Step 7, 

for the occupational mix adjustment to 

the FY 2007 wage index. Also, to 

comply with the order of the court in 

Bellevue Hosp. Center v. Leavitt, we will 

apply this adjustment to 100 percent of 

the wage index. 

The table below is an illustrative 

example of the final occupational mix 

adjustment. (Note: We have revised this 

example from that included in the 

proposed rule to reflect the change in 

step 7 discussed above. We have added 

an additional column for provider 

occupational mix salaries and the 

Provider Percent by Total is determined 

by dividing the hospital’s total nurse 

salaries (and separately, Total All Other 

Salaries) by Total Employee Salaries. 

BILLING CODE 4120–01–P 


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BILLING CODE 4120–01–C 


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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 

2007 wage index. 

For the FY 2005 and FY 2006 final 

wage indices, we used the unadjusted 

wage data for hospitals that did not 

submit occupational mix survey data. 

For calculation purposes, this equates to 

applying the national nursing mix to the 

wage data for these hospitals, because 

hospitals having the same mix as the 

Nation would have an occupational mix 

adjustment factor equaling 1.0000. 

However, an adjustment may not be 

equitable in situations where the 

hospital has a higher or lower than 

average occupational mix than the 

Nation as a whole. If the hospital’s 

occupational mix is higher than the 

average for the nation as a whole, 

hospitals in other areas are 

disadvantaged by the hospital not 

providing occupational mix 

information. If the hospital’s 

occupational mix is lower than the 

average for the Nation as a whole, other 

hospitals in the same geographic area 

would be disadvantaged by the hospital 

not providing the information. 

In the FY 2005 and FY 2006 IPPS 

final rules (69 FR 49035 and 70 FR 

47368), we noted that we would revisit 

this matter with subsequent collections 

of the occupational mix data. In the May 

17, 2006 proposed rule, for the FY 2007 

wage index, we proposed to use one of 

four options for treating the 

occupational mix data for 

nonresponsive hospitals: (1) Assign the 

hospital an occupational mix 

adjustment factor of 1.0000 as we did 

for FY 2005 and FY 2006; (2) assign the 

hospital the average occupational mix 

adjustment factor for its labor market 

area; (3) assign the hospital the lowest 

occupational mix adjustment factor for 

its labor market area; or (4) assign the 

hospital the average occupational mix 

factor for similar hospitals, based on 

factors such as, geographic location, bed 

size, teaching versus non-teaching status 

and case mix. We requested comments 

on these or other alternatives for 

equitably addressing the situation of 

hospitals that are not responsive to the 

occupational mix survey. 

Comment: A majority of the 

commenters believed that, in order for 

the wage index to be computed 

accurately, it is critical for all IPPS 

hospitals to complete the occupational 

mix survey. Many of the commenters 

suggested that CMS should penalize 

hospitals that did not submit a survey. 

However, the commenters indicated that 

no hospitals should be penalized for not 

completing the survey for the 1st quarter 

of FY 2006 (to be used in calculating the 

FY 2007 wage index) because of the 

short notification and timeframe for the 

collection of that data. Some suggested 

future penalties such as a 1 to 2 percent 

reduction in the hospital’s wage index 

value or a set percentage of the 

standardized amount, whichever is 

administratively feasible. However, the 

commenters also suggested that any 

penalty should be hospital-specific and 

should not affect the wage index 

amounts for other hospitals in the area. 

Commenters suggested that CMS should 

first calculate the area wage index using 

proxy data for a nonresponsive 

hospital’s occupational mix adjustment, 

and then CMS should assess a penalty 

on its wage index value or national 

standardized amount. 

The commenters supported all of the 

ideas we raised in the proposed rule 

except option 3. Commenters 

unanimously opposed assigning the 

hospital the lowest occupational mix 

adjustment factor for its labor market 

area, because they believed this option 

would have the most negative impact on 

other hospitals in the labor market area. 

MedPAC recommended option 4, to 

assign the hospital the average 

occupational mix factor for similar 

hospitals, based on factors such as, 

geographic location, bed size, teaching 

versus nonteaching status and case-mix. 

MedPAC suggested other factors that 

CMS should consider, such as share of 

ICU days and types of services offered. 

Some commenters recommended an 

option that we did not describe. These 

commenters recommended that CMS 

substitute data from the previous 2003 

survey for hospitals that did not submit 

2006 survey data for the FY 2007 wage 

index. Alternatively, several 

commenters recommended that CMS 

could substitute the national average 

hourly wage (that is, option 1, an 

occupational mix adjustment of 1.0000) 

for nonresponsive hospitals in 

calculating an area’s wage index, while 

others favored option 2 because it 

would have the least affect on the labor 

market area. One commenter 

recommended assigning the lower of the 

hospital’s occupational mix adjustment 

in FY 2006 or the average for the 

hospital’s labor market in FY 2007. The 

commenter believed that the best proxy 

for a hospital’s missing FY 2007 data is 

its FY 2006 occupational mix 

adjustment, even though there was a 

change in the formula to calculate the 

FY 2007 adjustment. The commenter 

stated that CMS should provide an 

exception for an exogenous event 

affecting all hospitals in the labor 

market area. In this scenario, the 

commenter recommended using the 

average FY 2007 adjustment. 

Response: We agree with the 

commenters that hospitals that did not 

respond to the occupational mix survey 

should not benefit from the 

participation of others. We also agree 

that, due to the unusual circumstances 

of the Court’s order and the short 

timeframe that hospitals were provided 

for completing and submitting their 

data, it would not be fair to apply a 

penalty to nonresponsive hospitals for 

the 2007 wage index. However, we 

believe that section 1886(d)(5)(I)(i) of 

the Act provides us with the authority 

to penalize hospitals that do not submit 

occupational mix survey data. That 

section authorizes us to provide for 

exceptions and adjustments to the 

payment amounts under IPPS as the 

Secretary deems appropriate. We will 

give serious consideration to applying a 

hospital-specific penalty such as those 

suggested by the commenters if a 

hospital does not comply with 

regulations requiring submission of 

occupational mix survey data in future 

years. We will address this issue in the 

FY 2008 IPPS proposed rule. 

Regarding the treatment of data for 

nonresponsive hospitals, we have 

chosen not to adopt option 3, because it 

would be punitive to other hospitals in 

the area that submitted occupational 

mix data. We also have not chosen 

option 1 because it does not provide an 

incentive for hospitals to respond if they 

have a higher mix of employees than the 

national average. We will not use data 

from the 2003 survey, as some 

commenters suggested, because the 

2007 wage index, we believe, should be 

exclusively based on the newly 

collected data. In addition, there was 

concern about the sufficient robustness 

of such data to support 100 percent 

adjustments. We also do not believe it 

would be entirely feasible, for 2007, to 

implement MedPAC’s recommendation, 

option 4, due to the wide range of 

parameters that could be used for 

developing proxies for the missing 

hospitals and the fact that the exact set 

of such parameters was not subject to 

comment. So many variables might be of 

relevance that our selection of any 

particular variables might be subject to 

controversy, and hospitals may wish to 

have an opportunity to comment on the 

exact variables that would be used. 

MedPAC’s recommendation to add more 

variables to further refine the analysis 


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could be so limiting as to result in few 

or no hospitals to use for comparison. 

For the FY 2007 wage index, we have 

adopted option 2—using the average 

occupational mix adjustment for the 

labor market area. We believe this 

option would have the least impact on 

the wage index for other hospitals in the 

area and does not have the 

disadvantages of the options discussed 

above. Although we believe this option 

is the best of the ones we considered for 

nonresponsive hospitals for FY 2007, 

we reserve the right to apply a different 

approach in future years, including 

potentially penalizing nonresponsive 

hospitals. If there is only one hospital in 

the labor market area, and that hospital 

failed to submit occupational mix data, 

or, if there are no hospitals in the labor 

market area, we would apply the 

national occupational mix factor of 

1.0000 in calculating the area’s FY 2007 

occupational mix adjusted wage index. 

Comment: Some commenters 

recommended that CMS allow hospitals 

that failed to submit their 1st quarter 

data by June 1, 2006, to submit that data 

when the 2nd quarter data is due (that 

is, by August 31, 2006). The 

commenters also suggested that CMS 

allow hospitals that submitted their 1st 

quarter data by June 1, an opportunity 

to correct that data when the 2nd 

quarter data are due. The commenters 

indicated that allowing hospitals to 

submit the data at this time would 

improve the survey response rate and 

eliminate the need for penalties for 

hospitals that would otherwise be 

nonresponsive and improve the 

accuracy of the data for the FY 2008 and 

the FY 2009 occupational mix 

adjustment. 

Response: We agree with the 

commenters. Hospitals that did not 

submit occupational mix data for the 1st 

quarter of 2006 will be permitted to 

submit 1st and 2nd quarter data by 

August 31. We included the 1st quarter 

data for some hospitals that submitted 

survey data after June 1. However, 

submissions that were received too late 

to include in the FY 2007 occupational 

mix adjustment will be included in the 

desk review process for the 

occupational mix adjustment for the FY 

2008 wage index. As we previously 

mentioned, we will also allow hospitals 

an opportunity to revise both their 1st 

quarter and 2nd quarter 2006 

occupational mix data for the FY 2008 

wage index. Further, we stated that we 

will notify hospitals early in the Fall of 

2006 regarding the revision/correction 

process for the FY 2008 wage index for 

both the cost report wage data and the 

2006 occupational mix survey data. 

D. Worksheet S–3 Wage Data for the FY 

2007 Wage Index 

The FY 2007 wage index values 

(effective for hospital discharges 

occurring on or after October 1, 2006, 

and before October 1, 2007) that will be 

published separately from this final rule 

will be based on the data collected from 

the Medicare cost reports submitted by 

hospitals for cost reporting periods 

beginning in FY 2003 (the FY 2006 wage 

index was based on FY 2002 wage data). 

The FY 2007 wage index will include 

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). 

• Wage-related costs, including 

pensions and other deferred 

compensation costs. 

Consistent with the wage index 

methodology for FY 2006, the final wage 

index for FY 2007 also will exclude 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 final 

FY 2007 wage index also will exclude 

the 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 will be excluded from the wage 

index, for the reasons explained in the 

FY 2004 IPPS final rule (68 FR 45397). 

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, 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. 

Such comments should be made in 

response to separate proposed rules for 

those providers. 

Comment: Several commenters 

addressed CMS’ policy of excluding 

data from CAHs when computing the 

wage index. They stated that, as of FY 

2007, 1,191 CAHs (representing 

approximately 24 percent of all IPPS 

hospitals in FY 2000, and 

approximately 55 percent of all rural 

hospitals in FY 2000) have been 

removed from the wage index. The 

commenters indicated that CAHs have 

lower average hourly wages than the 

typical IPPS hospital and eliminating 

their data from the wage index 

overstates the national average hourly 

wage by an estimated 0.707 percent. 

They added that increases in the 

national average hourly wage, in turn, 

are offset with the application of a 

negative budget neutrality adjustment, 

which understates IPPS operating 

payments according to the commenters. 

The commenters believed that the 

artificial increase in the national average 

hourly wage has lowered the budget 

neutrality adjustment by an estimated 

$1.52 billion over 5 years (2003–2007). 

The commenters stated that CMS should 

apply a one-time positive budget 

neutrality adjustment in FY 2007 to 

compensate for the prior 

underpayments. They did not believe 

similar future adjustments would be 

necessary because very few hospitals are 

expected ‘‘to convert to CAH status now 

that the necessary provider designation 

is no longer an option.’’

Other commenters asked that CMS 

use estimated CAH wage data to 

compute the FY 2007 wage index, and 

that an occupational mix factor of 

1.0000 be assigned to these hospitals. 

The commenters noted that MedPAC 

has recommended that CAH data be 

included in the wage index, at least in 

computing the national average hourly 

wage. The commenters asserted that 

because CAHs in rural areas still 

compete with rural IPPS hospitals for 

scarce resources, their data should be 

included in the wage index. 

Commenters also requested that CMS 

obtain wage data from CAHs and subject 

that data to the same rigorous review by 

the fiscal intermediaries as is done for 

IPPS hospitals. Another commenter 

suggested that an alternative to 

including the CAHs in wage index 

would be to not factor in any increases 

in the national average hourly wage that 

are attributable to the removal of CAHs’

wage data. 

Response: In the August 1, 2003 final 

rule (68 FR 45397–8), we explained the 

reasons for our decision to remove CAH 

data from the wage index immediately 

upon conversion to CAH status, even if 

the hospital was paid under the IPPS 

during the cost reporting period used in 

calculating the current fiscal year’s wage 

index. The primary reason for excluding 

CAHs from the wage index was that 


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they are a separate provider type and are 

unique compared to other short term, 

acute care hospitals with respect to 

factors such as their location and bed 

size. We discussed the payment impact, 

mentioning the substantial negative 

impact CAHs typically have on the wage 

indexes in the areas where they are 

located, and the minimal impact they 

have on other areas. We also stated that 

we would not be holding other 

hospitals’ payments harmless for this 

change, consistent with our general 

wage index policy. 

As the commenters indicated, in the 

FY 2006 IPPS final rule, we addressed 

a comment from MedPAC 

recommending that data from CAHs be 

included in the wage index (70 FR 

47370). MedPAC had recommended that 

CMS begin collecting wage data from 

CAHs in 2005. Although we agree with 

MedPAC that CAHs have recently 

become more similar to other rural 

hospitals, in structure, location, and 

services provided, largely due to 

changes in the CAH statute resulting 

from section 405 of Pub. L. 108–173 

(MMA), the wage index must be based 

on data from ‘‘subsection (d),’’ shortterm, acute care hospitals, consistent 

with section 1886(d)(3)(E) of the Act. 

Therefore, we cannot use any wage data 

collected from CAHs in the IPPS wage 

index. Because Pub. L. 108–173 was 

enacted at the end of calendar year 

2003, it would not affect the wage index 

at least until FY 2008, which would be 

computed from cost reporting periods 

beginning in FY 2004. Accordingly, we 

continue to believe that it has been 

prudent policy to remove the wage data 

for hospitals that later became CAHs 

from the wage index. 

We do not believe that the elimination 

of these data has resulted in an 

overstated national average hourly 

wage, nor has the budget neutrality 

adjustment been inappropriately 

reduced. The national average hourly 

wage appropriately reflects only those 

wages paid by IPPS hospitals. To 

determine the budget neutrality 

adjustment for FY 2007, we equate IPPS 

payments using the FY 2006 and FY 

2007 wage indices using FY 2005 

MedPAR data that excludes any 

hospitals that became CAHs as of 

February 17, 2006. The calculation 

excludes CAHs from the determination 

of IPPS payments using both the FY 

2006 and FY 2007 wage indices so the 

budget neutrality adjustment reflects 

only information from IPPS hospitals 

and is not overstated. Consequently, we 

will not apply a one-time positive 

budget neutrality adjustment in FY 

2007. 

E. Verification of Worksheet S–3 Wage 

Data 

The wage data for the final FY 2007 

wage index will be obtained from 

Worksheet S–3, Parts II and III of the FY 

2003 Medicare cost reports. Instructions 

for completing the Worksheet S–3, Parts 

II and III are in the Provider 

Reimbursement Manual, Part I, sections 

3605.2 and 3605.3. The data file used to 

construct the wage index will include 

FY 2003 data submitted to us as of June 

28, 2006. As in past years, we will 

perform an intensive review of the wage 

data, mostly through the use of edits 

designed to identify aberrant data. 

We asked our fiscal intermediaries to 

revise or verify data elements that 

resulted in specific edit failures. While 

some of the edits failures were resolved, 

we did remove the wage data of some 

hospitals from the final FY 2007 wage 

index. For the final FY 2007 wage index 

in this final rule, we removed the data 

for 229 hospitals from our database: 189 

hospitals designated as CAHs by 7 or 

more days prior to the posting of the 

preliminary February public use file, 

and 30 hospitals were low Medicare 

utilization hospitals or failed edits that 

could not be corrected because the 

hospitals terminated the program or 

changed ownership. In addition, we 

removed the wage data for 10 hospitals 

with incomplete or inaccurate data 

resulting in zero or negative, or 

otherwise aberrant, average hourly 

wages. As a result, the final FY 2007 

wage index is calculated based on FY 

2003 wage data from 3,570 hospitals. 

In constructing the final FY 2007 

wage index, we will include the wage 

data for facilities that were IPPS 

hospitals in FY 2003, even for those 

facilities that have since terminated 

their participation in the program as 

hospitals, as long as those data do 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. 

However, we exclude the wage data for 

CAHs as discussed in 68 FR 45397. 

Section 4410 of Pub. L. 105–33 

provides that, for the purposes of 

section 1886(d)(3)(E) of the Act, for 

discharges occurring 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 the 

State. This provision is commonly 

referred to as the ‘‘rural floor.’’ In the 

August 11, 2004 IPPS final rule (69 FR 

49109), we discussed situations where a 

State has only urban areas and no 

geographically rural areas, or a State has 

geographically rural areas but no IPPS 

hospitals are located in those rural 

areas. As a result, these States did not 

have rural IPPS hospitals from which to 

compute and apply a ‘‘rural floor.’’ In 

that final rule, we developed a policy 

for imputing a ‘‘rural floor’’ for these 

States, effective for the FYs 2005, 2006, 

and 2007 wage indices, so that a ‘‘rural 

floor’’ could be applicable to IPPS urban 

hospitals in those States in the same 

manner that a ‘‘rural floor’’ is applicable 

to IPPS urban hospitals in States that 

have IPPS rural hospitals. We revised 

the regulations at § 412.64(h) to describe 

the methodology for computing the 

imputed ‘‘rural floors’’ for these States 

and to define an all-urban State. 

Specifically, § 412.64(h)(5) defines an 

all-urban State as ‘‘a State with no rural 

areas * * * or a State in which there are 

no hospitals classified as rural. A State 

with rural areas and with hospitals 

reclassified as rural under § 412.103 is 

not an all-urban State.’’

We have received questions as to 

what area wage index CMS would apply 

in the instance where a new rural IPPS 

hospital opens in a State that has an 

imputed ‘‘rural floor’’ because it has 

rural areas but had no hospitals 

classified as rural. In addition, we have 

been asked whether a new IPPS hospital 

could submit its wages and hours data 

to be used in computing the wage index, 

even though the hospital did not file a 

cost report as an IPPS provider for the 

cost report base year that is used in 

calculating that wage index. 

A new hospital can be an entirely new 

facility that did not exist before, or it 

can be a hospital that participated in 

Medicare under a previous provider 

number, but has acquired a new 

Medicare provider number (such as 

when a CAH converts to IPPS status, or 

vice versa). As a new IPPS hospital (in 

this case, rural), the hospital would not 

yet have filed any wages and hours data 

on a Medicare cost report. Even in the 

situation where a new IPPS hospital 

previously participated in Medicare as a 

non-IPPS provider, wages and hours 

data collected as a non-IPPS provider 

would not be suitable for calculating an 

IPPS wage index because section 

1886(d)(3)(E) of the Act specifies that 

the wage index must be based on data 

from ‘‘subsection (d)’’ hospitals. Thus, 

CMS could not include wages and hours 

from a period during which a hospital 

was not an IPPS provider. Furthermore, 

even once the hospital files its first 

Medicare cost report under the new 

IPPS provider number, that first cost 

report is not used in computing the 

wage index for the hospital’s geographic 


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area until 4 years later (for example, we 

use the 2003 data to compute the wage 

index for FY 2007). Therefore, if a new 

rural IPPS hospital opens in a State that 

has an imputed ‘‘rural floor’’ and has 

rural areas, for FY 2007, the hospital 

would receive the imputed ‘‘rural floor’’

as its wage index. The imputed rural 

floor is set to expire on September 30, 

2007. However, we expect that we 

would address the 2008 implications for 

a new rural hospital that is the only 

rural hospital in the State in the FY 

2008 proposed rule. 

Comment: Two commenters stated 

that CMS’ above policy conflicts with 

the policy of excluding the wage data of 

IPPS hospitals that convert to CAH 

status. The commenters also asserted 

that in the years before the hospital’s 

own wage data is used, the rural 

hospital will be paid at the imputed 

rural floor, which they contend is 

unrelated to the hospital’s own labor 

market costs. The commenters also 

asserted that if the new rural hospital’s 

average hourly wage is greater than the 

imputed rural floor, the hospital would 

suffer underpayments until its index 

could be based upon its own wage data. 

One commenter suggested that, at least 

for CAHs converting to IPPS status, 

CMS should use wage data filed by the 

hospital when it was a CAH. 

The commenters urged CMS to 

include the wage data of a new rural 

IPPS hospital in the wage index ‘‘as 

soon as a full year’s cost report with the 

hospital operating as a PPS hospital is 

available.’’

Response: We disagree with the 

commenters. Our consistent policy is 

that new hospitals must first develop 

their wage data and have it reviewed by 

our fiscal intermediaries prior to the 

wage data being included in the wage 

index. The submission and review 

process requires a 4-year period, in 

order to allow time for all hospitals to 

complete and submit their wage data for 

the fiscal year, for the fiscal 

intermediaries to review the data, for 

the fiscal intermediaries to present the 

results of their review to hospitals, for 

hospitals to review any potential errors 

in the wage index files, for us to resolve 

any disputes between the fiscal 

intermediary and the hospital, and 

finally, for the final wage indices to be 

calculated and published in advance of 

the fiscal year. For a discussion of the 

wage data review and correction 

process, refer to section III.J. of this 

preamble. This policy applies to all new 

hospitals, not just rural hospitals. 

Although a new rural IPPS hospital that 

previously was a CAH may be willing to 

provide CMS with wage data from the 

period during which it was a CAH, the 

wage index must be based on data from 

IPPS hospitals, consistent with section 

1886(d)(3)(E) of the Act. A CAH is not 

an IPPS hospital; thus, we cannot 

include the hospital’s wages and hours 

from the period during which it was a 

CAH. Indeed, even if a CAH previously 

existed as an IPPS hospital (that is, it 

previously was an IPPS hospital, 

converted to CAH status, and then 

converted back to IPPS status), its 

historical wage data would have been 

submitted from years prior to the cost 

reports used to calculate the FY 2007 

wage index (that is, the FY 2003 cost 

reports). If a CAH converts back to IPPS 

status in FY 2007, there would be no 

wage data for the FY 2007 wage index 

because such a provider did not file 

Medicare cost reports as an IPPS 

provider in FY 2003. 

We recognize, as one commenter 

pointed out that in the past we have 

noted the importance of including ‘‘all’’

available wage data in the wage index 

calculation. However, our past 

statements to this effect were discussing 

the inclusion of all IPPS hospital wage 

data, not data from non-IPPS hospitals. 

In the FY 2003 IPPS final rule (67 FR 

50023), we discussed our policy of 

including data from IPPS hospitals that 

have since closed. We stated that such 

data should be included because, ‘‘any 

hospital that is in operation during the 

data collection period used to calculated 

the wage index should be included in 

the database, since the hospital’s data 

reflect conditions occurring in that labor 

market area during the period 

surveyed.’’ Our statement, however, was 

directed at the inclusion of IPPS 

hospital data—not the inclusion of data 

from hospitals that were not IPPS 

hospitals during the data collection 

period. As stated earlier, section 

1886(d)(3)(E) of the Act requires the 

wage index to be based upon a survey 

of ‘‘subsection (d) hospitals.’’

Lastly, we think it is false logic to 

state that our policy excluding data from 

hospitals that become CAHs necessarily 

requires inclusion of data from hospitals 

that switch from CAH status to IPPS 

status. As stated in the FY 2003 IPPS 

final rule, we exclude hospitals that 

convert to CAH status because our 

analysis showed that the wage data for 

these hospitals, in general, are 

significantly different from other shortterm hospitals (68 FR 45397). CAHs that 

convert to IPPS status, in contrast, could 

not, under the statute, be included in 

the wage index survey because they are 

not IPPS hospitals at the time of the 

survey. 

Comment: A few commenters 

recommended that CMS propose now to 

extend the imputed rural floor to 

coincide with the rural floor established 

under section 4410 of Pub. L. 105–33, in 

order to place all 50 states on a level 

playing field. 

Response: As stated above, our policy 

for imputing a ‘‘rural floor’’ is effective 

for the FYs 2005, 2006, and 2007 wage 

indices. We will determine the 

appropriateness of extending that policy 

beyond FY 2007 and state our proposal 

in the FY 2008 proposed rule. 

Commenters will be have sufficient time 

during the FY 2008 IPPS comment 

period to assess and comment on such 

a proposal. 

Comment: One commenter suggested 

that CMS should select one national 

contractor as part of the Medicare 

Administrative Contractor (MAC) 

bidding process (provided for under 

section 1847A of the Act as added by 

section 911 of Pub. L. 108-173) to do 

wage index reviews. The commenter 

believed that the use of the MAC 

process to solicit a single ‘‘national’’

contractor would ensure that the wage 

data and occupational mix data reviews 

are handled consistently and accurately, 

so that all hospitals are subject to the 

same policy interpretations. The 

commenter noted the importance of the 

wage index in determining Medicare 

payments to hospitals and indicated 

that any variation among contractors in 

the handling of hospitals’ wage index 

data could be detrimental to hospitals in 

certain geographic regions. The 

commenter also stated that the inclusion 

of a 100 percent occupational mix 

adjustment intensifies the need for a 

contractor approach going forward. 

Response: We appreciate the 

suggestion and will consider it as we 

develop our program acquisition 

strategies. 

F. Computation of the FY 2007 

Unadjusted Wage Index 

The method used to compute the FY 

2007 wage index without an 

occupational mix adjustment follows: 

Step 1—As noted above, we based the 

FY 2007 wage index on wage data 

reported on the FY 2003 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, 2002, 

and before October 1, 2003. In addition, 

we include data from some hospitals 

that had cost reporting periods 

beginning before October 2002 and 

reported a cost reporting period 

covering all of FY 2003. These data are 

included because no other data from 

these hospitals would be available for 


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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 2003 data. We note 

that, if a hospital had more than one 

cost reporting period beginning during 

FY 2003 (for example, a hospital had 

two short cost reporting periods 

beginning on or after October 1, 2002, 

and before October 1, 2003), we include 

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 

include 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. In calculating a 

hospital’s average salaries plus wagerelated 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 

nonexuded 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) to revised hours (Line 

1 minus the sum of Lines 2, 3, 4.01, 5, 

5.01, 6, 6.01, 7, 8, and 8.01); (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 wagerelated costs by the above excluded area 

hours ratio. Finally, we subtract the 

computed overhead salaries, wagerelated 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, 2002, 

through April 15, 2004, 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. 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

After Before Adjustment 

factor 

10/14/2002 11/15/2002 1.06058 

11/14/2002 12/15/2002 1.05679 

12/14/2002 01/15/2003 1.05304 

01/14/2003 02/15/2003 1.04915 

02/14/2003 03/15/2003 1.04513 

03/14/2003 04/15/2003 1.04108 

04/14/2003 05/15/2003 1.03713 

05/14/2003 06/15/2003 1.03325 

06/14/2003 07/15/2003 1.02948 

07/14/2003 08/15/2003 1.02584 

MIDPOINT OF COST REPORTING

PERIOD—Continued 

After Before Adjustment 

factor 

08/14/2003 09/15/2003 1.02231 

09/14/2003 10/15/2003 1.01878 

10/14/2003 11/15/2003 1.01510 

11/14/2003 12/15/2003 1.01127 

12/14/2003 01/15/2004 1.00743 

01/14/2004 02/15/2004 1.00367 

02/14/2004 03/15/2004 1.00000 

03/14/2004 04/15/2004 0.99644 

For example, the midpoint of a cost 

reporting period beginning January 1, 

2003, and ending December 31, 2003, is 

June 30, 2003. An adjustment factor of 

1.02948 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 

2003 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. 

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 is $29.6521. 

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 


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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 divided the sum by 

the total hours for Puerto Rico (as 

calculated in Step 4) to arrive at an 

overall average hourly wage of $13.0915 

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 Pub. L. 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. (For all-urban States, 

we establish an imputed floor (69 FR 

49109). Furthermore, this wage index 

floor is to be implemented in such a 

manner as to ensure that aggregate IPPS 

payments are not greater or less than 

those that would have been made in the 

year if this section did not apply. For FY 

2007, the areas affected by this 

provision, after the occupational mix 

adjustment is applied, will be by a 

footnote in Tables 4A–1 and 4A–2 that 

are to be published separate from this 

final rule. 

G. Implementation of the FY 2007 

Occupational Mix Adjustment to the 

Wage Index 

For the final FY 2005 and FY 2006 

wage indices, we used a blend of the 

occupational mix adjusted wage index 

and the unadjusted wage index. 

Specifically, we adjusted 10 percent of 

the FY 2005 and FY 2006 wage index 

adjustment factor by a factor reflecting 

occupational mix. We refer readers to 

the FY 2005 IPPS final rule at 69 FR 

49052 and the FY 2006 IPPS final rule 

at 70 FR 47376 for a detailed discussion 

of the blended wage index. 

As discussed in section III.C. of this 

preamble, for FY 2007, we are applying 

the occupational mix adjustment to 100 

percent of the FY 2007 wage index. We 

will calculate the occupational mix 

adjustment using the first 3 months of 

the 2006 survey data, using the 

methodology described in section III.C. 

of this preamble. 

Comment: One commenter suggested 

that, for the FY 2007 wage index, CMS 

should apply the Bellevue Hosp. Center 

v. Leavitt decision only to hospitals in 

the Second Circuit, and not on a 

nationwide basis. For States outside the 

Second Circuit, the commenter 

recommended that CMS apply the 

occupational mix adjustment at 10 

percent, as it did in FYs 2005 and 2006. 

The commenter noted that there is a 

CMS (then HCFA) precedent for 

applying a court’s order to only 

hospitals in the States in the Circuit 

where the decision was rendered, citing 

HCFA Ruling 97–2, pertaining to the 

inclusion of ‘‘eligible but unpaid’’

Medicaid days in the DSH calculation. 

Response: The commenter did not 

address whether the 10-percent 

adjustment would use the new 2006 

occupational mix survey data or the 

prior 2003 data. Therefore, it is not clear 

how the commenter is suggesting we 

apply the policy. Nevertheless, we 

believe the most appropriate policy is to 

apply the occupational mix adjustment 

uniformly nationwide, using the same 

survey data and a 100 percent 

adjustment for all hospitals. It is 

important to keep in mind that the 

occupational mix adjustment is an 

adjustment to the wage index factor that 

represents the ratio of a labor market 

area’s average hourly wage to the 

national average hourly wage. DSH 

adjustments, in contrast, are not based 

upon individual hospital information 

compared to a national average. If we 

were to use separate sets of data 

depending upon geographic location, 

hospitals located in the Second Circuit 

would be compared to one national 

benchmark, whereas hospitals located 

elsewhere would be compared to a 

different one. We believe such a policy 

would undermine the calculation of the 

wage index that is a relative measure of 

differences in area wage levels that uses 

a uniform national baseline for purposes 

of comparison. In addition, we note that 

the New York labor market area 

includes counties located both inside 

and outside of the Second Circuit. The 

New York-White Plains-Wayne, NY–NJ 

CBSA includes three New Jersey 

Counties: Bergen, Hudson, and Passaic 

Counties. These counties are located in 

the Third Circuit, not the Second 

Circuit. Therefore, applying the Bellevue 

Hosp. Center v. Leavitt decision only in 

the Second Circuit would result in two 

area wage index values for the New 

York labor market area, adding further 

complexity to the wage index 

calculation. 

Comment: One commenter believed 

that section 1886(d)(6) of the Act 

requires CMS to publish its actual wage 

tables and other factors by August 1. 

The commenter also cited the Balanced 

Budget Act of 1997 (BBA), Pub. L. 105–

33, under which Congress moved the 

deadline in section 1886(d)(6) of the Act 

from September 1 to August 1. The 

commenter contended that Congress 

would not have needed to move the 

deadline if the final data were not to be 

published as of August 1. 

Response: The relevant language of 

section 1886(d)(6)of the Act states: ‘‘The 

Secretary shall provide for publication 

in the Federal Register, on or before 

August 1 before each fiscal year * * * 

of a description of the methodology and 

data used in computing the adjusted 

DRG prospective payment rates under 

this subsection.’’ We believe the plain 

language of section 1886(d)(6) of the Act 

requires merely a description of the data 

and methodology that are used to 

compute the IPPS rates and does not 

require actual publication of the rates. 

With respect to the comments about 

the statutory change that moved the 

deadline for the IPPS rule from 

September 1 to August 1, section 4644 

of the BBA was an amendment to 

conform section 1886(h)(6) of the Act to 

the requirements of the Congressional 

Review Act. The Congressional Review 

Act does not allow a major rule to go 

into effect for 60-days unless there is an 

act of Congress allowing the rule to go 

into effect earlier. The publication date 

in section 1886(d)(6) of the Act was 

changed accordingly so that the IPPS 

final rule could take effect no sooner 

than 60 days after publication, or by the 

beginning of the Federal fiscal year on 

October 1 without Congress having to 

act. However, Congress did not alter 

section 1886(d)(6) of the Act with 

respect to the information that is to be 

included in the final rule. We agree with 

the commenter that it is our usual 

practice to publish the wage tables and 

other factors along with the final rule 

consistent with 42 CFR 412.8. However, 

due to our implementation of the 

Bellevue Hosp. Center v. Leavitt 

decision, it is not possible to follow this 

procedure for FY 2007. In the proposed 

rule, we explained our intent to post the 

FY 2007 occupational mix adjusted 

wage index tables and related impacts 

on the CMS Web site after we publish 

the FY 2007 IPPS final rule, and in 

advance of October 1, 2006 (71 FR 

28652). We have modified 42 CFR 412.8 

accordingly. The change we are making 

to § 412.8 is a procedural rule that we 

are making effective upon publication. 

Comment: A few commenters 

expressed concern that the new 

occupational mix adjustment may have 

a negative impact on some hospitals, 

and they would not know how they are 

affected until the final FY 2007 wage 

index tables are published. Some 

commenters recommended that CMS 

allow hospitals more time to review 

their data, comment on the survey 

results, and make adjustments and/or 


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revisions to their occupational mix 

survey data. One commenter requested 

that CMS publish the occupational mix 

regulations and data as an interim final 

rule with a full 60-day comment period 

so that providers will have an 

opportunity to comment further. 

Another commenter urged CMS to 

consider either delaying the 

implementation of the occupational mix 

adjustment, or consider allowing 

retroactive correction to any errors 

discovered after October 1. A few 

commenters recommended that CMS 

use its discretionary authority to 

‘‘smooth out’’ the impact of this change 

on adversely affected hospitals and 

apply a multiyear transition of the 

occupational mix survey data. 

Response: As we indicated above, 

while we understand the commenters’

concerns about the potential for 

inaccurate occupational mix survey data 

to be used due to the abbreviated data 

collection and reporting periods, we 

believe we have established a review 

and correction process that is intended 

to minimize errors. We cannot delay the 

implementation of, or transition in, the 

occupational mix adjustment for the FY 

2007 wage index because the Second 

Circuit Court required that all ‘‘data 

collection and measurement and any 

other preparations necessary for full 

application should be complete by 

September 30, 2006, at which time we 

instruct the agency to immediately 

apply the adjustment in full.’’ Also, we 

believe that the 30-day comment period 

after the May 17, 2006 publication of the 

amended FY 2007 IPPS proposed rule 

provided ample opportunity for the 

public to comment on the new 

occupational mix survey data and 

adjustment for the FY 2007 wage index. 

Hospitals are usually afforded 60 days 

to comment on the entire IPPS rule. In 

addition, we cannot allow retroactive 

changes to the FY 2007 wage index for 

errors discovered after October 1, 2006, 

unless a hospital’s correction request 

meets the strict criteria of § 412.64(k)(1) 

of our existing regulations (also see 

section III.J. of this preamble). However, 

as previously mentioned, we will allow 

hospitals an additional opportunity to 

revise both their 1st quarter and 2nd 

quarter 2006 occupational mix data for 

the FY 2008 wage index. 

Comment: One commenter 

recommended that CMS publish the 

corrected 1st quarter 2006 survey data 

as a public use file prior to the 

publication of the final FY 2007 wage 

index tables. 

Response: Intermediaries are required 

to transmit the corrected 1st quarter 

2006 survey data to CMS by July 27, 

2007. Unfortunately, due to our short 

timeframe after July 27 for reviewing the 

survey data and computing, analyzing, 

and publishing the final FY 2007 

occupational mix adjusted wage index, 

we cannot publish the corrected 1st 

quarter survey data before we publish 

final FY 2007 wage index tables. 

The final wage index values for FY 

2007 (except those for hospitals 

receiving wage index adjustments under 

section 505 of Pub. L. 108–173) will be 

included in Tables 4A–1, 4A–2, 4B, 4C–

1, 4C–2, and 4F that are to be posted on 

our Web site and published in a Federal 

Register notice subsequent to this final 

rule. 

Tables 3A and 3B in the separate 

issuance will list the 3-year average 

hourly wage for each labor market area 

before the redesignation of hospitals, 

using the wages included in the 

calculation for the FYs 2005, 2006, 2007 

wage indices. Table 3A in the separate 

issuance will list these data for urban 

areas and Table 3B in the separate 

issuance will list these data for rural 

areas. In addition, Table 2 in the 

separate issuance will include the 

adjusted average hourly wage for each 

hospital from the FY 2001 and FY 2002 

cost reporting periods, as well as the FY 

2003 period used to calculate the FY 

2007 wage index. The 3-year averages 

will be 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 will be calculated based on 

the data available during that period. 

The final wage index values in Tables 

4A–1, 4A–2, 4B, 4C–1, 4C–2, and 4F 

and the average hourly wages in Tables 

2, 3A, and 3B to be posted on our Web 

site and published in a subsequent 

Federal Register notice will include the 

occupational mix adjustment. 

H. Revisions to the Wage Index Based 

on Hospital Redesignations 

1. General 

Under section 1886(d)(10) of the Act, 

the Medicare Geographic Classification 

Review Board (MGCRB) considers 

applications by hospitals for geographic 

reclassification for purposes of payment 

under the IPPS. Hospitals must apply to 

the MGCRB to reclassify by September 

1 of the year preceding the year during 

which reclassification is sought. 

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 §§ 412.230 through 412.280. 

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 the 3 most 

recent years’ average hourly wage data 

in evaluating a hospital’s 

reclassification application for FY 2003 

and any succeeding fiscal year. 

Section 304(b) of Pub. L. 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 § 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 MSA 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 new 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. The 

eligible counties are identified under 

section III.H.4. 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 is applicable 

both to the hospitals located in rural 

counties deemed urban under section 

1886(d)(8)(B) of the Act and hospitals 


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that were reclassified as a result of the 

MGCRB decisions under section 

1886(d)(10) of the Act. In compliance 

with section 1886(d)(8)(C) of the Act, as 

well as with the rules CMS has 

established by regulation, 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 

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. 

• The wage data for a reclassified 

urban hospital is included in both the 

wage index calculation of the 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. 

• 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. 

• In cases where urban hospitals have 

reclassified to rural areas under 42 CFR 

412.103, the urban hospital 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. 

3. FY 2007 MGCRB Reclassifications 

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 § 412.230 

through § 412.280. 

In the FY 2007 IPPS proposed rule (71 

FR 24377), we identified hospitals that 

have reclassifications effective in FY 

2007. As specified in § 412.273, 

hospitals that have been reclassified by 

the MGCRB are permitted to withdraw 

an application for reclassification or 

terminate an existing 3-year 

reclassification for FY 2007. The request 

must be received by the MGCRB within 

45 days of publication of the IPPS 

proposed rule. 

However, as a result of our 

compliance with the Bellevue Hosp. 

Center v. Leavitt court decision, as 

discussed earlier, we will be 

recalculating wage indices using new 

occupational mix data and applying the 

occupational mix to 100 percent of the 

wage index. Wage tables in the IPPS 

proposed rule did not include the new 

survey data, nor did they adjust 100 

percent for occupational mix. Thus, the 

data that hospitals might have used to 

make withdrawal or termination 

decisions are obsolete. The necessary 

data (including wage indices and outmigration adjustments) hospitals 

generally utilize in evaluating whether 

to withdraw or terminate a 

reclassification will not be available 

until after this IPPS final rule has been 

published. Therefore, in the May 17, 

2006 proposed rule (71 FR 28650), in 

this limited circumstance, we 

suspended the 45-day deadline and 

have established the new procedure 

described below to withdraw from or 

terminate reclassifications for FY 2007. 

Some hospitals may have adhered to the 

established process and notified the 

MGCRB of their decision to withdraw or 

terminate a reclassification, in 

accordance with § 412.273, before 

publication of that proposed rule. 

Because hospitals made these 

decisions based on information in the 

FY 2007 IPPS proposed rule that is now 

obsolete, in the May 17, 2006 proposed 

rule, we proposed that the MGCRB not 

act on these withdrawal or termination 

requests. Instead, we have applied the 

following procedures for withdrawal 

and termination determinations for all 

hospital reclassifications for FY 2007. 

We will make reclassification 

withdrawal and termination 

determinations based on what we 

perceive would be most advantageous to 

the hospital. We will use our best efforts 

to determine what would provide the 

hospital with the highest possible wage 

index. Specifically, we will choose 

among: section 508 reclassifications, 

section 1886(d)(10) reclassifications, 

section 505 out-migration adjustments, 

and certain other changes to the wage 

index (for example, the special 

exceptions policy explained in the FY 

2005 IPPS rule (69 FR 49105) or Lugar 

status if we determine that it is in the 

hospital’s best interest to waive the 

Lugar/section 1886(d)(8)(B) 

redesignation in order to receive the 

section 505 out-migration adjustment). 

We also will make the final 

occupational mix adjusted wage indices 

and out-migration adjustments and our 

interim decisions on hospital 

reclassifications available to the public 

in the Federal Register and on the CMS 

Web site at: http://www.cms.hhs.gov/ 

AcuteInpatientPPS/WIFN/list.asp after 

August 1, 2006, and before October 1, 

2006. We will allow hospitals a 30-day 

period from the date the final data and 

our interim decisions are made available 

on the Web site to notify CMS in 

writing, with a copy to the MGCRB, of 

whether they wish to reverse the 

reclassification decision made by CMS 

or to choose another reclassification for 

which they are eligible. We will make 

every effort to provide the final data 

before September 1, 2006, so that the 30- 

day period to make these 

determinations will end before October 

1, 2006, and no retroactive adjustments 

will be necessary. Requests to reverse a 

decision made by CMS must be 

received, in writing, no later 30 days 

after the data are made available on the 

CMS Web site at the following: 

Division of Acute Care, C4–08–06, 

7500 Security Boulevard, Baltimore, MD 

21244, Attn: Marianne Myers; 

AND a copy to 

Medicare Geographic Classification 

Review Board, 2520 Lord Baltimore 

Drive, Suite L, Baltimore, MD 21244–

2670. 

Prior to FY 2004, hospitals had been 

able to apply to be reclassified for 

purposes of either the wage index or the 

standardized amount. Section 401 of 

Pub. L. 108–173 established that all 

hospitals will be paid on the basis of the 

large urban standardized amount, 

beginning with FY 2004. Consequently, 

all hospitals are paid on the basis of the 

same standardized amount, which made 

such reclassifications moot. Although 

there could still be some benefit in 

terms of payments for some hospitals 

under the DSH payment adjustment for 

operating IPPS, section 402 of Pub. L. 

108–173 equalized DSH payment 

adjustments for rural and urban 

hospitals, with the exception that the 

rural DSH adjustment is capped at 12 

percent (except that rural referral 

centers and, effective for discharges 


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occurring on or after October 1, 2006, 

MDHs have no cap). (A detailed 

discussion of this application appears in 

section IV.I. of the preamble of the FY 

2005 IPPS final rule (69 FR 49085). The 

exclusion of MDHs from the 12 percent 

DSH cap under Pub. L. 109–171 is 

discussed under section IV.F.4. of this 

preamble.) 

Comment: Several commenters asked 

CMS to clarify its position on 

withdrawing reclassifications as well as 

the timeframe of submitting 

applications for geographic 

reclassification. 

Response: The normal timetable of 45 

days after the publication of the 

proposed rule for hospitals to withdraw 

or terminate a reclassification under 

section 508 of Pub. L. 108–173, section 

1886(d)(10) of the Act, or section 

1886(d)(8)(B) of the Act (in order to 

receive a section 505 out-migration 

adjustment) does not apply for FY 2007. 

For this reason, any withdrawal or 

termination requests submitted to the 

MGCRB and/or CMS following 

publication of the FY 2007 IPPS 

proposed rule are not reflected in the 

reclassification tables shown in this 

final rule. 

We will make best efforts to give each 

hospital the highest FY 2007 wage index 

after reviewing applicable data using the 

100 percent occupational adjusted wage 

index. Hospitals will have 15 days from 

the display date of this final rule to 

notify us of whether, in the absence of 

viewing the final 100 percent 

occupational mix-adjusted wage index 

data, they wish to choose a particular 

wage index for which they are eligible 

(such as to definitively maintain a 

reclassification that they received or to 

definitively terminate or withdraw from 

a reclassification). Written requests to 

maintain, terminate, or withdraw a 

reclassification, in the absence of 

viewing the final wage tables, must be 

received at the following address no 

later than 5 p.m. EDT 15 days from the 

date this final rule appears on public 

display at the Office of the Federal 

Register: 

Division of Acute Care, C4–08–06, 

7500 Security Boulevard, Baltimore, MD 

21244, Attn: Marianne Myers. 

If we do not receive notice from the 

hospital within such 15-day timeframe, 

we will make determinations for the 

hospital using our best efforts to 

determine what we believe results in the 

highest wage index for the hospital. If 

applicable, we will give the hospital its 

home wage index with the outmigration adjustment, if that option 

results in the highest wage index. In 

some cases, we may determine that it is 

most advantageous for a hospital to 

terminate its Lugar/section 1886(d)(8)(B) 

reclassification in order to receive the 

out-migration adjustment. Because this 

termination would result in the hospital 

losing urban status, we will separately 

publish a table identifying these 

hospitals that move from Lugar/urban 

status to rural status with the outmigration adjustment. For section 508 

hospital individual reclassifications, we 

may make half-year terminations/ 

withdrawals on behalf of hospitals, 

using the procedures identified in our 

proposed rule. That is, for a section 508 

hospital that applied for an individual 

reclassification under section 

1886(d)(10), we would give the section 

508 hospital the higher of its home wage 

index, section 508 or 1886(d)(10) wage 

index for the first half of the year. For 

the second half of the year, we would 

give the section 508 hospital the higher 

of its home wage index or its section 

1886(d)(10) reclassification. (However, 

in no case could such a hospital receive 

its home wage indes for the first half of 

the year and its MGCRB reclassification 

for the second half, or vice versa. For 

group reclassifications, we will apply 

the higher of the home wage index or 

the section 1886(d)(10) reclassification 

for the entire year. For group 

reclassifications that include a section 

508 hospital, we will apply the decision 

that was on the MGCRB application for 

groups that followed the procedural 

rules (that is, the group either: (1) 

Withdrew from its section 1886(d)(10) 

reclassification for the first half of FY 

2007 and will only receive a second half 

FY 2007 section 1886(d)(10) 

reclassification; or (2) the group is 

reclassified under section 1886(d)(10) of 

the Act for the entire year and the 

section 508 hospital withdraws from its 

section 508 reclassification for the first 

half of the FY 2007) unless the group 

informs us differently after publication 

of the final occupational mix adjusted 

wage indices. Groups that include a 

section 508 hospital will be able to 

make decisions as a group, separately 

for the first and second half of the year. 

Thus, the group may decide to 

withdraw a section 1886(d)(10) 

reclassification that would be applicable 

only for the second half of FY 2007. 

Again, however, in no case could a 

group whose 508 hospital chose to 

waive its 508 reclassification (and 

therefore accept the MGCRB 

reclassification for the first half of FY 

2007) withdraw its MGCRB 

reclassification for the first half of the 

year, but not the second (or vice versa). 

We acknowledge that hospitals may 

base withdrawal/termination decisions 

on factors other than simply what 

results in the highest wage index for the 

upcoming fiscal year. For this reason, 

we will allow a hospital to change a 

decision that is made by CMS on its 

behalf. Hospitals should note that we 

will not recalculate the wage indices or 

budget neutrality factors after the final 

notice announcing the FY 2007 

occupational mix adjusted wage indices. 

That is, we will not further recalculate 

the wage indices or standardized 

amounts based on hospital decisions 

that further revise decisions made by 

CMS on the hospitals’ behalf. 

We will post the final occupational 

mix adjusted wage indices, outmigration adjustments, and our interim 

decisions on hospital reclassification on 

the CMS Web site, as discussed above, 

sometime after August 1, 2006, and 

before October 1, 2006. We will post the 

same tables on the CMS Web site that 

appear in the Federal Register final 

notice of the occupational mix adjusted 

wage indices to be published after 

August 1, 2006 and before October 1, 

2006. Hospitals will be able to 

determine the reclassification decision 

applied on their behalf by reviewing 

Tables 9A through 9C for hospitals that 

are reclassified under section 

1886(d)(8)(B) of the Act, section 508 of 

Pub. L. 108–173, or section 1886(d)(10) 

of the Act. The applicable wage index 

for these hospitals will be found on 

Table 2. If a hospital is not listed in 

Tables 9A through 9C, CMS will have 

made a decision not to reclassify the 

hospital and its home wage index will 

apply, including the effect of the outmigration adjustment, will be found in 

Table 2. The applicable out-migration 

adjustment for the hospital will be 

found in Table 4J. As indicated above, 

we will separately publish a table 

identifying hospitals that we move from 

Lugar/urban status to rural status with 

the out-migration adjustment in Table 

9D. Hospitals will have 30 days after the 

data are placed on the CMS Web site to 

submit, in writing, whether they wish to 

revise the decision made on their behalf 

by CMS. Written requests to revise a 

decision made on behalf of a hospital by 

CMS must be received by CMS no later 

than 5 p.m. EDT, with a copy sent to the 

MGCRB, within 30 days from the date 

the information appears on the CMS 

Web site at http://www.cms.hhs.gov/ 

AcuteInpatientPPS/WIFN/list.asp at the 

following addresses: 

Division of Acute Care, C4–08–06, 

7500 Security Boulevard, Baltimore, MD 

21244, Attn: Marianne Myers; 

AND a copy to 

Medicare Geographic Classification 

Review Board, 2520 Lord Baltimore 

Drive, Suite L, Baltimore, MD 21244–

2670. 


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If a hospital fails to notify CMS that 

it is revising a determination made on 

its behalf within 30 days from the date 

the information appears on the CMS 

Web site, the interim decision made by 

CMS on the hospital’s behalf will be 

final for FY 2007. Therefore, if CMS 

makes a decision on a hospital’s behalf 

to terminate or withdraw a 

reclassification and the hospital does 

not reverse or modify CMS’s decision, 

we will deem the hospital’s 

reclassification is withdrawn or 

terminated. Once CMS’s decision on the 

hospital’s behalf is in effect, it will be 

treated in the same manner as if the 

hospital(s) had made the reclassification 

decision on its own. Thus, for example, 

because a hospital cannot have 

overlapping reclassifications, if we 

decide a hospital should accept a FY 

2007 through 2009 reclassification, any 

reclassification the hospital previously 

had for FY 2006 through 2008 would be 

permanently terminated. 

Section 1886(d)(10)(C)(ii) of the Act 

indicates that a hospital requesting a 

change in geographic classification for a 

FY must submit its application to the 

MGCRB no later than the first day of the 

13-month period ending on September 

30 of the preceding fiscal year. Thus, the 

statute requires that FY 2008 

reclassification applications be 

submitted to the MGCRB no later than 

September 1, 2006. Hospitals must 

submit applications for geographic 

reclassification for FY 2008 by 

September 1, 2006. However, because 

the 3-year average hourly wage of 

hospitals for the FY 2007 final rule will 

not be available by the September 1, 

2006 deadline for submitting FY 2008 

geographic reclassification applications, 

we will allow hospitals to supplement 

incomplete reclassification applications 

with the official data used to develop 

the FY 2007 wage index after filing their 

initial application. As indicated above, 

the 3-year average hourly wage 

information that will be necessary for 

FY 2008 reclassification applications 

will be available subsequent to this final 

rule after August 1, and before October 

1, 2006. The information will be 

available on the CMS Web site at: http:// 

www.cms.hhs.gov/AcuteInpatientPPS/ 

WIFN/list.asp and then accessing the 

page titled ‘‘MGCRB Reclassification 

Data for FY 2008 Applications.’’

Applications and other information 

about MGCRB reclassifications may be 

obtained via the CMS Internet Web site 

at: http://www.cms.hhs.gov/mgcrb/, 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. 

Comment: Several commenters 

requested a revision in the geographic 

reclassification rules so that in the 

future the occupational mix adjusted 

average hourly wage data is used as a 

point of comparison for eligibility. The 

commenters believed this change would 

make reclassification decisions 

consistent with the new basis for the 

wage index. The commenters also 

suggested that hospitals should not be 

allowed to apply for reclassification if 

they do not provide complete 

occupational mix data. 

Response: Section 1886(d)(10)(D)(vi) 

of the Act requires the MGCRB to use 

the 3-year average of the average hourly 

wage data from the most recently 

published hospital wage survey data, as 

well as the preceding 2 fiscal years’

published surveys. Because our 

published surveys of wage data include 

adjustments for occupational mix (10 

percent in FYs 2005 and 2006 and 100 

percent in FY 2007), the MGCRB uses 

mix-adjusted wage indices in making 

reclassification decisions. Therefore, for 

FY 2008 reclassification applications, 

the MGCRB will use the average of the 

average hourly wages for FYs 2005 

through 2007. These data will be based 

on an occupational mix adjustment of 

10 percent for FY 2005 and FY 2006 and 

100 percent for FY 2007. 

With respect to the comment about 

precluding hospitals that did not submit 

occupational mix survey data from 

reclassifying, we believe that due to the 

unusual circumstances of the Court’s 

order and the short timeframe that 

hospitals were provided for completing 

and submitting their data, it would not 

be fair to apply a penalty to nonresponsive hospitals for the 2008 

reclassification applications. However, 

as indicated earlier, we will give serious 

consideration to applying some sort of 

penalty in the future if a hospital does 

not comply with regulations requiring 

submission of occupational mix survey 

data. 

4. Procedures for Hospitals Applying for 

Reclassification Effective in FY 2008 

and Reinstating Reclassifications in FY 

2008 

Applications for FY 2008 

reclassifications are due to the MGCRB 

by September 1, 2006. We note that this 

deadline also applies for canceling a 

previous wage index reclassification 

withdrawal or termination under 

§ 412.273(d). As we noted in the FY 

2007 IPPS proposed rule (71 FR 24083), 

applications and other information 

about MGCRB reclassifications may be 

obtained, beginning in mid-July 2006, 

on the CMS Web site at: http:// 

www.cms.hhs.gov/mgcrb/, or by calling 

the MGCRB at (410) 786–1174. 

The MGCRB, in evaluating a 

hospital’s request for reclassification for 

FY 2008 for the wage index, must utilize 

the official data used to develop the FY 

2007 wage index. The wage data used to 

support the hospital’s wage 

comparisons must be from the CMS 

hospital wage survey. Generally, the 

source for these data is the IPPS final 

rule to be published on or before August 

1, 2006. However, as we stated earlier, 

the wage tables identifying the 3-year 

average hourly wage of hospitals will 

not be available in time to include them 

in this FY 2007 IPPS final rule. 

Therefore, we will make the data 

available subsequent to August 1, 2006, 

but before October 1, 2006. 

Section 1886(d)(10)(C)(ii) of the Act 

indicates that a hospital requesting a 

change in geographic classification for a 

FY must submit its application to the 

MGCRB not later than the first day of 

the 13-month period ending on 

September 30 of the preceding FY. 

Thus, the statute requires that FY 2008 

reclassification applications be 

submitted to the MGCRB by no later 

than September 1, 2006. For this reason, 

hospitals must file an FY 2008 

reclassification application by the 

September 1, 2006 deadline even 

though the average hourly wage data 

used to develop the final FY 2007 wage 

indices will not yet be available. We 

note that, under § 412.256(c), the 

MGCRB must review applications and 

notify the hospital if it determines that 

the application is incomplete. We are 

also allowing hospitals 30 days from the 

date the final wage data is posted on the 

CMS Web site to request to cancel a 

withdrawal or termination in order to 

reinstate its reclassification for FY 2008 

or FY 2009, or both fiscal years. 

Requests to cancel a withdrawal or 

termination in order to reinstate a 

hospital’s reclassification for FY 2008 or 

FY 2009, or both fiscal years, should be 

forwarded to the following addresses: 

Medicare Geographic Classification 

Review Board, 2520 Lord Baltimore 

Drive, Suite L, Baltimore, MD 21244–

2670; 

AND a copy to 

Division of Acute Care, C4–08–06, 

7500 Security Boulevard, Baltimore, MD 

21244, Attn: Marianne Myers. 

As outlined in § 412.256(c)(2), 

hospitals with incomplete applications 

have the opportunity to request that the 

MGCRB grant a hospital that has 

submitted an application by September 

1, 2006, an extension beyond September 

1, 2006, to complete its application. 

Thus, while hospitals must file an 

application for reclassification to the 


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MGCRB by September 1, 2006, they will 

be able to supplement the 

reclassification application with official 

data used to develop the FY 2007 wage 

index after filing their initial 

application. We are providing that 

hospitals file a supplement to the 

reclassification application with official 

data used to develop the FY 2007 wage 

index no later than 30 days after the 

data are made available on the CMS 

Web site. These same rules will apply 

to canceling a withdrawal or 

termination of a geographic 

reclassification. 

5. FY 2007 Redesignations Under 

Section 1886(d)(8)(B) of the Act 

Beginning October 1, 1988, section 

1886(d)(8)(B) of the Act required 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 were met. Prior to FY 2005, the 

rule was that a rural county adjacent to 

one or more urban areas would be 

treated as being located in the MSA 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 

published in the Federal Register on 

January 3, 1980 (45 FR 956) for 

designating MSAs (and New England 

County Metropolitan Areas (NECMAs)), 

and if the commuting rates used in 

determining outlying counties (or, for 

New England, similar recognized areas) 

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 (or NECMAs). Hospitals that met 

the criteria using the January 3, 1980 

version of these OMB standards were 

deemed urban for purposes of the 

standardized amounts and for purposes 

of assigning the wage data index. 

Effective beginning FY 2005, we use 

OMB’s 2000 CBSA standards and the 

Census 2000 data to identify counties 

qualifying for redesignation under 

section 1886(d)(8)(B) for the purpose of 

assigning the wage index to the urban 

area. We provided the chart below with 

the listing of the rural counties 

designated as urban under section 

1886(d)(8)(B) of the Act in the FY 2007 

IPPS proposed rule. For discharges 

occurring on or after October 1, 2006, 

hospitals located 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. 

The following table is subject to 

revision if CMS decides it is most 

advantageous for a county to waive its 

county Lugar status in order for a 

hospital within that county to receive a 

section 505 out-migration adjustment. 

RURAL COUNTIES 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. 

Flagler, FL ................................................................................................ Deltona-Daytona Beach-Ormond Beach, 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. 


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RURAL COUNTIES REDESIGNATED AS URBAN UNDER SECTION 1886(D)(8)(B) OF THE ACT—Continued 

[Based on CBSAs and Census 2000 data] 

Rural County CBSA 

Pearl River, MS ........................................................................................ Gulfport-Biloxi, MS. 

Caswell, NC .............................................................................................. Burlington, NC. 

Granville, NC ............................................................................................ Durham, NC. 

Harnett, NC ............................................................................................... Raleigh-Cary, NC. 

Lincoln, NC ............................................................................................... Charlotte-Gastonia-Concord, NC-SC. 

Polk, NC ................................................................................................... Spartanburg, NC. 

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. 

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 are permitted to compare the 

reclassified wage index for the labor 

market area in Tables 4C–1 and 4C–2 

into which they have been 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 

once the final wage index data are 

posted on the CMS Web site. 

6. Reclassifications Under Section 508 

of Pub. L. 108–173 

Under section 508 of Pub. L. 108–173, 

a qualifying hospital could appeal the 

wage index classification otherwise 

applicable to the hospital and apply for 

reclassification to another area of the 

State in which the hospital is located 

(or, at the discretion of the Secretary, to 

an area within a contiguous State). We 

implemented this process through 

notices published in the Federal 

Register on January 6, 2004 (69 FR 661), 

and February 13, 2004 (69 FR 7340). 

Such reclassifications are applicable to 

discharges occurring during the 3-year 

period beginning April 1, 2004, and 

ending March 31, 2007. Under section 

508(b), reclassifications under this 

process do not affect the wage index 

computation for any area or for any 


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other hospital and cannot be effected in 

a budget neutral manner. 

Some hospitals currently receiving a 

section 508 reclassification are eligible 

to reclassify to that same area under the 

standard reclassification process as a 

result of the new labor market 

definitions that we adopted for FY 2005. 

The governing regulations indicate that 

‘‘if a hospital is already reclassified to 

a given geographic area for wage index 

purposes for a 3-year period, and 

submits an application to the same area 

for either the second or third year of the 

3-year period, that application will not 

be approved.’’ However in the FY 2006 

IPPS final rule (70 FR 47382), we stated 

that hospitals that indicated in their FY 

2007 MGCRB applications that they 

agreed to waive their section 508 

reclassification for the first 6 months of 

FY 2007 if they were granted a 3-year 

reclassification under the traditional 

MGCRB process will not be subject to 

the rule cited above. Thus, in applying 

for a 3-year MGCRB reclassification 

beginning in FY 2007, hospitals that are 

already reclassified to the same area 

under section 508 should have 

indicated in their MGCRB 

reclassification requests that if they 

receive the MGCRB reclassification, 

they would forfeit the section 508 

reclassification for the first 6 months of 

FY 2007. 

Under 1886(d)(10)(D)(v) of the Act, 

CMS has the authority to ‘‘establish 

procedures’’ under which a hospital 

may elect to terminate a reclassification 

before the end of a 3-year period. In the 

FY 2006 IPPS final rule (70 FR 47382), 

we discussed our decision to exercise 

this authority to establish a procedural 

rule for section 508 hospitals to retain 

their section 508 reclassification 

through its expiration on March 31, 

2007, and reclassify under the 

regulations at 42 CFR Part 412, Subpart 

L, for the second half of FY 2007. We 

provided further detail above on how 

we will apply decisions regarding 

section 508 reclassifications in the 

context of the Bellevue Hosp. Center v. 

Leavitt court decision. Again, we will 

select the reclassification option that 

provides the highest wage index for the 

hospital and will give the hospital 30 

days to revise the decision made on its 

behalf by CMS. We refer readers to the 

discussion above for further details 

about how section 508 hospitals that 

have applied for an individual 

reclassification and hospitals groups 

that include a section 508 hospital can 

revise a CMS decision. 

We will apply a similar rule for 

purposes of the out-migration 

adjustment for FY 2007 discussed in 

section III.I. of this preamble. The 

statute states that a hospital cannot 

receive an out-migration adjustment if it 

is reclassified under section 1886(d)(10) 

of the Act. Therefore, eligible hospitals 

that are not reclassified during any part 

of FY 2007 will, by default, receive an 

out-migration adjustment during that 

time period. If the hospital is 

reclassified for all of FY 2007, the 

hospital will be ineligible for the outmigration adjustment. If a hospital has 

a half fiscal year reclassification, the 

hospital will be eligible for the outmigration adjustment for the portion of 

the fiscal year that it is not reclassified. 

The procedural rules described in the 

FY 2006 IPPS final rule were intended 

to address specific circumstances where 

individual and group reclassifications 

involve a section 508 hospital. The rules 

were designed to recognize the special 

circumstances of section 508 hospital 

reclassifications ending mid-year during 

FY 2007 and were intended to provide 

flexibility in our regulations that would 

allow previously approved 

reclassifications to continue through 

March 31, 2007, and new 

reclassifications to begin April 1, 2007, 

upon the conclusion of the section 508 

reclassifications. As we indicated in the 

proposed rule, we have received 

questions about the application of these 

special procedural rules to non-section 

508 hospitals that are part of group 

applications that previously were 

awarded an individual reclassification 

that continues into FY 2007. These 

hospitals are concerned that the 

procedural rules imply that such prior 

reclassification would be terminated 

beginning October 1, 2006, because the 

rules specify that ‘‘the remainder of the 

group receives the home wage index’’

for the period October 1, 2006, through 

March 31, 2007, if the group 

reclassification application specified 

that the section 1886(d)(10) group 

reclassification would not begin until 

April 1, 2007. We did not specifically 

contemplate preexisting individual 

reclassifications when we drafted the 

special procedural rules for group 

reclassifications that involve section 508 

hospitals. However, we did not intend 

to adopt a less favorable policy for nonsection 508 hospitals in a group with a 

pending individual geographic 

reclassification than we did for section 

508 hospitals. Thus, we clarified our 

procedural rule with respect to nonsection 508 hospitals with preexisting 

individual reclassifications that are part 

of group reclassifications that include a 

section 508 hospital. For the first half of 

FY 2007, we intend to either apply (a) 

the area wage index where the hospital 

is physically located if there is no 

reclassification pending, or (b) the 

hospital’s individual reclassification 

wage index if the hospital was part of 

a group awarded a group reclassification 

and the group followed the procedural 

rules for postponing reclassification 

until April 1, 2007. However, once the 

hospital begins its new section 

1886(d)(10) reclassification for the 

period April 1, 2007, through September 

30, 2009, any prior reclassifications are 

permanently terminated, consistent 

with 42 CFR 412.274(b)(2)(ii). We are 

also reiterating that the special 

procedural rules that we have adopted 

for half fiscal year reclassifications and 

terminations are intended only to 

address the special circumstances 

created by section 508 of Pub. L. 108–

173 with respect to reclassifications 

beginning and ending mid-way through 

a fiscal year. These special procedural 

rules do not change any of the 

permanent provisions currently in effect 

with respect to reclassifications under 

subpart L of 42 CFR Part 412. 

We show the reclassifications 

effective under the one-time appeal 

process in tentative Table 9B in the 

Addendum to this final rule. All section 

1886(d)(10) reclassifications are listed in 

tentative Table 9A in the Addendum to 

this final rule. 

Comment: Many commenters stated 

their appreciation and support of CMS’

flexibility relating to the expiration of 

section 508 and in facilitating the 

transition between the end of section 

508 and reclassifications occurring 

under section 1886(d)(10) of the Act. 

Response: We thank the commenters 

for their support. 

7. Wage Indices for Reclassified 

Hospitals and Reclassification Budget 

Neutrality Factor 

Under the procedural rules described 

under section III.H.6. of this preamble, 

different wage indices may be in effect 

for the first 6 months and the second 6 

months of FY 2007. Specifically, there 

may be different wage indices in effect 

for the first and second half of FY 2007 

due to the special circumstances of 

section 508 reclassifications ending in 

the middle of a fiscal year and half of 

FY 2007 geographic reclassifications 

under section 1886(d)(10) beginning on 

April 1, 2007. This unique circumstance 

will not change as a result of the 

Bellevue Hosp. Center v. Leavitt court 

decision. 

The half fiscal year section 

1886(d)(10) reclassifications present 

issues related to the calculation of the 

reclassified wage indices and 

reclassification budget neutrality factor. 

Section 1886(d)(8)(C) of the Act 

provides requirements for determining 


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the wage index values for both hospitals 

located in rural counties 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. As 

provided in the statute, we are required 

to calculate a separate wage index for 

hospitals reclassified to an area if 

including the wage data for the 

reclassified hospitals would reduce the 

area wage index by more than 1 percent. 

We proposed to issue two separate 

reclassified wage indices for affected 

areas (one effective from October 1, 

2006, through March 31, 2007, and a 

second reclassified wage index effective 

April 1, 2007, through September 30, 

2007). The reclassified wage indices 

will be calculated based on the wage 

data for hospitals reclassified to the area 

in the respective half of the fiscal year. 

We only received public comments 

supporting this proposal. 

The half fiscal year reclassifications 

also have implications for budget 

neutrality. The overall effect of 

geographic reclassification is required 

by section 1886(d)(8)(D) of the Act to be 

budget neutral. We apply an adjustment 

to the IPPS standardized amounts to 

ensure that the effects of geographic 

reclassification are budget neutral. We 

proposed calculating one budget 

neutrality adjustment that reflects the 

average of the adjustments required for 

first and second half fiscal year 

reclassifications, respectively, as 

discussed in section II.A.4.b. of the 

Addendum to this final rule. We only 

received public comments supporting 

this proposal. 

I. FY 2007 Wage Index Adjustment 

Based on Commuting Patterns of 

Hospital Employees 

In accordance with the broad 

discretion under section 1886(d)(13) of 

the Act, as added by section 505 of Pub. 

L. 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 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 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 no longer qualify 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. We employ the 

pre-reclassified wage indices in making 

these calculations. 

In the FY 2007 IPPS proposed rule (71 

FR 24264 through 24272), in the OutMigration Adjustment table, Table 4J, 

we identified hospitals located in 

qualifying counties. Table 4J also listed 

the proposed adjustments calculated for 

qualifying hospitals. Hospitals that 

newly qualified for the adjustment in 

FY 2005 or FY 2006 are eligible to 

receive the same adjustment in FY 2007. 

In the FY 2007 IPPS proposed rule, we 

determined county eligibility based on a 

10 percent occupational mix adjustment 

to the wage index. However, under the 

May 17, 2006 proposed rule discussed 

in section III.C. of this preamble, for FY 

2007 we are applying the occupational 

mix adjustment to 100 percent of the FY 

2007 wage index. Therefore, we must 

reevaluate which counties are newly 

eligible for the out-migration adjustment 

in FY 2007 using the 100 percent 

occupational mix adjusted wage index 

data. We will publish an updated 

version of Table 4J showing eligible 

hospitals and their corresponding wage 

index adjustments on the CMS Web site 

after we publish this IPPS final rule, and 

in advance of October 1, 2006, using the 

procedures discussed in section III.H.of 

this preamble. We will use the same 

formula described in the FY 2005 final 

rule (69 FR 49064) to calculate the outmigration adjustment. 

The adjustments calculated for 

qualifying hospitals will be listed in the 

revised Table 4J that will be issued 

separately from this final rule. These 

adjustments will be effective for each 

county for a period of 3 fiscal years. 

Hospitals that received the adjustment 

in FY 2006 will be eligible to retain that 

same adjustment for FY 2007. 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, 2006. 

As previously noted, 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, 

or under section 508 of Pub. L. 108–173, 

unless they waive such out-migration 

adjustment. As announced in the FYs 

2005 and 2006 final rules, hospitals 

redesignated under section 1886(d)(8) of 

the Act or reclassified under section 

1886(d)(10) of the Act or under section 

508 of Pub. L. 108-173 will be deemed 

to have chosen to retain their 

redesignation or reclassification, unless 

they explicitly notified CMS that they 

elected to receive the out-migration 

adjustment instead within 45 days from 

the publication of the FY 2007 proposed 

rule. 

As previously noted, 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, 

or under section 508 of Pub. L. 108–173, 

unless they waive such out-migration 

adjustment. Ordinarily, our rule is to 

presume that a hospital wishes to retain 

its reclassification, unless it notifies us 

within 45 days of the proposed rule that 

it wishes to receive the out-migration 

adjustment in lieu of the 

reclassification. However, for FY 2007, 

as stated earlier, we will be making 

reclassification withdrawal and 

termination decisions on behalf of 

hospitals. Thus, the ordinary 45-day 

rule would not apply in FY 2007. 

Rather, hospitals will have 15 days from 

the display date of this final rule to 

notify us of whether, in the absence of 

viewing the final 100 percent 

occupational mix-adjusted wage index 

data, they wish to choose a particular 

wage index for which they are eligible 

(such as to definitively maintain a 

reclassification which they received or 

to definitively terminate or withdraw 

from a reclassification). Otherwise, we 

will make withdrawal and termination 

decisions on behalf of the hospital 

(including a decision as to whether to 

accept an out-migration adjustment 

instead of a reclassification), and the 

hospital will then have 30 days to 

reverse or modify our decision, as 

applicable. 

J. Process for Requests for Wage Index 

Data Corrections 

In the FY 2005 IPPS final rule (68 FR 

27194), we revised the process and 


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timetable for application for 

development of the wage index, 

beginning with the FY 2005 wage index. 

The preliminary and unaudited wage 

index data for FY 2007 were made 

available on October 7, 2005, through 

the Internet on the CMS Web site at: 

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

AcuteInpatientPPS. In a memorandum 

dated October 7, 2005, we instructed all 

Medicare fiscal intermediaries 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 

instructed the fiscal intermediaries to 

advise hospitals that these data are 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 7, 2005 wage index data files, 

the hospital was to submit corrections 

along with complete, detailed 

supporting documentation to its fiscal 

intermediary by December 5, 2005. 

Hospitals were notified of this deadline 

and of all other possible deadlines and 

requirements, including the requirement 

to review and verify their data as posted 

on the preliminary wage index data file 

on the Internet, through the October 7, 

2005 memorandum referenced above. 

The fiscal intermediaries notified the 

hospitals by mid-February 2006 of any 

changes to the wage index data as a 

result of the desk reviews and the 

resolution of the hospitals’ early 

December 2005 change requests. The 

fiscal intermediaries also submitted the 

revised data to CMS by mid-February 

2006. CMS published the proposed 

wage index PUFs that included 

hospitals’ revised wage data on 

February 24, 2006. Also, in a 

memorandum dated February 14, 2006, 

we instructed fiscal intermediaries to 

notify all hospitals regarding the 

availability of the proposed wage index 

PUFs and the criteria and process for 

requesting corrections and revisions to 

the wage index data. Hospitals had until 

March 13, 2006, to submit requests to 

the fiscal intermediaries for 

reconsideration of adjustments made by 

the fiscal intermediaries as a result of 

the desk review, and to correct errors 

due to CMS’s or the fiscal 

intermediary’s mishandling of the wage 

index data. Hospitals were also required 

to submit sufficient documentation to 

support their requests. 

After reviewing requested changes 

submitted by hospitals, fiscal 

intermediaries transmitted any 

additional revisions resulting from the 

hospitals’ reconsideration requests by 

April 14, 2006. The deadline for a 

hospital to request CMS intervention in 

cases where the hospital disagreed with 

the fiscal intermediary’s policy 

interpretations was April 21, 2006. 

Hospitals were also instructed to 

examine Table 2 in the Addendum to 

the proposed rule. 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 2003 data used to construct the 

proposed FY 2007 wage index. We 

noted that the hospital average hourly 

wages shown in Table 2 only reflected 

changes made to a hospital’s data and 

transmitted to CMS by March 1, 2006. 

As discussed in section III.C. of this 

preamble, on May 17, 2006, we 

published in the Federal Register (71 

FR 28644) a proposed rule that 

proposed to revise the methodology for 

calculating the occupational mix 

adjustment by applying the 

occupational mix adjustment to 100 

percent of the wage index using the new 

2006 occupational mix data. In section 

III.C.2 of this preamble, we discussed in 

detail the timeline and process for 

collecting, reviewing, and correcting the 

FY 2006 occupational mix survey data. 

The 1st quarter 2006 occupational mix 

data PUF was released on June 29, 2006, 

to hospital associations and the public 

on the Internet at http:// 

www.cms.hhs.gov/AcuteInpatientPPS. 

The release of this file superseded any 

and all of the 2003 occupational mix 

survey data that we had previously 

published and proposed to use for the 

FY 2007 wage index. Hospitals had 

until July 13 to submit to the 

intermediaries their requests for 

corrections to the new 2006 survey data. 

Intermediaries were to submit all 

corrected occupational mix data to CMS 

by July 27, 2007. Also, as discussed in 

section III.C., the occupational mix data 

could not be finalized in time to include 

in this final rule, so we are releasing the 

final occupational mix adjusted wage 

index data and tables after the 

publication of this final rule, but before 

October 1, 2006. 

Because hospitals had access to the 

final occupational mix data by June 29, 

2006, we believe they had the 

opportunity to detect any data entry or 

tabulation errors made by the fiscal 

intermediary or CMS before the 

development and publication of the 

final FY 2007 wage index and the 

implementation of the FY 2007 wage 

index on October 1, 2006. We believe 

that if hospitals availed themselves of 

the opportunities afforded to provide 

and make corrections to the 

occupational mix data, the wage index 

implemented on October 1, 2006, will 

be accurate. In the extent that errors are 

identified by hospitals and brought to 

our attention after July 13, 2006, we will 

only make mid-year changes to the wage 

index in accordance with § 412.64(k) 

(see below for a detailed discussion). 

The final Worksheet S–3 wage data 

PUF was released in May 2006 to 

hospital associations and the public on 

the Internet at http://www.cms.hhs.gov/ 

AcuteInpatientPPS (hereon, referred to 

as the May 2006 PUF). The May 2006 

PUF was made available solely for the 

limited purpose of identifying any 

potential errors made by CMS or the 

fiscal intermediary in the entry of the 

final Worksheet S–3 wage data that 

result from the correction process 

described above (revisions submitted to 

CMS by the fiscal intermediaries by 

April 14, 2006). If, after reviewing the 

May 2006 PUF, a hospital believed that 

its Worksheet S–3 wage data were 

incorrect due to a fiscal intermediary or 

CMS error in the entry or tabulation of 

the final data, the hospital was to send 

a letter to both its fiscal intermediary 

and CMS outlining why the hospital 

believed an error existed and to provide 

all supporting information, including 

relevant dates (for example, when it first 

became aware of the error). CMS and the 

fiscal intermediaries were to receive 

these requests no later than June 12, 

2006. (We note that the June 12, 2006 

date was revised from the June 9, 2006 

date originally specified in the October 

7, 2005 letter to hospitals.) Requests 

mailed to CMS were to be sent to: 

Centers for Medicare & Medicaid 

Services, Center for Medicare 

Management, Attention: Wage Index 

Team, Division of Acute Care, C4–08–

06, 7500 Security Boulevard, Baltimore, 

MD 21244–1850. 

Each request also was to be sent to the 

fiscal intermediary. The fiscal 

intermediary was to review requests 

upon receipt and contact CMS 

immediately to discuss its findings. 

After the release of the May 2006 

PUF, changes to the hospital Worksheet 

S–3 wage data were only to be made in 

those very limited situations involving 

an error by the fiscal intermediary or 

CMS that the hospital could not have 

known about before its review of the 

final wage data file. Specifically, neither 

the intermediary nor CMS would 

approve the following types of requests: 

• Requests for Worksheet S–3 wage 

data corrections that were submitted too 

late to be included in the data 

transmitted to CMS by fiscal 

intermediaries on or before April 14, 

2006. 

• Requests for correction of errors 

that were not, but could have been, 

identified during the hospital’s review 


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of the February 24, 2006 wage index 

data file. 

• Requests to revisit factual 

determinations or policy interpretations 

made by the fiscal intermediary or CMS 

during the wage index data correction 

process. 

Verified corrections to the Worksheet 

S–3 wage data received timely by CMS 

and the fiscal intermediaries (that is, by 

June 12, 2006) are incorporated into the 

final wage index and will be reflected in 

the FY 2007 final wage index tables that 

will be published in a separate issuance 

after the publication of this final rule. 

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 2007 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 

decision with respect to requested 

changes. Specifically, our policy is that 

hospitals that did 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 the reader also to the FY 2000 

final rule (64 FR 41513) for a discussion 

of the parameters for appealing to the 

Provider Reimbursement Review Board 

for wage index data corrections. 

We believe the wage index data 

correction process described above 

provides hospitals with sufficient 

opportunity to bring errors in their wage 

index data to the fiscal intermediaries’

attention. Nevertheless, in the event that 

errors are identified by hospitals and 

brought to our attention after June 12, 

2006, for Worksheet S–3 wage data, or 

after July 13, 2006, for the 1st quarter 

2006 occupational mix data, we retain 

the right to make midyear changes to the 

wage index under very limited 

circumstances. 

Specifically, in accordance with 

§ 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 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 deadline for making 

corrections to the wage data for the 

following fiscal year’s wage index. With 

regard to the FY 2007 wage index, this 

means by June 12 for Worksheet S–3 

wage data and by July 13 for 1st quarter 

2006 occupational mix data. 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, since 

CMS makes the wage data available to 

a hospital on the CMS Web site prior to 

publishing both the proposed and final 

IPPS rules, and the fiscal intermediaries 

notify hospitals directly of any wage 

data changes after completing their desk 

reviews, we do not expect that midyear 

corrections would be necessary. 

However, 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 § 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 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 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, for the FY 2007 wage index, by the 

June 12, 2006 deadline for Worksheet S–

3 data and the July 13, 2006 deadline for 

1st quarter 2006 occupational mix data); 

and (3) CMS agreed that the fiscal 

intermediary 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 requests a correction to its wage 

index data before CMS calculates the 

final wage index (that is, for the FY 

2007 wage index, by the June 12, 2006 

deadline for Worksheet S–3 wage data 

and the July 13, 2006 deadline for 1st 

quarter 2006 occupational mix data), 

and CMS acknowledges that the error in 

the hospital’s wage data was caused by 

CMS’s or the fiscal intermediary’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; it can only be used for the current 

Federal fiscal year. In other situations, 

we continue to believe that it is 

appropriate to make corrections 

prospectively only. 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 Wage 

Index for FY 2007 

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 wagerelated 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 Pub. L. 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 Pub. L. 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 wagerelated 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. 

We have continued our research into 

the assumptions employed in 

calculating the labor-related share. Our 

research involves analyzing the 

compensation share separately for urban 


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and rural hospitals, using regression 

analysis to determine the proportion of 

costs influenced by the area wage index, 

and exploring alternative methodologies 

to determine whether all or only a 

portion of professional fees and 

nonlabor intensive services should be 

considered labor-related. 

In the FY 2006 IPPS final rule (70 FR 

47392), we presented our analysis and 

conclusions regarding the frequency and 

methodology for updating the laborrelated share for FY 2006. We also 

recalculated a labor-related share of 

69.731 percent, using the FY 2002-based 

PPS market basket for discharges 

occurring on or after October 1, 2005. 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 

PPS base payment rate to which the area 

wage index is applied. In this final rule, 

we are not making any changes to the 

national average proportion of operating 

costs that are attributable to wages and 

salaries, fringe benefits, professional 

fees, contract labor, and labor intensive 

services. Therefore, we are continuing to 

use a labor-related share of 69.731 

percent for discharges occurring on or 

after October 1, 2006. Tables 1A and 1B 

which will be issued as part of a 

document separate from this final rule, 

as discussed in section III.C. of this final 

rule, will reflect this labor-related share. 

We note that section 403 of Pub. L. 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.’’

We also are continuing to use a laborrelated share for the Puerto Rico-specific 

standardized amounts of 58.7 percent 

for discharges occurring on or after 

October 1, 2006. 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, nonmedical professional 

fees, and other labor-intensive services 

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. For 

Puerto Rico hospitals, the national 

labor-related share will always be 62 

percent because the wage index for all 

Puerto Rico hospitals is less than 1.0. A 

Puerto Rico-specific wage index is 

applied to the Puerto Rico-specific 

portion of payments to the hospitals. 

The labor-related share of a hospital’s 

Puerto Rico-specific rate will be either 

62 percent or the Puerto Rico-specific 

labor-related share 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 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 Ricospecific labor-related share of 58.7 

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 58.7 

percent for FY 2007 will be reflected in 

the Table 1C of the separately issued 

document referenced under sections 

III.C. and III.H. of this preamble. 

Comment: One commenter suggested 

that, for hospitals with a wage index 

greater than one, CMS should use the 

FY 1992-based labor share of 71.1 

percent rather than continue to use the 

FY 2002-based IPPS labor share of 69.7 

percent. 

Response: The labor-related share is 

used to determine the proportion of the 

national PPS based payment rate to 

which the area wage index is applied. 

For IPPS, the labor share remains 

constant until the market basket is 

rebased. As discussed in the August 12, 

2005 IPPS final rule (70 FR 47393), the 

labor-related share for the FY 2002- 

based market basket was calculated by 

adding the relative weights of the laborrelated operating cost categories of that 

market basket. These cost categories are: 

wages and salaries, fringe benefits, 

professional fees, contract labor, and 

labor-intensive services. Their relative 

weights were derived from the FY 2002 

Medicare cost reports, which 

represented the most recent and 

complete data available when the FY 

2002-based market basket was 

developed. 

A return to the considerably older FY 

1992-based labor share, where the 

relative weights were determined using 

FY 1992 Medicare cost reports, would 

mean relying on outdated information 

and thus is not optimal. 

Finally, although the wage index and 

the labor-related share are interrelated 

regarding final payments, it is important 

to note that the labor-related share is 

calculated completely independently of 

the wage index. For these reasons, we 

will continue to use a labor-related 

share of 69.731 percent for discharges 

occurring on or after October 1, 2006. 

L. Proxy for the Hospital Market Basket 

In the FY 2006 IPPS final rule (70 FR 

47387), we changed the base year cost 

structure for the IPPS hospital index for 

the hospital market basket for operating 

costs from FY 1997 to FY 2002. As 

discussed in that final rule, the IPPS 

hospital index primarily uses the BLS 

data as price proxies, which are grouped 

in one of the three BLS categories. The 

categories are Producer Price Indexes 

(PPIs), Consumer Price Indexes (CPIs), 

and Employment Cost Indexes (ECIs), 

discussed in detail in the FY 2006 IPPS 

final rule (70 FR 47388 through 47391). 

We evaluate the price proxies using the 

criteria of reliability, timeliness, 

availability, and relevance. The PPIs, 

CPIs, and ECIs selected by us and used 

for this final rule meet these criteria as 

described in the FY 2006 IPPS final 

rule. We believe they continue to be the 

best measures of price changes for the 

cost categories. 

Beginning April 2006 with the 

publication of March 2006 data, the 

BLS’ ECI will use a different 

classification system, the North 

American Industrial Classification 

System (NAICS), instead of the Standard 

Industrial Codes (SIC), which will 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 are not 

making any changes to the usage at this 

time. However, we did solicit comments 

in the IPPS proposed rule on our 

continued use of the BLS ECI data in 

light of the BLS change in system usage 

to the NAICS-based ECI. CMS received 

no comments on use of the BLS ECI 

data. As the SIC-based ECIs no longer 

exist, we will therefore adopt the 

proposed policy of using the BLS 

NAICS-based ECIs to replace the SICbased ECIs as price proxies in the 

market basket. 

IV. Other Decisions and Changes to the 

IPPS for Operating Costs and GME 

Costs 

A. Reporting of Hospital Quality Data 

for Annual Hospital Payment Update 

(§ 412.64(d)(2)) 

1. Background 

Section 5001(a) of the Deficit 

Reduction Act of 2005, Pub. L. 109–171 

(DRA) sets out new requirements for the 

Reporting Hospital Quality Data for 


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19 Institute of Medicine, ‘‘Performance 

Measurement: Accelerating Improvement,’’

December 1, 2005, available at http://www.iom.edu/ 

CMS/3809/19805/31310.aspx. 

Annual Payment Update (RHQDAPU) 

program. The RHQDAPU program was 

established to implement section 501(b) 

of Pub. L. 108–173 (MMA). It builds on 

our ongoing voluntary Hospital Quality 

Initiative which is intended to empower 

consumers with quality of care 

information to make more informed 

decisions about their health care while 

also encouraging hospitals and 

clinicians to improve the quality of care. 

Section 5001(a) of Pub. L. 109–171 

revises the mechanism used to update 

the standardized amount for payment 

for hospital inpatient operating costs. 

New sections 1886(b)(3)(B)(viii)(I) and 

(II) of the Act provide that the payment 

update for FY 2007 and each subsequent 

fiscal year will be reduced by 2.0 

percentage points for any ‘‘subsection 

(d) hospital’’ that does not submit 

certain quality data in a form and 

manner, and at a time, specified by the 

Secretary. 

New sections 1886(b)(3)(B)(viii)(III) 

and (IV) of the Act require that we 

expand the ‘‘starter set’’ of 10 quality 

measures that we have used since 2003. 

Specifically, the Secretary is required to 

expand, consistent with the provisions 

of section 5001(a) of Pub. L. 109–171, 

the set of measures that the Secretary 

determines to be appropriate for the 

measurement of the quality of care 

furnished by hospitals in inpatient 

settings. In expanding these measures, 

section 1886(b)(3)(B)(viii)(IV) of the Act 

provides that we must begin to adopt 

the baseline set of performance 

measures as set forth in a 2005 report 

issued by the Institute of Medicine 

(IOM) of the National Academy of 

Sciences under section 238(b) of Pub. L. 

108–173,19 effective for payments 

beginning with FY 2007. The IOM 

measures include the Hospital Quality 

Alliance (HQA) measures (the HQA is a 

public-private collaboration to improve 

the quality of care provided by the 

nation’s hospitals by measuring and 

publicly reporting on that care), the 

HCAHPS patient perspective survey, 

and three structural measures. The 

structural measures included in the IOM 

report are: ‘‘(1) Implementation of 

computerized provider order entry for 

prescriptions, (2) staffing of intensive 

care units with intensivists, and (3) 

evidence-based hospital referrals. These 

measures originate from the Leapfrog 

Group’s original ‘‘three leaps,’’ and are 

part of the [National Quality Forum’s] 

30 safe practices.’’

New sections 1886(b)(3)(B)(viii)(V) 

and (VI) of the Act require that, effective 

for payments beginning with FY 2008, 

we add other quality measures that 

reflect consensus among affected 

parties, and provide the Secretary with 

the discretion to replace any quality 

measures or indicators in appropriate 

cases, such as where all hospitals are 

effectively in compliance with a 

measure, or the measures or indicators 

have been subsequently shown to not 

represent the best clinical practice. 

Thus, the Secretary has broad discretion 

to replace measures on the basis that 

they are not appropriate. 

New section 1886(b)(3)(B)(viii)(VII) of 

the Act requires that we establish 

procedures for making quality data 

available to the public after ensuring 

that a hospital has the opportunity to 

review, in advance, its data that are to 

be made public. In addition, this section 

requires that we report quality measures 

of process, structure, outcome, patients’

perspective on care, efficiency, and 

costs of care that relate to services 

furnished in inpatient settings on the 

CMS Web site. 

Like the provisions of section 501(b) 

of Pub. L. 108–173, the provisions of 

section 5001(a) of Pub. L. 109–171 do 

not apply to hospitals and hospital units 

excluded from the IPPS, or to payments 

to hospitals under other prospective 

payment systems such as the hospital 

outpatient PPS. New section 

1886(b)(3)(B)(viii)(I) of the Act also 

provides that any reduction will apply 

only with respect to the fiscal year 

involved, and will not be taken into 

account for computing the applicable 

percentage increase for a subsequent 

fiscal year. 

Initially, section 1886(b)(3)(B)(vii) of 

the Act provided for a reduction of 0.4 

percentage points to the update 

percentage increase for each of FYs 2005 

through 2007 for any ‘‘subsection (d) 

hospital’’ that did not submit data on 

the starter set of 10 quality measures 

established by the Secretary of Health 

and Human Services as of November 1, 

2003. Section 5001(a) of Pub. L. 109–

171 limits the 0.4 percentage point 

reduction to FY 2005 and FY 2006, and 

establishes a 2.0 percentage point 

reduction for FY 2007 and subsequent 

fiscal years. 

The starter set of 10 quality measures 

we established as of November 1, 2003 

are: 

Heart Attack (Acute Myocardial 

Infarction) 

• Was aspirin given to the patient 

upon arrival to the hospital? 

• Was aspirin prescribed when the 

patient was discharged? 

• Was a beta-blocker given to the 

patient upon arrival to the hospital? 

• Was a beta-blocker prescribed when 

the patient was discharged? 

• Was an ACE inhibitor given for the 

patient with heart failure? 

Heart Failure (HF) 

• Did the patient get an assessment of 

his or her heart function? 

• Was an ACE inhibitor given to the 

patient? 

Pneumonia (PNE) 

• Was an antibiotic given to the 

patient in a timely way? 

• Had the patient received a 

pneumococcal vaccination? 

• Was the patient’s oxygen level 

assessed? 

We adopted these measures after the 

Secretary of HHS initiated a partnership 

with several collaborators intended to 

promote hospital quality improvement 

and public reporting of hospital quality 

information. These collaborators 

included the American Hospital 

Association, the Federation of American 

Hospitals, the Association of American 

Medical Colleges, the Joint Commission 

on Accreditation of Healthcare 

Organizations (JCAHO), the National 

Quality Forum (NQF), the American 

Medical Association, the ConsumerPurchaser Disclosure Project, the 

American Association of Retired 

Persons, the American Federation of 

Labor-Congress of Industrial 

Organizations, the Agency for 

Healthcare Research and Quality 

(AHRQ), as well as CMS, Quality 

Improvement Organizations (QIOs), and 

others. 

This collaboration, originally known 

as the National Voluntary Hospital 

Reporting Initiative, is now known as 

the HQA. Hospital data are submitted 

through the QualityNet Exchange secure 

Web site (www.qnetexchange.org). This 

Web site meets or exceeds all current 

Health Insurance Portability and 

Accountability Act requirements. Data 

from this initiative were initially used to 

populate the Hospital Compare Web 

site, www.hospitalcompare.hhs.gov. 

This Web site assists beneficiaries and 

the general public by providing 

information on hospital quality of care 

for consumers who need to select a 

hospital. It further serves to encourage 

consumers to work with their doctors 

and hospitals to discuss the quality of 

care they provide to patients, thereby 

providing an additional incentive to 

improve the quality of that care. 

This starter set of 10 quality measures, 

all of which have been endorsed by the 

NQF, is a subset of measures currently 

collected for the JCAHO as part of its 


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certification program. NQF is a 

voluntary consensus standard-setting 

organization established to standardize 

health care quality measurement and 

reporting through its consensus 

development process We chose these 10 

quality measures in order to collect data 

that will: (1) provide useful and valid 

information about hospital quality to the 

public; (2) provide hospitals with a 

sense of predictability about public 

reporting expectations; (3) begin to 

standardize data and data collection 

mechanisms; and (4) foster hospital 

quality improvement. Most hospitals 

have participated in the HQA, and are 

continuing to submit data to the QIO 

Clinical Warehouse. Since the HQA 

released the starter set of 10 quality 

measures, it has continued to release 

additional quality measures, and has 

released 11 additional NQF-endorsed 

quality measures to date. Many HQAparticipating hospitals have been 

voluntarily reporting on these 

additional quality measures, although 

only the starter set of 10 quality 

measures were subject to potential 

reductions in hospitals’ annual payment 

update percentages under section 501(b) 

of Pub. L. 108–173. 

To implement section 501(b) of Pub. 

L. 108–173, we created the RHQDAPU 

program. Originally, the program set out 

the form, manner, and timeframes for 

hospitals to submit data regarding the 

starter set of 10 quality measures. For 

the FY 2005 payment update, we 

permitted hospitals to withdraw from 

the RHQDAPU program at any time up 

to August 1, 2004. Hospitals that 

withdrew from the program did not 

receive the full payment update and, 

instead, received a reduction of 0.4 

percentage points in their payment 

update. We did not establish a deadline 

for withdrawal for the FY 2006 payment 

update. 

For FY 2006, in order to receive a full 

payment update, hospitals were 

required to continuously submit to the 

QIO Clinical Warehouse abstracted data 

regarding the starter set of 10 quality 

measures each calendar quarter 

according to the schedule found on the 

QualityNet Exchange Web site. New 

participants were required to submit 

these data using the same schedule, 

starting with the quarter they began 

discharging patients. The data for each 

quarter had to be submitted on time and 

pass all of the edits and consistency 

checks required in the QIO Clinical 

Warehouse. Hospitals that did not treat 

a condition or that had very few 

discharges were not penalized, and they 

received the full payment update if they 

submitted appropriate data on each of 

the 10 quality measures that they treated 

for patients who were discharged during 

the reporting periods. 

2. New Procedures for Hospital 

Reporting of Quality Data 

a. Two Percentage Point Reduction 

In the FY 2007 IPPS proposed rule (71 

FR 24091), we proposed to amend our 

regulations at § 412.64(d)(2) to reflect 

the 2.0 percentage point reduction in 

the payment update for FY 2007 and 

subsequent fiscal years for hospitals that 

do not comply with requirements for 

reporting quality data as provided for 

under section 5001(a) of Pub. L. 109–

171. 

Comment: One commenter stated that 

the increase from a 0.4 percentage point 

reduction in the annual payment update 

to a 2.0 percentage point reduction was 

too great and that this increase could 

cause some small hospitals to close. 

Response: The increase from a 0.4 

percentage point reduction to a 2.0 

percentage point reduction is mandated 

by section 1886(b)(3)(B)(viii)(I) of the 

Act. 

Comment: One commenter asked if 

the 2.0 percentage point reduction in 

the market basket update would ever 

apply retroactively. 

Response: The amount of the 

reduction and the payment update to 

which a reduction applies are governed 

by statute. Section 1886(b)(3)(B)(viii)(I) 

of the Act requires a 2.0 percentage 

point reduction for FY 2007 ‘‘and each 

subsequent fiscal year.’’ Section 

1886(b)(3)(B)(viii)(I) also provides that 

the 2.0 percentage point reduction 

‘‘shall apply only to the fiscal year 

involved.’’ Therefore, the 2.0 percentage 

point reduction will not affect the 

annual payment update for a hospital 

for any fiscal year prior to FY 2007. 

b. New Procedures 

We also revised the RHQDAPU 

program’s procedures to reflect our 

experience with this program and to 

implement section 5001(a) of Pub. L. 

109–171, including the new 

requirement for the reporting of an 

expanded set of quality measures. In 

addition to publication in this final rule, 

all revised procedures will be added to 

the ‘‘Reporting Hospital Quality Data for 

Annual Payment Update Reference 

Checklist’’ section of the QualityNet 

Exchange Web site. This checklist also 

contains all of the forms to be 

completed by hospitals participating in 

the program. In order to participate in 

the hospital reporting initiative, 

hospitals must follow these steps: 

• Identify a QualityNet Exchange 

Administrator who follows the 

registration process and submits the 

information through the QIO. This must 

be done regardless of whether the 

hospital uses a vendor for transmission 

of data. 

• Complete the revised ‘‘Reporting 

Hospital Quality Data for Annual 

Payment Update Notice of 

Participation’’ form. All hospitals must 

send this form to their QIO, no later 

than August 15, 2006. In addition, 

before participating hospitals initially 

begin reporting data, they must register 

with the QualityNet Exchange, 

regardless of the method used for 

submitting data. Although, we proposed 

that this form be submitted by August 

1, 2006, we have chosen to extend the 

due date to August 15, 2006 to provide 

hospitals with additional time to notify 

their QIOs regarding their intent to 

participate. We received no comments 

on this proposal. 

• Continue to collect data for all 10 

‘‘starter set’’ quality measures (or begin 

collecting such data, if newly 

participating in the program), and 

submit the data to the QIO Clinical 

Warehouse either using the CMS 

Abstraction & Reporting Tool (CART), 

the JCAHO ORYX Core Measures 

Performance Measurement System, or 

another third-party vendor tool that has 

met the measurement specification 

requirements for data transmission to 

QualityNet Exchange. The QIO Clinical 

Warehouse will submit the data to CMS 

on behalf of the hospitals. The 

submission will be done through 

QualityNet Exchange. Because the 

information in the QIO Clinical 

Warehouse is considered QIO 

information, it is subject to the stringent 

QIO confidentiality regulations in 42 

CFR Part 480. We proposed that 

hospitals continue to submit data 

regarding the starter set of 10 quality 

measures because the existing data 

submission schedule that we will use 

for the FY 2007 update relies on 

discharges that occurred in calendar 

year (CY) 2005. Because the first three 

quarters of CY 2005 data already have 

been submitted, we did not propose to 

require hospitals to submit any 

additional CY 2005 data to address the 

new quality measures. However, we 

again note that many hospitals have 

been providing data on these additional 

measures since they were first included 

in the HQA set, although these measures 

did not affect hospitals’ annual payment 

adjustment under the RHQDAPU 

program implementing section 501(b) of 

Pub. L. 108–173. 

• For the FY 2007 update, we 

proposed that hospitals also would be 

required to complete and return a 

written form on which they pledge to 

submit data on the set of expanded 


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48032 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

quality measures starting with 

discharges that occur in CY 2006. The 

proposed 21 quality measures which we 

included in the proposed rule are part 

of the HQA-released measures that the 

2005 IOM report recommended we use 

as expanded ‘‘starter’’ measures, and 

they include the 10 measures that we 

originally adopted for the RHQDAPU 

program. As discussed above, new 

section 1886(b)(3)(B)(viii)(IV) of the Act 

requires us to begin to adopt the 

baseline set of performance measures set 

forth in the 2005 IOM report effective 

for payments beginning with FY 2007. 

We proposed that hospitals would be 

required to submit data on the expanded 

measures to the QIO Clinical Warehouse 

beginning with discharges that occur in 

the first calendar quarter of 2006 

(January through March discharges). We 

also stated that the deadline for 

hospitals to submit their data for first 

calendar quarter of 2006 would be 

August 15, 2007. 

Comment: Over 100 commenters 

opposed our proposal that hospitals 

submit data using the expanded quality 

measures for discharges occurring in 

calendar year 2006. Even though data 

for the first calendar quarter of 2006 are 

not required to be submitted until 

August 15, 2006, commenters stated that 

using the first calendar quarter as a 

starting date for submissions would 

create a hardship for hospitals, and 

require that their staff re-review records. 

Commenters recommended that the 

expanded measure set be used for future 

reviews only, and that all changes made 

to reporting should be done with a 

future effective date. Most of the 

commenters recommended that we 

require hospitals to begin reporting 

using the expanded quality measures 

starting with discharges occurring in the 

third calendar quarter of 2006. 

Response: After careful review and 

consideration of the operational issues 

raised by commenters, CMS has decided 

to modify the starting quarter for 

hospital reporting of the expanded 21 

quality measures. In reviewing this 

matter, we recognized that hospitals 

who concurrently abstract data may 

have been required to reabstract data 

from records that had already been 

completed. Others would have the 

burden of reconsidering the additional 

data elements after the timeframe for 

which they are preparing to submit data. 

Given the goal of improving quality 

through public reporting in an efficient 

manner that does not create undue 

burden, CMS believes it is appropriate 

in this instance to modify the starting 

quarter for the expanded measures. 

Therefore, hospitals will now be 

required to submit data on the specified 

expanded set of 21 quality measures to 

the QIO Clinical Data Warehouse 

beginning with discharges that occur in 

the third calendar quarter of 2006 (July 

through September discharges). The 

deadline for hospitals to submit this 

data for third calendar quarter of 2006 

is February 15, 2007. The measures that 

are part of this expanded measure set 

are described below. 

Comment: Several commenters stated 

that not all hospitals are currently 

submitting data on the expanded 

measure set. These commenters noted 

that hospitals that do not currently 

submit data using the expanded 

measure set may need to hire and train 

new staff to handle the new increased 

data abstraction requirements that we 

proposed to implement in the proposed 

rule. Some of these commenters 

suggested that reporting data on the 

expanded measure set should start with 

January 2007 discharges in order to 

allow hospitals additional time to make 

the necessary changes for the extra 

work. 

Response: Although hospitals are not 

currently required to submit data on the 

full set of 21 quality measures identified 

in the proposed rule, many of them are 

already submitting these data on a 

voluntary basis under the HQA 

initiative. As noted in our response to 

the previous set of comments, we have 

modified our proposal in response to 

concerns expressed by commenters. 

Hospitals will now be required to 

submit data on a specified expanded set 

of measures to the QIO Clinical Data 

Warehouse beginning with discharges 

that occur in the third calendar quarter 

of 2006 (July through September 

discharges). The deadline for hospitals 

to submit this data for third quarter 

2006 is February 15, 2007. We believe 

that this will provide adequate 

additional time for hospitals to hire or 

train staff regarding the expanded 

quality measures. 

Comment: One commenter expressed 

concern that the proposed rule requires 

hospitals to start collecting data on the 

expanded quality measures 

immediately. 

Response: As indicated above, we 

have modified our original proposal to 

ease the hospitals’ transition to 

reporting using the expanded quality 

measures. For the expanded measures 

reporting requirement, hospitals will 

now be required to pledge to submit 

data on the expanded measures 

beginning with discharges that occur in 

the third calendar quarter of 2006 (July 

through September discharges). 

Hospitals are given 41⁄2 months 

following the last day of a discharge 

quarter to submit accurate data into the 

QIO Clinical Data Warehouse. 

Therefore, under our revised policy, we 

believe that hospitals will have 

sufficient time to plan when they will 

begin to collect data on the expanded 

quality measures. 

We would also like to note that we 

have taken steps to ensure that the 

burden on hospitals to submit data on 

the expanded measures is as minimal as 

possible. For example, in addition to 

being described in this rule, all of the 

measures that must be reported, 

including the 11 newly required 

measures, are also described in the 

‘‘Specifications Manual for National 

Hospital Quality Measures,’’ which is a 

manual that is jointly issued and 

maintained by CMS and JCAHO. The 

manual contains all of the 

specifications, data definitions, data 

collection rules and algorithms related 

to all 21 measures (the 10 RHQDAPU 

PROGRAM measures and the 11 

measures that are being voluntarily 

reported under the HQA initiative). All 

specifications for each of these measures 

as used by CMS for the RHQDAPU 

program are identical to, or ‘‘aligned’’

with, those used by JCAHO. The CMS 

and JCAHO alignment results in a single 

standardized process for the reporting of 

measures that is accepted by both CMS 

and JCAHO. In an effort to reduce the 

reporting burden on hospitals, CMS and 

the JCAHO work together to refine the 

data collection process for hospitals for 

the purposes of validation, public 

reporting, and the RHQDAPU program. 

Additionally, CMS and JCAHO have 

agreed to release all documents 

associated with data collection at a 

minimum of 120 days prior to 

implementation. 

Comment: One commenter stated that 

the time frames for data collection in the 

proposed rule do not provide hospitals 

the opportunity to change or correct 

mistakes. 

Response: The current data 

submission timeframe is designed to 

provide sufficient time for hospitals to 

meet all reporting requirements. 

Hospitals are given 41⁄2 months 

following the last day of a discharge 

quarter to submit accurate data into the 

QIO Clinical Data Warehouse. We 

believe that this is a sufficient 

timeframe for the vendor, hospital, QIO 

or other interested party to identify data 

errors and submit corrections in 

advance of the data submission 

deadline. Additionally, abstractions can 

begin as early during the quarter as the 

day the patient is actually admitted. As 

such, hospitals actually have up to 3 

months in addition to the 41⁄2 months 

following the last day of the discharge 

quarter to collect and submit data. In 


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Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48033 

addition, under § 482.24 of our 

regulations, all elements of the medical 

record (for example, documentation) are 

required to be complete within 30 days 

following discharge, so we believe that 

hospitals have adequate time for the 

record abstraction and submission. 

To ensure that data submission 

problems are recognized and corrected 

early, we encourage hospitals to submit 

their data continuously or to conduct 

test transmissions prior to the quarterly 

posted data transmission deadlines. 

Testing transmissions ensures that 

hospitals’ computer systems are 

equipped with the proper software and 

configuration required to successfully 

transmit data through QualityNet 

Exchange Web site. We note that it is a 

hospital’s responsibility to ensure that 

its data are submitted successfully to the 

QIO Clinical Data Warehouse. To make 

it easier for hospitals to verify whether 

their data were successfully submitted, 

the QualityNet Exchange Web site has a 

function that enables hospitals to run 

reports during test transmissions and 

after final transmission of data that 

indicate which records were 

successfully submitted, with and 

without errors, and/or which data were 

rejected by the warehouse. We 

recommend that hospitals run these 

reports following each submission of 

data. Submitting test files early also 

allows hospitals to check the reports to 

identify and change or correct mistakes. 

Comment: Two commenters stated 

that the retrospective way that data are 

reviewed does not offer sufficient 

opportunity to quickly correct a 

problem in the hospital setting. One 

commenter recommended that 

abstracting occur concurrently with 

discharge, thereby preventing discharge 

if additional clinical requirements need 

to be met. The commenter suggested 

that a real-time data system be 

developed to capture this information. 

The system would alert health care 

providers when clinical requirements 

have not been met so that hospitals can 

remedy these requirements prior to 

discharging the patient. The commenter 

also suggested that CMS sponsor a 

demonstration project for this activity. It 

would give CMS the opportunity to lead 

the way for improved technology 

dissemination in hospitals. 

Response: As we discussed in our 

discussion of value-based purchasing in 

the FY 2007 IPPS proposed rule (71 FR 

24098), one of the challenges we face is 

minimizing the length of time between 

our receipt of, and our ability to provide 

feedback to hospitals on, the data they 

submit. We agree that hospitals also face 

this same issue with data they collect. 

CMS encourages hospitals to take steps 

toward the adoption of electronic 

medical records (EMRs) that will allow 

for the reporting of clinical quality data. 

In general, whether to abstract on a 

concurrent or on a retrospective basis is 

a hospital’s decision, although we 

recognize there may be a necessary 

period of retrospective abstraction due 

to the implementation of new measures. 

We do not believe that a demonstration 

project is needed. 

Comment: Several commenters noted 

that expanding the measure set 

retroactively will require hospitals to renegotiate contracts with their vendors. 

Response: We disagree that our 

proposal to require hospitals to submit 

data beginning with first quarter 2006 

discharges would have expanded the 

measure set retroactively. However, as 

noted above, in response to the 

comments we received, we will require 

that hospitals begin using the expanded 

measure set for submissions due 

February 15, 2007 relating to discharges 

occurring in the third calendar quarter 

of 2006. We believe that this change will 

afford hospitals adequate notice to 

prepare for reporting using the 

expanded quality measures. CMS 

provides information in a manner that is 

timely for purposes of meeting the 

requirements outlined. CMS does not 

comment on the contractual 

arrangements between private parties 

such as hospitals and their vendors. 

CMS will continue to work with all to 

assist with their timely performance, but 

this issue remains a private contractual 

arrangement between those parties. As 

an alternative, CMS also provides the 

CART tool to ensure that hospitals may 

timely meet its requirements for the 

annual payment update. 

Comment: Sixteen commenters 

requested that CMS consider publishing 

the proposal to expand the set of 

measures at least one full year prior to 

the start of the fiscal year to which the 

proposal would apply. Seven other 

commenters requested a 6-month to 1- 

year lead-time to prepare for reporting 

additional quality measures adopted by 

the Secretary as part of the RHQDAPU 

program. 

Response: We have used the 

rulemaking process to adopt new 

quality measures under the RHQDAPU 

program, and we believe that this 

process provides sufficient notice for 

hospitals to comply for the annual 

payment update. We also note that all 

of the measures we have adopted to date 

for reporting under the RHQDAPU 

program were previously reported by 

many hospitals under other voluntary 

reporting initiatives. 

Comment: One commenter suggested 

that CMS publicly release a list of the 

hospitals that do not meet quality 

reporting requirements each year. This 

would allow the affected hospitals to 

know immediately that they are not in 

compliance with quality reporting. 

Response: Hospitals that met the 

current CMS requirements for quality 

data reporting and received their full 

annual payment update (APU) for FY 

2006 are listed on www.qualitynet.org. 

In the future, QualityNet will display a 

list of those hospitals receiving their full 

APU for FY 2007. CMS currently does 

not have a system in place for 

individually notifying hospitals that fail 

to meet the RHQDAPU program 

requirements. CMS is currently 

considering how to inform those 

hospitals that do not receive their full 

annual payment update for FY 2007. 

c. Expanded Quality Measures 

In the FY 2007 IPPS proposed rule (71 

FR 24093), we listed 21 proposed 

quality measures, including the 10 

‘‘starter set’’ measures and 11 new 

measures. The expanded set of measures 

includes: 

Heart Attack (Acute Myocardial 

Infarction) 

• Aspirin at arrival 

• Aspirin prescribed at discharge 

• ACE inhibitor (ACE–I) or 

Angiotensin Receptor Blocker (ARBs) 

for left ventricular systolic dysfunction 

• Beta blocker at arrival 

• Beta blocker prescribed at discharge 

• Thrombolytic agent received within 

30 minutes of hospital arrival 

• Percutaneous Coronary Intervention 

(PCI) received within 120 minutes of 

hospital arrival 

• Adult smoking cessation advice/ 

counseling 

Heart Failure (HF) 

• Left ventricular function assessment 

• ACE inhibitor (ACE–I) or 

Angiotensin Receptor Blocker (ARBs) 

for left ventricular systolic dysfunction 

• Discharge instructions 

• Adult smoking cessation advice/ 

counseling 

Pneumonia (PNE) 

• Initial antibiotic received within 4 

hours of hospital arrival 

• Oxygenation assessment 

• Pneumococcal vaccination status 

• Blood culture performed before first 

antibiotic received in hospital 

• Adult smoking cessation advice/ 

counseling 

• Appropriate initial antibiotic 

selection 

• Influenza vaccination status 


bajohnson on PROD1PC67 with RULES2
48034 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

Surgical Care Improvement Project 

(SCIP)—Named SIP for Discharges 

Prior to July 2006 (3Q06) 

• Prophylactic antibiotic received 

within 1 hour prior to surgical incision 

• Prophylactic antibiotics 

discontinued within 24 hours after 

surgery end time 

Comment: Six commenters fully 

supported the progress CMS has made 

on the identification and reporting of 

quality measures. 

Response: CMS appreciates the 

comments and looks forward to 

continued support for this effort. 

Comment: One commenter suggested 

that, with regard to hospital acquired 

infections, CMS make it clear that 

process measures are an interim step 

prior to the reporting in the near future 

of the actual rates of common hospital 

acquired infections. 

Response: CMS believes that the 

information obtained from both process 

and outcome measures (an example of 

which would be the rates of common 

hospital acquired infections) are 

important and complementary in 

stimulating the system changes 

necessary for quality improvement. 

With regard to nosocomial or hospitalacquired infections, we appreciate the 

comment and would note that the NQF 

is currently evaluating measures of 

hospital acquired infections with the 

goal of endorsing a set of measures by 

2007. The NQF is a voluntary consensus 

standard-setting organization 

established to standardize healthcare 

quality measurement and reporting, for 

its review and endorsement through its 

consensus development process. In 

addition, we are working with the 

Centers for Disease Control (CDC) and 

the AHRQ, two government agencies 

that collaborate with CMS on the SCIP 

on ways to further reduce surgical 

complications and infections and 

improve the kinds of information 

collected related to this goal. 

Comment: One commenter urged 

CMS to recognize new technology 

promptly and appropriately to ensure 

that measures do not provide incentives 

for hospitals to keep older technologies 

in place after they are outdated. 

Response: CMS is constantly 

reviewing the medical literature and 

maintains technical expert panels and 

consultants for its performance measure 

sets so that its measures remain up to 

date with current technologies. 

Additionally, we have regular 

conference calls with the relevant 

specialty societies, such as the 

American College of Surgeons, the 

American Society of Anesthesiologists, 

and the Association of periOperative 

Registered Nurses), to obtain their input 

on new evidence and changing best 

practices that might warrant a change to 

our performance measures. 

Comment: One commenter stated that 

in small hospitals, one person may be 

responsible for many jobs. In this 

situation, the commenter felt that 

submitting data regarding more 

measures was very redundant. 

Response: For each of the conditions 

(such as pneumonia) for which we 

adopt measures, the measures focus on 

individual aspects of care that are 

considered standard for every patient. 

The addition of measures represents a 

more comprehensive view of the quality 

of services provided to each patient. We 

believe that additional information from 

the added measures will contribute to 

quality improvement in patient care. 

Comment: Twenty-four commenters 

stated that their hospitals do not 

currently collect data for the surgical 

infection prevention (SIP) measures. 

They contend that the FY 2007 IPPS 

proposed rule’s requirement that they 

establish a procedure for abstracting and 

collecting these measures for first 

quarter 2006 would be very burdensome 

for hospitals. Many of the commenters 

requested a delay in the implementation 

of the collection of SIP measures until 

third calendar quarter of 2006. Another 

commenter noted that the hospital’s 

data collecting vendor would require 

additional funds to collect and process 

data to support the SIP measure data 

collection for January and February of 

2006. 

Response: As noted above, in this 

final rule we have revised the 

implementation date for hospital 

reporting using the expanded quality 

measures (including the SIP/SCIP 

measures) so that reporting will begin 

starting with discharges occurring in the 

third calendar quarter of 2006. We also 

note that submitting data via vendors is 

not the only route available to hospitals. 

Currently hospitals have available to 

them three mechanisms by which to 

submit data into the QIO Clinical 

Warehouse. It is the hospital’s choice 

which mechanism it will utilize to 

report its data. The following data 

reporting mechanisms are available to 

hospitals: 

• Quality Improvement Organization 

Program (QIO)—CMS makes available to 

hospitals data reporting assistance via 

QIOs. QIOs provide technical assistance 

to hospitals as they report data, and if 

need be will report the data on behalf 

of the hospital. 

• Self reporting—Hospitals can report 

their own data. All data collection, 

including SIP/SCIP can be 

accomplished by using the CMS 

Abstraction & Reporting Tool (CART). 

This application tool is available at no 

charge to hospitals or other 

organizations. 

• JCAHO vendor—A hospital may 

authorize a JCAHO Performance 

Measurement System (PMS) vendor that 

has met the CMS measurement 

specifications to transmit data into the 

QIO Clinical Warehouse on its behalf. 

These reporting mechanisms are also 

described on the QualityNet Exchange 

Web site (www.qualitynet.org). 

Comment: Nine commenters noted 

that the data requirement for SCIP 

would result in unplanned costs to 

hospitals including the hiring of 

additional abstractors, additional 

training, and additional medical 

assistance to pull the pertinent charts. 

Response: Under section 5001(a) of 

Pub. L. 109–171, we are required to 

begin to adopt the baseline set of 

performance measures as set forth in the 

2005 IOM report, which include the 

SIP/SCIP measures. In considering 

which of these measures we would 

adopt for the RHQDAPU program, we 

weighed the burden for the hospital to 

report additional quality data for the 

measure against the benefits of 

addressing recognized gaps in quality 

and providing beneficiaries with useful 

information on the quality of hospital 

care. We believe that the SIP/SCIP 

measures strike the appropriate relative 

balance of interests. 

That balance is appropriate and 

valuable on three levels given the 

potential improvements in surgical site 

infections that can occur through proper 

antibiotic use. It is estimated that over 

half of the 127,000 surgical site 

infections that are contracted by 

Medicare beneficiaries were preventable 

(Best, WR, Khuri SF, et al.; Identifying 

Patient Preoperative Risk Factors and 

Postoperative Adverse Events in 

Administrative Databases: Results from 

the Department of Veterans Affairs 

National Surgical Quality Improvement 

Program. J Am Coll Surg 2002;194:257–

266. 2002 by the American College of 

Surgeons). 

SCIP measures are designed as a 

framework to help hospitals organize 

and coordinate care. Evidence has 

shown that when hospitals change their 

internal systems to reliably deliver the 

care mandated in the SCIP measures, 

they are more efficient and safer for 

patients. For example, a nationwide 

collaborative dedicated to improve the 

processes of care outlined in the 

proposed SCIP Infection measures 

demonstrated a significant reduction in 

surgical site infection (Dellinger EP, 

Hausmann SM, et al., Hospitals 

collaborate to decrease surgical site 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48035 

infections. Am J Surg. 2005 Jul;190(1):9–

15.). And reliable processes of care 

aimed at assuring the correct deep 

venous thrombosis prevention as 

outlined in the proposed SCIP VTE 

measures ‘‘markedly reduced’’ the rates 

of these complications in patients at risk 

(Kucher, N, Koo S, et al.; Electronic 

Alerts to Prevent Venous 

Thromboembolism among Hospitalized 

Patients N Engl J Med 2005;352:969–77). 

Comment: One commenter stated that 

the sample size for SCIP for large 

hospitals will be onerous for these 

facilities. The commenter requested that 

the sample size be calculated using the 

entire organization’s activity rather than 

each specialty. Under this approach, 

hospitals could decide on an individual 

basis if they want to drill down for more 

information. 

Response: Specialty-specific sample 

sizes are required to provide more 

precise measures by specialty. Much of 

the existing research about antibiotic 

administration is specialty-specific, and 

the exclusion criteria and process 

measure rates differ by specialty. The 

increased sample size is necessary to 

incorporate these specialty-specific 

differences into hospital-level estimates 

of antibiotic administration. 

The SCIP sample is designed to 

provide precise hospital level measures 

for all SCIP measures, including the 

SCIP Infection 1 and 3 measures 

included in this rule. CMS believes that 

the SCIP specialty-specific sample is 

designed to produce precise measures 

for the entire SCIP expanded measure 

set. 

Comment: One commenter agreed 

with the inclusion of the SIP measures. 

This commenter believed that there was 

not sufficient information provided by 

the two measures alone. The commenter 

urged CMS to include SIP–2 in the 

measures. 

Response: We agree with the 

commenter. CMS will evaluate how we 

can include SIP 2 (SCIP 2), appropriate 

selection of prophylactic antibiotics, in 

the future. 

Comment: One commenter 

recommended that CMS review the way 

some of the indicators are measured. 

Two commenters recommended that 

quality measures should conform to 

clinically appropriate care established 

by peer-reviewed literature or 

professional consensus. One commenter 

suggested that there needs to be a more 

scientific method when setting up 

indicators. 

Response: We believe that the quality 

measures in this rule and on Hospital 

Compare have a strong evidence base 

and represent technical guidelines from 

relevant stakeholder societies such as 

the American College of Cardiology and 

the American Heart Association. They 

are maintained by CMS working with 

the JCAHO through ongoing 

assessments of changes in the clinical 

literature, evaluation of trends in 

performance, and review by technical 

experts. In addition, all measures 

currently being reported, as well as 

those that we are adopting in this rule, 

have been endorsed by the NQF, a 

national consensus body whose mission 

is to identify a common set of 

standardized evidence-based measures 

for quality reporting. Detailed 

specifications for each of the measures, 

including information concerning the 

underlying literature and clinical 

evidence that led to their endorsement 

and adoption, are included in the 

Specifications Manual for National 

Hospital Quality Measures, at 

www.qualitynet.org. 

Comment: Two commenters stated 

that financial incentives must allow 

sufficient flexibility to meet the unique 

needs of individual patients, and not 

encourage hospitals to avoid the most 

difficult cases. 

Response: As noted in our response to 

the previous commenter, we have 

adopted evidence-based quality 

measures which have been endorsed by 

the NQF. There is no question that any 

payment system potentially contains 

incentives for unintended consequences 

that may be counter to the intent of 

those who design the system. We share 

the commenters’ concern regarding this 

issue and will consider it as we monitor 

the impact of hospitals reporting data to 

receive the full market basket update 

under section 5001(a) of Pub. L. 109–

171, and as we develop our plan for 

implementing a value-based purchasing, 

under section 5001(b) of Pub. L. 109–

171. 

Comment: Eight commenters stated 

payment for 2007 will be reduced by 2.0 

percentage points for performance 

indicators that have a track record of 

poor reliability, such as the working 

diagnosis of pneumonia. The 

commenters noted that some hospitals 

resort to answering working diagnosis 

for pneumonia as a ‘‘yes’’ for all 

pneumonia charts regardless of actual 

documentation, since the penalty is 

disproportionately more severe if the no 

answer is found to be incorrect. The 

commenters noted that a couple of 

mismatches on the ‘‘no’’ response to 

working diagnosis can drive the 

hospitals to the brink of losing 2.0 

percentage points of their annual 

payment update. 

Response: The working diagnosis 

element is only one of over 15 elements 

in a single episode of care that is used 

to calculate the pneumonia measures. 

Many of the hospitals that failed 

quarterly validation due to submitting 

inaccurate pneumonia elements did not 

submit additional elements used in the 

calculation of pneumonia measures and 

validation score. All hospitals are able 

to submit all elements potentially used 

to calculate validation scores, and we 

encourage hospitals to submit all of 

these elements to improve their 

likelihood to pass quarterly validation. 

Comment: Two commenters 

recommended that for future measure 

development, CMS select measures only 

from those used by the HQA for public 

reporting. 

Response: CMS strongly values its 

participation in the HQA, which was 

established as a public-private 

collaboration to promote voluntary 

hospital public reporting on quality of 

care. Led by representatives of the 

hospital industry, with membership that 

includes consumer groups, unions, 

purchasers, providers, health plans and 

government, accrediting and standardsetting organizations, the HQA has been 

instrumental in helping to identify and 

find common ground among the diverse 

interests of these stakeholders. Congress 

recognized the HQA’s role when it 

included the ‘‘starter set’’ of 10 

measures, first identified by the HQA 

for reporting on Hospital Compare, in 

the Pub. L. 108–173 RHQDAPU program 

provisions (section 501(b)). As we now 

implement section 5001(a) of Pub. L. 

109–171 and expand the measure set for 

FY 2007 and beyond, we are asking 

hospitals to report on the 21 HQAapproved measures. In addition, HQA 

has strongly supported the development 

and use of the HCAHPS tool for 

assessment of patient experience with 

care. We expect to continue to work 

closely with the HQA in our future 

efforts, as well. 

In addition, we expect to add 

HCAHPS measures to the RHQDAPU 

program’s reporting set as soon as 

feasible. The HCAHPS survey is 

designed to make ‘‘apples to apples’’

comparisons of patients’’ perspectives 

on hospital care including 

communications with doctors, 

communications with nurses, 

responsiveness of hospital staff, 

cleanliness and quietness of the 

hospital, pain control, communication 

about medicines, and discharge 

information. 

Comment: One commenter requested 

a clear definition for antibiotic 

administration time. In the commenter’s 

opinion, the current standard requiring 

that no longer than one-hour pass 

between the administration of the 

antibiotic and the making of a surgical 


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incision does not have adequate clinical 

support. 

Response: The performance measures 

that we have adopted for the RHQDAPU 

program, including the timing of 

prophylactic antibiotic administration 

prior to surgery, are evidence-based, 

consensus-derived measures. The 

measurement specifications each of 

these measures includes the supporting 

evidence basis for the measure, and can 

be found in the Specifications Manual 

for National Hospital Quality Measures, 

at www.qualitynet.org. In addition, as 

part of our routine maintenance review 

of the measures, we monitor any 

changes in the medical literature that 

would require modification of the 

measures. 

Comment: One commenter suggested 

‘‘retiring’’ the oxygenation assessment 

measure. New section 

1886(b)(3)(B)(viii)(VI) of the Act 

specifies that CMS has the ability to 

replace measures ‘‘where all hospitals 

are effectively in compliance.’’ The 

commenter noted that the average 

performance on this measure is 99 

percent and that retiring this measure 

would be a signal to hospitals that CMS 

is willing to reduce the burden of data 

collection as the set evolves. 

Response: The commenter’s points are 

well taken. The oxygenation measure 

was previously endorsed by the NQF. 

The NQF has recently initiated a 

‘‘maintenance’’ review of all of its 

previously-endorsed pulmonary care 

measures, including the oxygenation 

measure, under which process these 

measures will be reevaluated by panels 

of experts and health care stakeholders 

(including CMS) to determine their 

continuing technical merit. CMS will 

defer its decision on the oxygenation 

measure until after this group has 

completed its deliberations. 

Comment: Several commenters stated 

that the measures recommended by the 

Leapfrog Group (computerized provider 

order entry, intensive care intensivists, 

and evidence-based hospital referrals) 

and included in the 2005 IOM report do 

not meet the quality measure standards 

necessary for inclusion in CMS’ national 

quality measurement initiatives. In 

addition, commenters noted that rural 

hospitals have not previously been 

asked to comply with these measures. 

These commenters believe that it would 

be unwise for CMS to adopt these 

measures. Another commenter wrote in 

support of the use of such structural 

measures. This commenter noted, 

however, that in terms of burden on 

hospitals, such programs span multiple 

years, must be approved on an annual 

basis, and require board approval. They 

also require significant financial 

resources, human resources, and time to 

develop and implement. The 

commenter stated that requiring such 

programs, which present a challenge to 

either fund or risk reduction in 

payment, would not appear to be 

reasonable. For example, the commenter 

stated that the phased-approach 

implementation of computerized 

provider order entry for prescriptions 

(CPOE) for its facility is projected to be 

completed by 2009 with an estimated 

cost of up to $2 million. 

Response: We thank the commenters 

for their input. For FY 2007, we are not 

proposing that hospitals submit data on 

the three structural measures 

recommended by the three Leapfrog 

Group and included in the 2005 IOM 

report. However, as we continue to 

expand the set of measures on which 

hospitals report, we will consider 

whether to include these measures, as 

well as other structural measures and 

will bear the commenters’ observations 

in mind. 

Comment: Several commenters agreed 

that measures selected should be those 

that are endorsed by NQF and aligned 

with JCAHO’s reporting requirements. 

The commenters also proposed that 

methods for maintaining measures be 

developed and implemented. Since 

medical knowledge continues to evolve, 

the science behind clinical practice 

guidelines must be monitored for 

changing evidence that previously 

accepted clinical practices no longer 

define the best care. Without this 

important step, measures cannot 

continue to evaluate best quality of care 

delivered to patients. The commenters 

proposed that CMS create a plan, 

including method and frequency for 

monitoring new evidence that impacts 

established measures, in addition to 

monitoring for adjustments needed to 

improve their implementation. 

Response: We agree with the 

commenters. CMS continuously 

monitors new evidence and works with 

panels of experts, as well as with the 

relevant specialty societies and other 

groups that develop practice guidelines, 

to assure that the measures are up to 

date, and to verify that measures reflect 

best clinical practice. In addition, we 

work with JCAHO experts to assure that 

the detailed specifications and 

instructions for collection of data used 

to calculate the rates reflects the most 

up to date information about 

medications, coding, and other issues. 

Comment: A commenter suggested 

that as new measures are added and 

mandated for public reporting, payment 

should not be based on simply the 

indicator percentage, but should also 

include the percentage change of 

improvement or the quarters of 

sustained improvement. The commenter 

stated that data collected based on such 

process improvement would be test data 

until the processes being measured were 

stable. Just as indicators are tested and 

validated, process improvement 

provides data that is test data. 

Transparency of data reporting 

connected to payment needs to allow a 

test period for data to not ‘‘count’’

toward payment. 

Response: The commenter has made 

several important suggestions that are 

relevant to our ongoing deliberations 

about measures for both reporting 

quality data and for value-based 

payment systems (discussed more fully 

in section IV.B. of this preamble). In 

proposing that CMS consider measures 

that highlight improvement over time, 

rather than just performance during a 

single time period, the commenter has 

offered an important suggestion that 

addresses our goal of identifying a set of 

measures that will support sustained 

quality improvement. We also raised 

this issue in the 2007 IPPS proposed 

rule in our discussion of value-based 

purchasing (71 FR 24098). As we 

consider further expansion of the 

measure set, we will consider this 

suggestion, as well as the commenter’s 

suggestion that hospitals be given the 

opportunity to ‘‘test’’ the reporting of 

new measures before they are included 

in any payment incentive arrangement. 

Comment: Three commenters strongly 

urged CMS to adopt measures identified 

in the 2005 IOM report as well as 

consider and adopt as many additional 

NQF-endorsed measures as can be 

feasibly collected, for example: 

Outcomes 

• 30-day heart failure mortality 

• 30-day heart attack mortality 

• Failure to rescue 

Complications 

• Urinary catheter-associated 

infection rate 

• Central line-associated blood stream 

infection rate 

• Ventilator associated pneumonia 

rate 

Clinical 

• Surgery patients with 

recommended venous 

thromboembolism prophylaxis ordered 

• Surgery patients who received 

appropriate venous thromboembolism 

prophylaxis within 24 hours prior to 

surgery to 24 hours after surgery 

Response: We appreciate the specific 

recommendations of the commenters 

and will consider them as we look to 

expand the set of measures. 


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Comment: One commenter 

recommended that CMS continue to 

work to ensure the accuracy of the 

information posted on the Hospital 

Compare Web site. The methodology 

adopted should be fully transparent to 

all stakeholders to clearly assess 

hospital-level reliability. The 

commenter recommended that we also 

engage representatives from the 

research, provider, and consumer 

communities to obtain input on the 

different potential methodologies and 

their impact on data validity, accuracy, 

and completeness. 

Response: We agree with the 

commenter. The integrity of the 

information posted on the Web site 

depends on the accuracy of the 

underlying data. In the 2007 IPPS 

proposed rule, we solicited input on 

proposed revisions to our methodology, 

and CMS remains open to advice and 

suggestions concerning how to continue 

to improve its processes to assess and 

assure hospital-level reliability. 

Comment: Two commenters urged 

CMS to include outcome measures 

based on the best available science and 

consensus, rather than permanently 

focus on the process measures that it 

has adopted. Ultimately, consumers 

want to see the results of hospital 

practices, that is, whether the processes 

measured actually yield higher quality 

care as indicated by results, such as 

better mortality rates and fewer 

infections. 

Response: We appreciate the specific 

recommendations of the commenter and 

will consider them as we look to further 

expand the set of measures. We are 

particularly interested in considering 

measures that have been endorsed by 

consensus building entities such as the 

NQF that take into account the issues of 

validity, reliability, impact and 

feasibility of the measures and involve 

a wide array of stakeholders. We also 

anticipate issuing a rulemaking in the 

near future that would propose to adopt 

a number of outcome measures, which 

may include 30-day post-admission 

mortality rates for patients with acute 

myocardial infarction and heart failure 

Comment: Two commenters requested 

that, as we consider new measures, we 

involve all stakeholders in the process. 

Response: CMS agrees with the 

commenter that stakeholder input is an 

essential part of the measure selection 

process. CMS receives input from 

stakeholders through multiple vehicles 

such as the NQF, the HQA and the 

notice and comment rulemaking 

process. CMS remains committed to the 

goal of including stakeholders in the 

process. 

Comment: One commenter suggested 

that because CMS makes its hospital 

quality data public, the data should be 

risk adjusted, and technical standards 

should be applied to the data to assure 

fair treatment of hospitals. 

Response: The set of measures 

currently reported on Hospital Compare 

are process measures for which no risk 

adjustment is needed, since they are 

constructed to reflect the proportion of 

cases in which a patient received the 

care that is appropriate for his or her 

clinical needs. The measures are 

constructed to exclude cases for which 

an intervention would not be 

appropriate. We expect that, as we 

consider whether to expand the set of 

measures to include outcome measures, 

we will need to address concerns about 

risk-adjustment and patient-mix. 

Comment: Two commenters suggested 

that CMS develop measures that 

examine quality and costs of care within 

and across settings over time. A 

commenter also recommended allowing 

variation in the implementation of new 

measures due to variability across the 

country. 

Response: We appreciate the 

recommendations of the commenters. 

As we work to expand the set of 

measures that hospitals report under the 

RHQDAPU program, we will consider 

such issues as how to assess care 

coordination both within and across 

hospitals and health care providers, as 

well as how to account for expected and 

unexpected variations in performance 

across providers. 

Comment: One commenter expressed 

concern about the negative effects of 

requiring hospitals to report measures 

when it is actually the physician who 

orders the care. This particularly 

happens in the case of small rural 

hospitals. This commenter indicated 

that the hospital should not be 

responsible for physician mistakes. 

Response: Hospitals cannot abrogate 

their responsibility for the care that is 

practiced at their own facilities. Given 

that virtually all significant treatment 

decisions are initiated with a 

physician’s order, this argument would 

absolve hospitals of virtually all 

responsibility for quality and safety. 

Comment: One commenter 

recommended addressing the alignment 

of physician and hospital indicators. If 

alignment is not possible, the 

commenter recommended that we have 

physician-driven indicators that apply 

to physicians only. 

Response: CMS is working 

collectively with the hospital and 

physician communities to improve the 

overall quality of health care for 

Americans. As part of this effort, CMS 

to use a common focus on quality by 

clinicians and providers to achieve 

improvement in the quality of 

healthcare. One example of this is the 

Surgical Care Improvement Project 

(SCIP). The use of metrics that focus on 

surgical quality from both the physician 

and provider perspective offer the best 

opportunity to improve the surgical 

quality of care. In addition, CMS 

launched a Physician Voluntary 

Reporting Program (PVRP) that 

incorporated indicators that will align 

physician interests with hospitals. More 

information on PVRP can be found at 

www.cms.hhs.gov/pvrp. 

d. HCAHPS Survey 

As recommended in the IOM report, 

we will be implementing the HCAHPS

survey in October 2006 as a part of the 

HQA. HCAHPS is designed to make 

‘‘apples to apples’’ comparisons of 

patients’’ perspectives on hospital care 

including communications with 

doctors, communications with nurses, 

responsiveness of hospital staff, 

cleanliness and quietness of the 

hospital, pain control, communication 

about medicines, and discharge 

information. More information on this 

survey can be found on our Web site: 

www.cms.hhs.gov/HospitalQualityInits/ 

downloads/ 

HospitalHCAHPSFactSheet200512.pdf. 

We intend to report the first three 

quarters of these survey data in late 

2007 on the Web site: 

www.hospitalcompare.hhs.gov. 

HCAHPS was endorsed by the NQF in 

May 2005. However, we did not propose 

to include HCAHPS as a part of the 

revised FY 2007 ‘‘Reporting Hospital 

Quality Data for Annual Payment 

Update Notice of Participation’’ form. 

We believe that the procedures and 

expanded measure set that we proposed 

to adopt in the FY 2007 IPPS proposed 

rule meets the requirement of section 

1886(b)(3)(B)(viii)(IV) of the Act that, 

‘‘for payments beginning with fiscal 

year 2007, in expanding the number of 

measures, under subclause (III), the 

Secretary shall begin to adopt’’ the 2005 

IOM report’s set of baseline measures. 

Section 1886(b)(3)(B)(viii)(III) of the Act 

states that we must expand, for FY 2007 

and each subsequent fiscal year, the set 

of measures that the Secretary 

determines to be ‘‘appropriate’’ for the 

measurement of the quality of care 

furnished by hospitals in inpatient 

settings beyond the original quality 

measures that applied in FY 2005 and 

FY 2006. 

We believe that the statute gives the 

Secretary the discretion to choose what 

‘‘begin to adopt’’ should involve in FY 

2007 and the number of additional 


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measures, if any that would be 

‘‘appropriate’’ during this time. In 

proposing our revised procedures, 

designing the methods that hospitals 

will use to report during FY 2007, 

establishing a set of expanded measures 

based on the 2005 IOM report, and 

revising RHQDAPU program materials, 

we believe that we have met the 

statutory requirements. We will 

continue to explore the feasibility of 

adopting additional measures for 

purposes of the FY 2008 update, 

including the HCAHPS survey 

described in the IOM report and other 

measures that reflect consensus among 

affected parties, as required by new 

sections 1886(b)(3)(B)(viii)(III) through 

(V) of the Act. 

Comment: One commenter expressed 

support for the HCAHPS initiative, but 

requested that CMS make the survey 

available in languages other than 

English and Spanish. The commenter 

noted that in areas with diverse patient 

populations such as New York City, 

hospitals will not be able to conduct the 

survey adequately in only two 

languages. 

Response: The HCAHPS survey is 

currently available only in English and 

Spanish. We intend to solicit comments 

from participating hospitals and survey 

vendors regarding additional languages 

for HCAHPS. This information can be 

submitted to our HCAHPS mailbox, 

CMSHOSPITALCAHPS@cms.hhs.gov. 

Based on the information we receive, we 

will establish priorities for HCAHPS

translation into additional languages. 

Comment: One commenter 

recommended that we offer hospitals 

sufficient time to incorporate the 

HCAHPS measures into their care 

protocols. The commenter suggested 

that we establish an implementation 

schedule that provides for sufficient 

time for hospitals to become familiar 

with data submission, and instructions 

explaining how to use the tool for 

feedback. The commenter noted that 

such an approach would allow for 

development of more accurate data. 

Response: We agree that hospitals and 

survey vendors must become familiar 

with the HCAHPS instrument, data 

collection, and data submission 

procedures prior to participation in the 

national implementation of the survey. 

To this end, CMS offered free training 

to hospitals and survey vendors in 

February and April of this year. 

Additionally, to gain experience in all 

aspects of the survey, hospitals that will 

participate in the national 

implementation of HCAHPS in 

October 2006 were required to take part 

in a ‘‘dry run’’ of the survey in April, 

May, or June of this year. Data 

submitted to CMS from this dry run will 

not be publicly reported. CMS is 

planning to offer additional training and 

dry run opportunities for hospitals that 

will join the HCAHPS initiative after 

October 2006. 

Comment: One commenter 

recommended that the following 

question be added to the HCAHPS

patient survey proposed for October 

2006, ‘‘Did you get an infection while 

you were in the hospital or after any 

surgery or other procedure?’’ The 

commenter stated that most patients 

would know about the existence of an 

infection, and this would be a more 

precise way to identify significant 

problems than more general and 

subjective HCAHPS questions, such as 

questions that address the ‘‘cleanliness 

and quietness of the hospital.’’

Response: We appreciate this 

suggestion, but at this time we are not 

planning to add new items to the 

current version of the HCAHPS survey 

(which can be found on 

www.hcahpsonline.org)) based on our 

evaluation of the survey and on 

comments we received on the survey in 

response to multiple Federal Register 

notices that we published (for example, 

68 FR 5889, 68 FR 38346, 68 FR 68087, 

and 70 FR 67476). However, we will 

keep this suggestion in mind for future 

versions of the survey. 

Comment: Two commenters stated 

that for FY 2008, CMS needs to more 

than merely explore the feasibility of 

adopting additional measures for FY 

2008 update. There should be a 

substantial expansion of measures for 

hospitals to obtain the FY 2008 annual 

update. The commenters agreed with 

the Consumer-Purchaser Disclosure 

Project recommendations that CMS 

adopt the additional measures identified 

in the 2005 IOM report (HCAHPS and 

three structural measures), as well as 

consider and adopt a number of other 

NQF-endorsed measures. 

Response: We note that in addition to 

the expanded measure set that we are 

adopting in this rule, we will begin 

national implementation of the 

HCAHPS survey in October 2006. We 

also anticipate further expanding the 

measure set for FY 2008 and will 

consider adopting other NQF-endorsed 

measures at that time. 

Comment: A commenter suggested 

that CMS identify and develop, in 

collaboration with the long-term care 

hospital (LTCH) industry, appropriate 

quality measurement indicators and 

begin collecting and public reporting 

results across providers. 

Response: At this time, we are not 

working on developing measures for the 

long term care hospital setting. However 

we will consider, in the future, the 

commenter’s suggestions regarding the 

collection of quality measures from long 

term care hospitals. HCAHPS has been 

developed for use by short-term, acutecare hospitals, which encompasses all 

hospitals that are eligible to submit 

clinical measures for public reporting. 

At this time, other types of hospitals, 

including LTCHs, are not eligible to 

participate in HCAHPS. CMS will, in 

the future, consider whether and how 

an HCAHPS survey could be redesigned for appropriate use by other 

types of hospitals, including LTCHs. 

Comment: Several commenters stated 

that there is no ‘‘no-cost’’ alternative to 

using a vendor to participate in 

HCAHPS, unlike the situation of the 

collection of clinical chart abstraction 

data. They noted that this presented a 

significant burden to hospitals that will 

have no alternative to using commercial 

vendors to satisfy a Federal mandate. In 

addition, the commenters stated that a 

substantial number of hospitals do not 

currently conduct a patient experience 

survey and that the Federal government 

has committed only to providing the 

interface to upload data to QualityNet 

Exchange. Some commenters suggested 

that it would be helpful if we provided 

clear and concise guidance on 

HCAHPS sampling. 

Response: From the inception of the 

survey, CMS has been attentive to the 

costs to hospitals that participate in 

HCAHPS. HCAHPS has been 

designed to allow a hospital to either 

conduct the survey on its own, or to 

conduct the survey through the use of 

a survey vendor. A hospital that elects 

to self-administer HCAHPS must meet 

a series of minimum survey 

requirements related to prior survey 

experience, capacity to conduct 

HCAHPS, and its ability to satisfy 

quality control procedures. In addition, 

HCAHPS was designed to be 

compatible with a range of popular 

survey practices. It is made available in 

four modes of administration (mail, 

telephone, mail with telephone followup, or active IVR), and can be 

implemented as a stand-alone survey, or 

integrated within an ongoing patient 

survey. Because of the nature of the 

HCAHPS, the tool developed for 

HCAHPS is different from the CART 

tool. However, CMS has designed an 

HCAHPS on-line tool that allows 

hospitals that self-administer the survey 

to enter and upload the survey data into 

the QualityNet Exchange data base. 

There is no charge for use of the 

HCAHPS on-line tool. 

Further, in February and April 2006 

CMS offered free training on 

participation in the HCAHPS survey. 


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Among its topics, this training included 

detailed instruction on sampling. 

Additional iterations of this training 

program are currently being planned. 

CMS also provides readily available 

guidance on sampling and other 

HCAHPS issues through its 

HCAHPSonline.org help desk. In 

addition, QualityNet Exchange 

maintains a help desk that provides 

assistance on matters related to 

submission to the HCAHPS data 

warehouse. All of these services are 

available free of charge. 

An independent study of the benefits 

and costs of HCAHPS estimated that 

the average cost of HCAHPS collected 

as a separate survey to be between 

$3,300 and $4,575 per hospital. The cost 

of combining HCAHPS with an 

existing hospital survey would be about 

$978 per hospital (Abt Associates Inc.: 

Costs and Benefits of HCAHPS, October 

5, 2005). Additionally, hospitals have 

the option to use a survey vendor or 

conduct HCAHPS on their own if they 

have prior survey experience. 

e. Data Submission 

For the FY 2007 update, we specify 

that hospitals must submit complete 

data regarding the quality measures in 

accordance with the joint CMS/JCAHO 

sampling requirements located on the 

QualityNet Exchange Web site. These 

requirements specify that hospitals must 

submit a random sample or complete 

population of cases for each of three 

topics (acute myocardial infarction, 

heart failure, and pneumonia) covered 

by the starter set of 10 quality measures. 

Hospitals are expected to continuously 

meet these sampling requirements for 

the starter set of 10 quality measures for 

discharges in each quarter. 

We do not anticipate significant 

additional burden on hospitals 

regarding the starter set of 10 quality 

measures or the anticipated 21 clinical 

quality measures because all JCAHOaccredited hospitals are currently 

required to adhere to these sampling 

requirements in acute myocardial 

infarction, heart failure, pneumonia, 

and surgical infection prevention for 

accreditation and core measure 

reporting purposes. 

Comment: One commenter suggested 

that CMS consider a methodology that 

would allow resubmission of data in 

cases where incorrect data has been 

identified by the submitting provider, 

while still maintaining the integrity of 

the data validation process for payment 

purposes. The commenter suggested 

that this could be accomplished through 

the use of two databases. One database 

would be frozen once the final 

submission deadline for a quarter has 

passed to be used for Clinical Data 

Abstraction Center (CDAC) validation. 

However, if the providers discovered 

errors in its data submission after the 

quarterly deadline, it would be able to 

use a second database to submit 

updated data. The commenter believed 

that this would improve the data 

available on Hospital Compare. 

Response: We believe that the 

commenter’s suggestion that we create 

two separate databases has the potential 

to maintain the integrity of the 

validation process as well as to improve 

the quality of the publicly reported data. 

We will review the methodology and 

take this suggestion into consideration. 

Comment: One commenter requested 

that CMS create meaningful and useful 

reports that would be available to 

vendors after data submission is 

complete each quarter. The reports 

should identify actionable steps that 

hospitals are required to take to make 

sure they successfully submit data for 

the RHQDAPU program. CMS should 

also modify the current Failure and 

Success Reports so that any data 

elements needed to populate or 

calculate measures reported for the 

annual payment update can be 

identified as a critical error and result 

in the rejection of the record. The 

hospital should be able to download the 

entire report, without having to 

download it into several reports. 

Response: CMS thanks the commenter 

for the suggestions on how to improve 

the reports. The following reports are 

currently available to hospitals and 

vendors: 

Title of report Vendor access Provider 

access 

QIO Clinical Warehouse Import Detail by Provider—Provides case import status into warehouse; options for queries include topic, upload status, discharge dates, types of messages 

(critical, informational and measures) and various sort options.

X ............................................... X 

QIO Clinical Warehouse Import Detail by Error Code—Provides case import status into warehouse; options for queries include topic, upload status, discharge dates and various sort options.X ............................................... X 

QIO Clinical Warehouse Submission Summary—Case submission summary ............................... X ............................................... X 

Case Status Summary Report—Includes measure inclusion status and reason for exclusion ...... Based on hospital authorization X 

Measure Status Summary Report—Summary of number of cases indicated per quality measure 

for cases accepted into the QIO Clinical Warehouse.

Based on hospital authorization X 

CMS is currently reviewing the data 

submission reports and considering 

modifications to improve and enhance 

the existing feedback reports. In the 

interim, we released two additional 

reports in June 2006 to provide more 

detailed information to hospitals. 

• QIO Clinical Warehouse Measure 

Status by Category; this report will 

provide information by measure to 

include total cases as well as the 

number of cases by measure category 

(A–E). 

• QIO Clinical Warehouse Measure 

Status by Case; this report will provide 

by measure for each case whether the 

case was eligible for the denominator, 

passed the measure (numerator), was 

excluded from measure calculation and 

the reason for exclusion. 

CMS and its contractors routinely 

conduct training to provide additional 

assistance concerning how to access and 

utilize QualityNet Exchange Reports. 

Information on these trainings can be 

found on QualityNet Exchange Web site. 

Comment: Two commenters requested 

that corporate owners and vendors have 

access to QualityNet reports about their 

specific hospitals, and believe that these 

reports should not be provided only to 

hospitals. The commenters stated that 

having access to these reports will allow 

hospitals to discern whether errors in 

data transmission have occurred and 

whether data should be resubmitted 

before the deadline. 

Response: Hospitals have had the 

ability to grant third parties such as 

health care systems and vendors 

permission to access select QualityNet 

Exchange Reports since December 2004 

through QualityNet Exchange SelfServe. Health care system users and 

vendors obtain permission to access 

hospital reports by completing a 

QualityNet registration form and 

submitting the form to the QualityNet 

help desk. The QualityNet help desk 

will process the registration form. When 


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a QualityNet user account is assigned, 

the health care system or vendor user 

can then request access to reports 

through the QualityNet Self Serve. The 

healthcare system’s or vendor’s report 

request is then sent to the hospital for 

report access approval. Detailed 

instructions for using QualityNet 

Exchange Self-Serve are available in 

Chapter 2, Section 2 of the User Guide 

located on www.QualityNet.org. 

Comment: One commenter opposed 

CMS’ intent to develop measures 

specifications and a system or 

mechanism to accept data without 

converting it into XML. 

Response: CMS does not intend to 

develop measures specifications and a 

system or mechanism to accept data 

without converting it into XML. Our 

intent is to continue to utilize the XML 

format for file submissions. 

Comment: Four commenters 

disagreed with CMS’ opinion that no 

additional burden would be placed on 

hospitals. The commenters noted that 

JCAHO participating hospitals are not 

required to submit the data regarding all 

21 measures found in the proposed rule. 

Therefore, it would be an additional 

burden on the hospitals to have to 

submit more measures than are required 

by the current JCAHO requirements. 

Response: We acknowledge this 

concern, but we are required by new 

section 1886(b)(3)(B)(viii)(IV) of the Act 

to begin to adopt the measures as 

specified in the 2005 IOM report. We 

believe that the measures we have 

selected are appropriate because we 

believe these quality measures will: (1) 

Provide useful and valid information 

about hospital quality to the public; (2) 

provide hospitals with a sense of 

predictability about public reporting 

expectations; (3) begin to standardize 

data and data collection mechanisms; 

and (4) foster hospital quality 

improvement. 

We have also taken steps to ensure 

that the burden on hospitals is as 

minimal as possible. First, while some 

hospitals report through JCAHO 

vendors, we make available the CART 

tool for reporting on all of the measures 

in the expanded measures set, at no 

additional cost to the hospital. Second, 

our data analysis indicates that although 

hospitals are not currently required to 

submit data regarding the 21 measures 

identified in the proposed rule, many of 

them are already submitting these data 

as part of our HQA voluntary reporting 

initiative. Many hospitals have 

participated in the HQA, and are 

continuing to submit data to the QIO 

Clinical Warehouse. Many HQAparticipating hospitals have been 

voluntarily reporting on the additional 

quality measures 

Comment: One commenter stated that 

the additional requirements for 

reporting are too burdensome for rural 

hospitals. The commenter noted that 

additional resources required for this 

work takes away from time the staff can 

provide for actual care and that the costs 

associated with submitting the 

additional measures are too prohibitive 

for rural hospitals. 

Response: Although we acknowledge 

that the additional reporting 

requirements will potentially require 

hospitals to begin collecting data that 

they have not, to date, been collecting, 

this potential burden must be weighed 

against the goals of improving quality of 

care and meeting the needs of patients. 

As we stated in response to a previous 

comment above, we have taken a series 

of steps to minimize the burden for all 

hospitals. 

Comment: One commenter stated that 

the QUEST system does not provide 

consistent answers to questions about 

abstraction. This commenter stated that 

there are flaws in the current system. 

Therefore, the commenter stated that 

payment should not be based on this 

system. 

Response: The QUEST system is the 

question and answer system that is 

available on the internet at 

QualityNet.org. Questions can be 

submitted by anyone and they are 

answered by CMS or its contractors. 

CMS is working to improve the QUEST 

system. New processes have been 

implemented in order to avoid 

inconsistent answers to questions about 

abstraction. However, payment is not 

based on the QUEST system, but is 

based on compliance with the full set of 

RHAQDAPU requirements. The primary 

source for abstraction clarification is the 

Specifications Manual for National 

Hospital Quality Measures, available on 

the QualityNet Exchange Web site. 

f. RHQDAPU Program Withdrawal and 

Chart Validation Requirements 

For the FY 2007 update, hospitals 

may withdraw from the revised 

RHQDAPU program at any time up to 

August 1, 2006. If a hospital withdraws 

from the program, it will receive a 2.0 

percentage point reduction in its 

payment update. 

For the FY 2007 update, and until 

further notice, we will continue to 

require that hospitals meet the chart 

validation requirements that we 

implemented in the FY 2006 IPPS final 

rule. There were no chart-audit 

validation criteria in place for FY 2005. 

Based upon our experience with the FY 

2005 submissions and our requirement 

for reliable and validated data, in the FY 

2006 IPPS final rule, we discussed 

additional requirements that we had 

established for the data that hospitals 

were required to submit in order to 

receive the full FY 2006 payment 

update (70 FR 47421 and 47422). These 

requirements, as well as additional 

information on validation requirements, 

will continue and are being placed on 

the QualityNet Exchange Web site. 

For the FY 2007 payment update, and 

until further notice, hospitals must pass 

our validation requirement of a 

minimum of 80 percent reliability, 

based upon our chart-audit validation 

process, for the first three quarters of 

data from CY 2005. These data were due 

to the QIO Clinical Warehouse by July 

15, 2005 (first quarter CY 2005 

discharges), November 15, 2005 (second 

quarter CY 2005 discharges), and 

February 15, 2006 (third quarter CY 

2005 discharges). 

We use confidence intervals to 

determine if a hospital has achieved an 

80-percent reliability aggregated over 

the three quarters. The use of 

confidence intervals allows us to 

establish an appropriate range below the 

80-percent reliability threshold that 

demonstrates a sufficient level of 

reliability to allow the data to still be 

considered validated. We estimate the 

percent reliability based upon a review 

of five charts, and then calculate the 

upper 95-percent confidence limit for 

that estimate. If this upper limit is above 

the required 80-percent reliability, the 

hospital data are considered validated. 

We are using the design-specific 

estimate of the variance for the 

confidence interval calculation, which, 

in this case, is a stratified single stage 

cluster sample, with unequal cluster 

sizes. (For reference, see Cochran, 

William G.: Sampling Techniques, John 

Wiley & Sons, New York, chapter 3, 

section 3.12 (1977); and Kish, Leslie.: 

Survey Sampling, John Wiley & Sons, 

New York, chapter 3, section 3.3 

(1964).) Each quarter is treated as a 

stratum for variance estimation 

purposes. 

We use a two-step process to 

determine if a hospital is submitting 

valid data. In the first step, we calculate 

the percent agreement for all of the 

variables submitted in all of the charts. 

If a hospital falls below the 80-percent 

cutoff, we restrict the comparison to 

those variables associated with the 

starter set of 10 quality measures. We 

recalculate the percent agreement and 

the estimated 95-percent confidence 

interval and again compare to the 80- 

percent cutoff point. If a hospital passes 

under this restricted set of variables, the 

hospital is considered to be submitting 


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valid data for purposes of the 

RHQDAPU program. 

Comment: Four commenters 

recommended that CMS consider a 

validation process that would focus 

more resources on those hospitals that 

are having difficulty in passing the 

validation thresholds on a consistent 

basis. 

Response: QIOs, on behalf of CMS, 

work to assist hospitals with all aspects 

of hospital reporting activity. QIOs are 

available to provide training and 

assistance to those hospitals 

experiencing difficulty passing the 

validation thresholds. This training and 

assistance is designed to improve the 

validation scores of hospitals with 

failing validation scores through better 

performance measurement techniques 

and medical record documentation. 

Comment: One commenter 

recommended using an alternative 

method of data validation and suggested 

that we use the monthly data points of 

each clinical measure instead of relying 

on chart abstraction. Under this 

methodology, a monthly data point that 

exceeds three (3) standard deviations 

would be considered an outlier. 

Response: The current validation 

methodology measures abstraction 

accuracy of hospital submitted data 

elements, and thereby measures the 

accuracy of reported data. The suggested 

alternative methodology is designed to 

identify outlier measures at the 

aggregate hospital level, and does not 

identify the specific source of errors. 

CMS believes that its current validation 

methodology more accurately measures 

abstraction accuracy at the element level 

for the RHQDAPU program. 

Comment: One commenter stated that 

it is incongruent to require results from 

the first three quarters of 2005 for 

validation with an effective date of the 

final rule that is after the data 

submissions. 

Response: Section 

1886(b)(3)(B)(viii)(I) of the Act requires 

an annual determination of payment 

eligibility, and we believe that we can 

make accurate payment determinations 

based on three quarters of validated 

data. In order to make timely payments 

to hospitals under the IPPS during FY 

2007, we need to complete our payment 

determinations prior to the start of FY 

2007 that is, prior to October 1, 2006. 

Data submitted in connection with 

discharges that occurred during the first 

three quarters of 2005 constitute the 

most current data that we can use to 

make our payment determination for FY 

2007. 

Comment: Two commenters suggested 

that if we are going to increase the 

penalties for failure, there needs to be 

more timely feedback allowing 

organizations to correct their 

submission errors. These commenters 

recommended that the validation 

process take into account at least 6 

quarters of data to allow for learning 

and to accommodate the constant 

changes in the specifications. 

Response: We use quarterly validation 

results in order to make a single annual 

determination. The first three quarters 

of 2005 constitute the complete set of 

most currently available data to 

determine FY 2007 payment eligibility 

by September 1, 2006. We believe that 

using three quarters of data is sufficient 

to allow us to make accurate payment 

assessments. We will continue to review 

whether using additional quarters of 

data can improve the reliability of 

hospital results under the RHQDAPU 

program. In addition, as we noted in 

response to an earlier comment, 

hospitals and their vendors can use test 

transmissions in order to identify 

problems before the submission 

deadlines. Also, in an effort to reduce 

hospital burdens, CMS and JCAHO have 

agreed to release aligned measure 

changes 120-days prior to their 

implementation. This allows both 

hospitals and vendors adequate time to 

prepare for those changes prior to 

implementation. However, hospitals are 

responsible for ensuring that their 

vendors submit accurate and timely 

data. It is the responsibility of each 

vendor, and ultimately of the hospital, 

to adhere to the requirements listed in 

the specifications manual for the set 

discharge time period. 

Comment: One commenter 

recommended a provision to allow CMS 

and the hospital to have the flexibility 

to meet 2 of 3, or 3 of 4 quarters. This 

would provide some assurance that if 

and when the processes break down, 

hospitals are not unilaterally punished 

while providing quality care. 

Response: The 3 quarter validation 

determination is designed to provide a 

single overall estimate of hospital 

abstraction accuracy over the entire 

period. This single overall estimate 

pools the quarterly samples to increase 

the overall reliability of the abstraction 

accuracy estimate for that period. The 

expectation is that hospitals will 

abstract and submit cases every quarter 

with consistency. The entire period 

would not be reflected if hospitals are 

allowed the flexibility to meet 2 of 3, or 

3 of 4 quarters. To utilize fewer quarters 

decreases the overall reliability of the 

abstraction accuracy estimate. 

Comment: One commenter suggested 

that the annual payment update not be 

tied to validation until the JCAHO and 

CMS have aligned the measures, 

resulting in making the guidelines clear 

and consistent. 

Response: As of July 1, 2004 

discharges, all data elements within the 

10-starter set were CMS and JCAHO 

aligned. As of January 1, 2005 

discharges, all data elements for the 

expanded 21 measure set were aligned. 

The changes are designed to keep the 

measures current with the accepted 

evidence base of medical research, and 

to improve the clarity and reliability of 

the abstraction instructions. CMS and 

its contractors have and will continue to 

work diligently to ensure that alignment 

issues do not affect a hospital’s 

eligibility for receiving the full annual 

payment update. 

Comment: One commenter requested 

that hospitals not be held responsible 

when data processing and 

communication errors, under the 

control of CMS or that occur as a result 

of actions of its contractors, cause a 

failure in validation. 

Response: When a hospital reports 

data processing and communication 

errors, the errors are thoroughly 

researched. CMS has not held a hospital 

responsible for data processing and 

communication errors that were clearly 

under the control of CMS or its 

contractors. However, CMS does hold 

the hospital responsible for its own 

errors in data processing and 

communication. If the error is by the 

hospital’s contracted vendor, the 

hospital is held responsible. 

Under the standard appeal process, all 

hospitals are given the detailed results 

of CDAC reabstraction along with their 

estimated percent reliability and the 

upper bound of the 95-percent 

confidence interval. If a hospital does 

not meet the required 80-percent 

threshold, the hospital has 10 working 

days to appeal these results to its QIO. 

The QIO will review the appeal with the 

hospital and make a final determination 

on the appeal. The QIO receives from 

the hospital the element or elements 

that are to be evaluated during the 

appeal process, along with the hospital’s 

rationale for the difference between the 

hospital’s abstraction and the CDAC 

reabstraction. In this validation appeal 

process, the QIO reviews the appeal 

using the medical record to evaluate the 

data elements that are being appealed. 

This process allows for an independent 

review and is designed to find coding 

errors on the part of abstractors. QIO 

appeal decisions are based on the data 

that the hospital submitted to the QIO 

Clinical Warehouse. The QIO has 20 

calendar days to make a final decision. 

The QIO can either uphold or reverse 

the CDAC validation decision. If the 

QIO does not agree with the hospital’s 


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appeal, the original results stand. 

However, if the QIO agrees with the 

hospital, new validation results are 

calculated and provided to the hospital 

through the usual processes. This 

validation appeal process is described 

in detail at the QualityNet Exchange 

Web site. 

Comment: Twelve commenters 

recommended expanding the appeal 

process to include any indicator, 

regardless of whether the overall 

validation score for the hospitals is at or 

above 80 percent. The commenters 

believed that this would allow hospitals 

the opportunity for improvement. The 

commenters also felt that this was 

significant due to the aggregations of 

validation results for multiple quarters, 

and for the resolution of discrepancies 

between the hospital and the CDAC. 

Response: Currently the appeals 

process is only available to those 

hospitals that had an overall reliability 

rate of less than 80 percent for the 

quarter. However, CMS encourages all 

hospitals to use their validation results 

as a tool for improving abstraction 

accuracy. 

Comment: Seventeen commenters 

urged CMS to review, on a case-by-case 

basis, any instance in which a hospital’s 

payment would be put in jeopardy as a 

result of the validation process. These 

commenters did not feel that the 

validation process is reliable enough to 

warrant a hospital losing its update due 

to faulty validation. If a hospital has 

made a good faith effort to submit valid 

data, one commenter felt that the 

hospital should receive its update 

regardless of whether the data are 

deemed accurate enough for display. 

Response: CMS believes that the 

current validation process provides a 

reliable estimate of abstraction accuracy 

on an annual basis. CMS and its 

contractors work closely with the CDAC 

regarding issues that are raised by 

hospitals about the validation processes. 

If a hospital identifies an issue where it 

believes that its validation score is 

incorrect, CMS conducts a 

comprehensive review. We work 

diligently to ensure that validation 

issues do not impact eligibility for 

receiving the full market basket update. 

Comment: Two commenters requested 

that hospitals receive more time to file 

validation appeals. One commenter 

suggested increasing the time for filing 

validation appeals from 10 days to 30 

days. 

Response: The current time frame for 

a hospital to file an appeal is 10 

business days after the results are 

posted to QualityNet Exchange. The 

hospital is notified by electronic mail 

when its validation results are posted so 

it receives the information quickly, and 

it has the full 10 business days to review 

and appeal the results. The QIO then 

has an additional 20 calendar days to 

review and respond to this appeal by 

forwarding the information to the CDAC 

or upholding the CDAC decision while 

providing education to the hospital. 

CMS believes this is adequate time to 

file an appeal. The current validation 

and appeal process can extend as much 

as 6–9 months beyond the last day of a 

discharge quarter. To extend the time 

allowed to file appeals would further 

lengthen this time for hospitals to 

receive final results. 

Comment: One commenter 

recommended that we use an impartial 

party to decide appeals. The commenter 

felt that the CDAC should not be 

responsible for both the abstraction as 

well as reabstraction if there is an 

appeal. 

Response: All data successfully 

submitted into the QIO Clinical Data 

Warehouse are subject to the hospital 

data validation process. The CDAC 

reabstraction process that occurs during 

the appeal is a very objective process. 

Both the hospitals and the CDAC 

abstract the records using the same 

guidelines, the Specifications Manual 

for National Hospital Quality Measures. 

The hospital’s abstraction is compared 

to the CDAC’s reabstraction in order to 

determine mismatches and the 

validation score. A hospital that scores 

at least 80 percent overall for the quarter 

is considered to be supplying valid data 

for that quarter. A hospital that scores 

less than 80 percent overall for the 

quarter has the opportunity to file an 

appeal with its QIO. The hospital must 

supply to the QIO the rationale for the 

appeal and the QIO will review a copy 

of the same record the CDAC completed 

during its reabstraction. The QIO will 

then determine the final outcome of the 

appeal. The QIO has the final say in 

appeal decisions. 

Comment: One commenter expressed 

several concerns with the validation 

process. 

• The method that is used to 

construct the numerator and 

denominator on the summary report is 

unclear. 

Response: We are unsure specifically 

which numerator & denominator the 

commenter is referring to. If we 

interpret the comment correctly, the 

commenter is referring to the 

Submission Feedback report. The 

denominator in the summary report 

refers to the number of elements in the 

sampled records used to calculate the 

measures, and the numerator refers to 

the number of correctly abstracted 

elements in the sampled records used to 

calculate the measures. Two measure 

lists are used to determine the 

denominator list of elements, one list for 

the ten starter set measures versus the 

second list for the expanded measure 

set. We believe that the documentation 

regarding these reports, available on the 

QualtyNet.org Web site, provides clear 

explanation of how the numerator and 

denominator are determined. 

• CMS does not accept 

documentation from hospitals after the 

validation results have been published. 

Response: Although we do not accept 

documentation from hospitals after the 

validation results have been published, 

we do have several safeguards in place 

to prevent this from happening. The 

CDAC works diligently with the QIOs 

and CMS to ensure that the 

requirements for hospital reporting of 

quality data are efficiently and 

effectively being addressed. We have 

devoted a great deal of resources to 

ensuring that the CDAC process, 

including the receipt of documentation, 

is consistent, reliable and accurate. Due 

in part to our adherence to the fixed 

time schedule in the hospital data 

validation process, and for security 

purposes, the CDAC utilizes an in-house 

system to track and monitor the end-toend processing of each medical record 

request from hospitals. The CDAC also 

relies on external contractors like 

Federal Express or the U.S. Postal 

Service (within HIPAA guidelines) with 

their tracking systems to ship and track 

medical records. The CDAC goes so far 

as to contact each provider when all 

requested medical records are not 

received. 

• Hospitals have failed validation due 

to the CDAC not receiving all materials, 

although the hospital verified that all of 

the materials were sent in a timely 

manner. 

Response: CMS has several safeguards 

in place to prevent this from happening. 

The CDAC works diligently with QIOs 

and CMS to ensure that the 

requirements of the QIO program are 

efficiently and effectively being met. We 

have devoted a great deal of resources 

to ensuring that the CDAC process is 

consistent, reliable and accurate. Due in 

part to our adherence to the fixed time 

schedule in the hospital data validation 

process, and for security purposes, the 

CDAC utilizes an in-house system to 

track and monitor the end-to-end 

processing of each medical record 

request from hospitals. The CDAC also 

relies on external contractors like 

Federal Express or the U.S. Postal 

Service (within HIPAA guidelines) with 

their tracking systems to ship and track 

medical records. The CDAC goes so far 

as to contact each provider when all 


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requested medical records are not 

received. 

• There is no information to verify 

the reliability of abstraction. 

Response: Hospitals that score below 

80 percent are able to appeal abstraction 

results, and these results are 

documented. If the hospital believes 

that it scored below 80 percent due to 

an abstraction error on the part of the 

CDAC, there is an appropriate process 

by which the hospital can appeal the 

validation results. 

• For most hospitals, the sample size 

is too small to determine conditionspecific indicator accuracy. 

Response: The validation sample is 

designed to provide overall quarterly 

feedback on abstraction accuracy and to 

provide an annual estimate for payment 

eligibility determination. However, 

hospitals can use several quarters’

validation results to estimate conditionspecific accuracy. 

In reviewing the hospital data, we 

will combine the samples for first 

quarter, second quarter, and third 

quarter (15 cases) into a single stratified 

sample to determine whether the 80- 

percent reliability level is met. This 

gives us the greatest accuracy when 

estimating the reliability level. The 

confidence interval approach accounts 

for the variation in coding among the 

five charts pulled each quarter and for 

the entire year around the overall 

hospital mean score (on all individual 

data elements compared). The closer 

each case’s reliability score is to the 

hospital mean score, the tighter the 

confidence interval established for that 

hospital. A hospital may code each 

chart equally inaccurately, achieve a 

tight confidence interval, and not pass, 

even though its overall score is just 

below the passing threshold (75 percent, 

for example). A hospital with more 

variation among charts will achieve a 

broader confidence interval, which may 

allow it to pass, even though some 

charts score very low and others score 

very high. 

We believe we have adopted the most 

suitable statistical tests for the hospital 

data we are trying to validate. In the FY 

2007 IPPS proposed rule, we solicited 

comments from hospitals on this 

passing threshold, the confidence 

interval, and the sampling approach (71 

FR 24094). Based on analytical results 

from FY 2006, we found confidence 

intervals using only five charts widely 

varied in size. As a result of these 

findings, we decided to combine 

multiple quarters of validation samples 

into a single stratified sample to shrink 

and/or decrease the variation and 

produce a more reliable estimate of 

abstraction reliability to determine if 

any changes in our methodology are 

required. We will make any necessary 

revisions to the sampling methodology 

and the statistical approach through 

manual issuances and other guidance to 

hospitals. 

Comment: Several commenters 

objected to our validation process. They 

indicated that this process places a large 

burden on hospitals working with 

vendors that require the submission of 

100 percent of the hospitals’ cases. 

Additionally, this process will not 

provide timely feedback, and will only 

add to the burden of receiving untimely 

feedback while attempting to continue 

abstraction. Two commenters expressed 

concern about the accuracy of the 

validation process due to large 

fluctuations in the data dictionary 

guidelines. One of the commenters 

suggested that any modifications to the 

technical process should be published 

120 days before the effective/ 

implementation date and that the 

parameters of the validation process 

should be stated explicitly and 

documented. Several commenters 

suggested that hospitals should be 

notified about any validation rule 

changes at least 120 days before 

abstraction and that any validation 

process should not penalize hospitals 

for technical data issues. 

Response: The current validation 

process of 5 charts per quarter is 

designed to provide hospitals, 

regardless of size, with an estimate of 

their abstraction accuracy. The quarterly 

interval is designed to minimize 

abstraction burden by coinciding with 

required submission requirements for 

JCAHO-accredited hospitals. NonJCAHO accredited hospitals also need 

periodic feedback about their 

abstraction accuracy for quality 

improvement, and the current process is 

designed to provide this feedback. As 

noted above, CMS and JCAHO have 

agreed to release documents at a 

minimum of 120 days before 

implementation. All manuals contain 

data file submission requirements and 

programming formats for each quarter. 

Hospitals are encouraged to be aware of 

the release schedule and to ensure the 

proper Specifications Manual (data 

dictionary) is being used for the 

discharge time period specified. We will 

explore modifying the release date of 

updated Specifications Manuals to 

provide additional time to hospitals and 

vendors to incorporate these 

modifications. 

Comment: Three commenters did not 

believe the validation process of using 

5 charts over 4 patient populations is 

statistically reliable. The commenters 

recommended that we use 4 quarters of 

data to increase the number of charts. A 

commenter also recommended that we 

use as many as 25 charts. 

Response: As we noted above, 

although we will consider using 

additional quarters of data, we believe 

that the current 3 quarters stratified 

sample provides sufficiently reliable 

results. The abstraction accuracy 

estimate is an element level estimate, 

and the chart is considered a cluster of 

elements. Each quarterly validation 

sample generally contains 50 to 100 

elements clustered in 5 charts. Analysis 

of previous quarters of submitted data 

indicates that the clustering effect 

increases sampling variability by a 

relatively small proportion. However, 

the increase in sampling variability is so 

small that the sample still produces 

reliable validation rate estimates. The 

median hospital standard error using 

the three quarter stratified sample was 

about 3 percent. 

Time limitations prevent us from 

using 2005 fourth quarter calendar year 

discharges for purposes of making the 

FY 2007 annual payment determination, 

since the scheduled completion date of 

appeals would not occur until after the 

September 1, 2006 scheduled release 

date of the list of hospitals receiving full 

payment update. However, we will 

consider using 4 quarters of validation 

results (that is, fourth quarter 2005 

through third quarter 2006) for the FY 

2008 determination. Additionally, CMS 

factored cost, burden, and precision of 

the validation results in determining the 

current validation sampling 

methodology. The goal of the chart audit 

validation process is to ensure that the 

hospital is abstracting and submitting 

accurate data. In order to calculate 

quality measures, which are used to 

determine the standard of care, 

complete and accurate data are 

necessary. 

Comment: Eight commenters stated 

that hospitals may be negatively affected 

by the way CMS will determine the 80 

percent reliability. The stratified 

sampling method could result in a 

passing score for the first two quarters, 

but may result in an overall failure 

rating based on the results of the third 

quarter. 

Response: The stratified sampling 

method is designed to produce a single 

estimate of abstraction accuracy using 

three combined quarters of validation 

results. CMS uses three quarters’ results 

to provide a reliable estimate of 

sustained abstraction accuracy. 

Combining results from multiple 

quarters improves the reliability of the 

estimate, since it is possible that 

abstraction accuracy varies widely from 

quarter to quarter. Thus, it is possible 


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that one or two quarterly validation 

samples achieve a passing score above 

80percent, but a single quarterly 

validation score below 80 percent 

would drop the three combined quarter 

score below 80 percent. It is the weight 

of cases for a particular quarter that 

determines how much impact a single 

quarter will have on the overall 

reliability calculation. However, the 

aggregate approach improves the ability 

to accurately calculate the reliability of 

data submissions. 

g. Data Validation and Attestation 

For the FY 2007 update, we will 

revise and post up-to-date confidence 

interval information on the QualityNet 

Exchange Web site explaining the 

application of the confidence interval to 

the overall validation results. The data 

are being validated at several levels. 

There are consistency and internal edit 

checks to ensure the integrity of the 

submitted data; there are external edit 

checks to verify expectations about the 

volume of the data received. 

In the FY 2007 proposed IPPS rule, 

we proposed that hospitals attest to the 

completeness and accuracy of the data 

submitted to the QIO Clinical 

Warehouse in order to improve aspects 

of the validation checks (71 FR 24094). 

In order to meet this requirement, for 

each quarter, hospitals will have to 

verify the completeness and accuracy, 

including the volume, of the data 

submitted. We plan to provide 

additional information to explain the 

data completeness requirement as well 

as provide the relevant form to be 

completed on the QualityNet Exchange 

Web site. 

Comment: One commenter supported 

the requirement for hospitals to attest to 

the validity of their data. One 

commenter also suggested requiring 

hospitals to not only attest to the data, 

but to also subject a small number of 

hospitals to a random audit. Another 

commenter felt there are still significant 

issues with the completeness and 

adherence to sampling requirements. 

Response: CMS appreciates the 

commenter’s support for the attestation 

requirement and strives to continually 

improve the accuracy and reliability of 

the hospital quality data. In addition to 

the attestation requirement, CMS is 

currently studying the need, cost, and 

feasibility of alternative methods for 

assessing submission completeness and 

adherence to sampling requirements, 

including on-site random audits. 

Comment: One commenter did not 

want the hospital attestations to become 

too burdensome. The commenter 

recommended that if the attestation can 

be a part of the review period, the 

QualityNet Exchange Administrator 

should be allowed to review the data in 

the preview period, and electronically 

sign for its accuracy. At a minimum, the 

attestations should be able to be 

delivered electronically. 

Response: We welcome this 

suggestion, and agree that the electronic 

attestation would increase efficiency 

and lessen the burden for hospitals. We 

will investigate aspects, such as 

operational and legal requirements for 

attestation pertaining to electronic 

submission. 

Comment: One commenter requested 

that CMS establish and communicate to 

the field which quarters will be used in 

the calculation of the validation 

threshold. The commenter believes that 

CMS should provide notice to 

RHQDAPU program eligible hospitals 

which quarters will be included in the 

annual payment update prior to the 

beginning of the rulemaking process 

each year. 

Response: CMS is aware of and 

understands the commenters concerns 

in regards to the calculation of the 

validation threshold. However, we 

believe that the appropriate way to 

announce the quarters for which data 

must be submitted under the program is 

to announce them as part of the 

rulemaking process. 

h. Public Display and Reconsideration 

Procedures 

We will continue to display quality 

information for public viewing as 

required by new section 

1886(b)(3)(B)(viii)(VII) of the Act. Before 

we display this information, hospitals 

will be permitted to review their 

information as we have it recorded. 

For hospitals that CMS has 

determined do not meet the RHQDAPU 

program requirements for the applicable 

fiscal year who wish to appeal this 

determination, the appeals process set 

forth in 42 CFR Part 405, Subpart R (a 

Provider Reimbursement Review Board 

(PRRB) appeal) applies. However, in the 

FY 2007 IPPS proposed rule (71 FR 

24095) we noted that we believe it may 

be appropriate to establish a structured 

reconsideration process to precede the 

PRRB appeal for FY 2008 and 

subsequent fiscal years. 

Currently, a hospital may submit a 

letter setting out its reasons for 

requesting that we reconsider our 

decision that the hospital did not meet 

the RHQDAPU program requirements. 

We proposed to continue this process 

for FY 2007 RHQDAPU program 

decisions (71 FR 24095). However, we 

proposed to establish a deadline of 

November 1, 2006, for hospitals to make 

such requests related to the FY 2007 

RHQDAPU program decisions, which 

will give hospitals a minimum of 30 

days to submit reconsideration requests 

from the dates that the decisions are 

made public. Further, we proposed that 

the November 1, 2006 deadline also 

would apply to FY 2005 and FY 2006 

RHQDAPU program decisions and that 

a November 1 deadline would apply in 

all future fiscal years. CMS will 

officially respond to the letters 

submitted by hospitals. 

Further, we sought public comment 

specifically on the need for a more 

structured reconsideration process to 

precede any PRRB appeal for FY 2008 

and subsequent fiscal years (71 FR 

24095). We also sought comment on 

what such a process would entail. For 

example, we noted that such a process, 

if established, could include—

• A limited time, such as 30 days 

from the public release of the decision, 

for requesting a reconsideration; 

• Who in a hospital organization can 

request such a reconsideration and be 

notified of its outcome; 

• The specific factors that CMS will 

consider in such a reconsideration, such 

as an inability to submit data timely due 

to CMS systems failures; 

• Specific requirements for 

submitting a reconsideration request, 

such as a written request for 

reconsideration specifically stating all 

reasons and factors, including specific 

data elements, why the hospital believes 

it did meet the RHQDAPU program 

requirements; 

• Specific CMS components that 

would participate in the reconsideration 

process; and 

• The timeframe, such as 60 days, for 

CMS to provide its reconsideration 

decision to the hospital. 

We also solicited comments on the 

reasons for not establishing such a 

reconsideration process. 

Comment: One commenter 

recommended a structured 

reconsideration process for FY 2007 

RHQDAPU program decisions. This 

commenter supported reconsideration 

predicated on a written request 

specifically stating all reasons and 

factors why a hospital believes it did not 

meet the RHQDAPU program 

requirements. The commenter agreed 

with the deadline of November 1 for 

RHQDAPU program decisions, and a 

maximum of 60 days for a CMS 

response to the reconsideration. 

Response: We are pleased that the 

commenter supports reconsideration 

predicated on a written request stating 

all reasons and factors for a hospital not 

meeting the RHQDAPU program 

requirements and concurs with the 

timeframes we proposed. We expect to 


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Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48045 

move forward with establishing a 

structured reconsideration process for 

future RHQDAPU program decisions. 

Comment: Three commenters stated 

that the PRRB may not be the best 

review mechanism for appeals. A 

commenter suggested that CEOs should 

be able to submit their appeals in 

writing, stating all reasons and facts and 

that CMS should then establish a prePRRB review panel that does not 

involve any of the individuals who 

make the original determination. If the 

pre-PRRB review panel renders a 

decision against the hospital, the 

hospital can then go before the PRRB for 

a review. 

Response: We are pleased that the 

commenter supports reconsideration 

predicated on a written request stating 

all reasons and factors for a hospital not 

meeting the RHQDAPU program 

requirements. We expect to move 

forward with establishing a structured 

reconsideration process for future 

RHQDAPU program decisions. We will 

examine the feasibility of using a panel 

structure that does not include 

individuals involved in the original 

determination. However, because of the 

highly technical nature of this process, 

it may be necessary to consult with 

those individuals due to their 

specialized expertise. 

Comment: Three commenters 

supported establishing a process that 

could consider the reasons why a 

hospital did not meet the RHQDAPU 

program requirements. A commenter 

suggested that QIOs could be very 

helpful in developing and administering 

a reconsideration process. 

Response: We appreciate these 

comments and will consider the 

suggestion that QIOs have a role in a 

reconsideration process as we begin to 

implement the reconsideration process 

for FY 2007 and subsequent fiscal years. 

i. Conclusion 

After consideration of the public 

comments received, because the change 

in the percentage point reduction from 

0.4 percentage points to 2.0 percentage 

points is required by section 

1886(b)(3)(B)(viii)(I) of the Act, we are 

adopting as final, without modification, 

the proposed changes to § 412.64(d) of 

our regulations. 

After careful consideration of the 

public comments received, we are 

adopting as final the expanded quality 

measures we proposed. 

In response to public comments, we 

will require that reporting of the 

expanded quality measures begin with 

discharges occurring on or after the 

third calendar quarter of 2006 (July 

through September discharges). The 

deadline for hospitals to submit data for 

this quarter will be February 15, 2007. 

We are also setting the deadline for 

hospitals to complete and send the 

revised ‘‘Reporting Hospital Quality 

Data for Annual Payment Update Notice 

of Participation’’ form to their respective 

QIO, no later than August 15, 2006. 

With these modifications, after careful 

consideration of the public comments 

received, we are adopting these 

procedures as final. 

3. Electronic Medical Records 

In the FY 2006 IPPS final rule, we 

encouraged hospitals to take steps 

toward the adoption of electronic 

medical records (EMRs) that will allow 

for reporting of clinical quality data 

from the EMRs directly to a CMS data 

repository (70 FR 47420). We intend to 

begin working toward creating measures 

specifications and a system or 

mechanism, or both, that will accept the 

data directly without requiring the 

transfer of the raw data into an XML file 

as is currently done. The Department 

continues to work cooperatively with 

other Federal agencies in the 

development of Federal health 

architecture data standards. We 

encouraged hospitals that are 

developing systems to conform them to 

both industry standards and, when 

developed, the Federal Health 

Architecture Data standards, and to 

ensure that the data necessary for 

quality measures are captured. Ideally, 

such systems will also provide point-ofcare decision support that enables high 

levels of performance on the measures. 

Hospitals using EMRs to produce data 

on quality measures will be held to the 

same performance expectations as 

hospitals not using EMRs. 

Due to the low volume of comments 

we received on this issue in response to 

the FY 2006 proposed IPPS rule, in the 

proposed IPPS rule for FY 2007 (71 FR 

24095), we again invited comments on 

these requirements and options. In 

section IV.B.6. of the preamble to the FY 

2007 IPPS proposed rule, we also 

invited comments on the potential role 

of effective, interoperable health 

information on technology in valuebased purchasing. 

Comment: Most of the comments that 

were submitted on the adoption of 

electronic health records in the hospital 

settings focused on: 

• HIT associated cost implication for 

hospitals. 

• The time frame for implementation 

should be at least a 10-year window, to 

allow hospitals to obtain the financial 

and technical support needed for this 

initiative. 

• CMS statutory authority to 

encourage the use and adoption of HIT 

without new legislation. 

• Support for the initiative but 

recommended that CMS develop 

partnerships with affected parties to 

ensure its successful development. 

Response: After consideration of the 

public comments received, we will 

continue to pursue the adoption of 

electronic health records for the 

reporting of hospital quality data. In 

addition, for the future we will take all 

comments submitted under 

consideration as we move forward. 

B. Value-Based Purchasing 

1. Introduction 

CMS has undertaken a number of 

activities to improve the quality and 

efficiency of care delivered to Medicare 

beneficiaries. Currently, there are 

several different fee-for-service payment 

systems under Medicare that are used to 

pay health professionals and other 

providers based on the number and 

complexity of services provided to 

patients. In general, all providers to 

which a specific Medicare payment 

system applies receive the same amount 

for a service, regardless of its quality or 

efficiency. As a result, Medicare’s 

payment systems can direct more 

resources to hospitals that deliver care 

that is not of the highest quality or 

include unnecessary services (for 

example, duplicative tests and services 

or services to treat avoidable 

complications). Therefore, we are 

examining the concept of ‘‘value-based 

purchasing,’’ which may use a range of 

incentives to achieve identified quality 

and efficiency goals, as a means of 

promoting better quality of care and 

more effective resource use in the 

Medicare payment systems. In 

considering the concept of value-based 

purchasing, we are working closely with 

stakeholder partners, including health 

professionals and providers. In the FY 

2007 IPPS proposed rule (71 FR 24095), 

we sought public comment on valuebased purchasing as related specifically 

to hospitals. 

We discussed CMS’ and Congress’

initial steps toward hospital value-based 

purchasing, which include the Premier 

Hospital Quality Incentive 

Demonstration, the RHQDAPU program 

authorized by section 501(b) of Pub. L. 

108–173 (MMA), and the extended and 

expanded RHQDAPU program 

authorized by section 5001(a) of Pub. L. 

109–171 (DRA). (The RHQDAPU 

program was also discussed in section 

IV.A. of the preamble to the proposed 

rule.) In addition, we discussed the 

issues that must be considered in 


bajohnson on PROD1PC67 with RULES2
48046 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

20The Premier Hospital Quality Incentive 

Demonstration was authorized under section 402 of 

Pub. L. 90–248, Social Security Amendments of 

1967 (42 U.S.C. 1395b–1). This section authorizes 

certain types of demonstration projects that waive 

compliance with the regular payment methods used 

in the Medicare program. 

21For more information about CMS’ Hospital 

Quality Initiative, see http://www.cms.hhs.gov/ 

HospitalQualityInits/. 

22 Institute of Medicine, ‘‘Performance 

Measurement: Accelerating Improvement,’’

December 1, 2005, available at http://www.iom.edu/ 

CMS/3809/19805/31310.aspx. 

23The three structural measures are: (1) 

Computerized provider order entry; (2) intensive 

care intensivists; and (3) evidence-based hospital 

referrals. 

developing a plan to implement a valuebased purchasing plan beginning with 

FY 2009 for Medicare payments for 

subsection (d) hospitals. This plan is 

required by section 5001(b) of Pub. L. 

109–171. For each of the required 

planning issues (measures, data 

infrastructure, incentives), we discussed 

CMS’ activities to date and solicited 

comments on outstanding policy 

questions. Next, we discussed options 

for implementation of section 5001(c) of 

Pub. L. 109–171, which authorizes 

quality adjustment to DRG payments for 

certain conditions that were not present 

on hospital admission. We solicited 

input about detailed design 

considerations related to each of these 

issues and the advantages and 

disadvantages of possible approaches to 

planning and implementing hospital 

value-based purchasing. 

Finally, we discussed and invited 

comments on how to encourage 

hospitals to effectively use health 

information technology to improve 

efficiency, processes, and health care 

outcomes, through, for example, 

adopting interoperable health 

information technology. 

2. Premier Hospital Quality Incentive 

Demonstration 

One of the ways in which CMS is 

testing innovative potential approaches 

to improving quality is through 

demonstrations and pilot projects. The 

demonstration most relevant to 

hospitals is the Premier Hospital 

Quality Incentive Demonstration. 

Premier, Inc., a nationwide alliance of 

not-for-profit hospitals, submitted an 

unsolicited proposal for consideration 

by CMS.20 We have partnered with 

Premier to conduct a demonstration that 

is designed to test whether the quality 

of inpatient care for Medicare 

beneficiaries improves when financial 

incentives are provided. Under the 

demonstration, about 270 hospitals are 

voluntarily providing data on 34 quality 

measures related to 5 clinical 

conditions: heart attack, heart failure, 

pneumonia, coronary artery bypass 

graft, and hip and knee replacements. 

Using the quality measures, CMS 

identifies hospitals with the highest 

quality performance in each of the five 

clinical areas. Hospitals scoring in the 

top 10 percent in each clinical area 

receive a 2-percent bonus payment in 

addition to the regular Medicare DRG 

payment for the measured condition. 

Hospitals in the second highest 10 

percent receive a 1-percent bonus 

payment. In the third year of the 

demonstration, some hospitals that do 

not achieve absolute improvements 

above the demonstration’s first year 

composite score baseline (the lowest 20 

percent) for that condition will have 

their DRG payments reduced by 1 or 2 

percent, depending on how far their 

performance is below the baseline. 

Following the first year of the 

demonstration (FY 2004), CMS awarded 

a total of $8.85 million to participating 

hospitals in the top two deciles for each 

clinical area. In the aggregate, quality of 

care improved in all five clinical areas 

that were measured. Preliminary 

information from the second year of the 

demonstration indicates that quality is 

continuing to improve, particularly for 

the poorest performing hospitals. 

Additional information on the Premier 

Hospital Quality Incentive 

Demonstration is available on the CMS 

Web site at: http://www.cms.hhs.gov/ 

HospitalQualityInits/ 

35_HospitalPremier.asp. 

3. RHQDAPU Program 

We believe that the acts of collecting 

and submitting performance data and of 

publicly reporting comparative 

information about hospital performance 

seem to be a strong incentive to 

encourage hospital accountability. 

Measurement and reporting can help 

focus the attention of hospitals and 

consumers on specific goals and on 

hospitals’ performance relative to those 

goals. 

a. Section 501(b) of Pub. L. 108–173 

(MMA) 

Since 2003, we have operated the 

Hospital Quality Initiative,21 which is 

designed to stimulate improvements in 

hospital care by standardizing hospital 

performance measures and data 

transmission to ensure that all payers, 

hospitals, and oversight and accrediting 

entities use the same measures when 

publicly reporting on hospital 

performance. Section 501(b) of Pub. L. 

108–173 authorized us to link the 

collection of data for an initial starter set 

of 10 quality measures to the Medicare 

annual update of the standardized 

payment amount for hospital inpatient 

operating costs (also known as the 

RHQDAPU program). For FYs 2005 and 

2006, hospitals that met the RHQDAPU 

program’s requirements received the full 

annual payment update to their 

inpatient operating costs, while 

hospitals that did not comply received 

an update that was reduced by 0.4 

percentage points. For FY 2005, 

virtually every hospital in the country 

that was eligible to participate 

submitted data (98.3 percent), and 

approximately 96 percent of all 

participating hospitals met the 

requirements to receive the full update. 

The data regarding the starter set of 10 

quality measures as well as additional, 

voluntarily-reported data on other 

quality measures, are available to the 

public through the Hospital Compare 

Web site at: http:// 

www.hospitalcompare.hhs.gov. 

b. Section 5001(a) of Pub. L. 109–171 

(DRA) 

As discussed in section IV.A. of the 

FY 2007 IPPS proposed rule (71 FR 

24091), for FY 2007 and each 

subsequent year, section 5001(a) of Pub. 

L. 109–171 amended section 

1886(b)(3)(B) of the Act and made 

changes to the program established 

under section 501(b) of Pub. L. 108–173. 

These changes require us to expand the 

number of measures for which data 

must be submitted, and to change the 

percentage point reduction in the 

annual payment update from 0.4 

percentage points to 2.0 percentage 

points for subsection (d) hospitals that 

do not report the required quality 

measures in a form and manner, and at 

a time, specified by the Secretary. 

Effective for payments beginning with 

FY 2007, new section 

1886(b)(3)(B)(viii)(IV) of the Act 

requires the Secretary to begin to adopt 

the expanded set of performance 

measures set forth in the IOM’s 2005 

report entitled, ‘‘Performance 

Measurement: Accelerating 

Improvement.’’ 22 Those measures 

include the HQA measures, the 

HCAHPS patient perspective survey, 

and three structural measures.23

Effective for payments beginning with 

FY 2008, the Secretary must add other 

measures that reflect consensus among 

affected parties and may replace 

existing measures as appropriate. New 

section 1886(b)(3)(B)(viii)(VII) of the Act 

requires the Secretary to establish 

procedures for making hospital quality 

data on these measures available to the 

public. We discuss our responses to 


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24Medicare Payment Advisory Commission: 

Report to Congress: Medicare Payment Policy, 

March 2005, pp. 186–187, available at: http:// 

www.medpac.gov/publications/generic_

report_display.cfm?report_type_id=1&

sid=2&subid=0. 

25 Institute of Medicine, ‘‘Performance 

Measurement: Accelerating Improvement,’’

December 1, 2005, available at http://www.iom.edu/ 

CMS/3809/19805/31310.aspx. 

public comments on these requirements 

in section IV.A. of this preamble. 

4. Plan for Implementing Hospital 

Value-Based Purchasing Beginning With 

FY 2009 

Section 5001(b) of Pub. L. 109–171 

requires us to develop a plan to 

implement hospital value-based 

purchasing beginning with FY 2009. 

The plan must consider the following 

issues: (a) The ongoing development, 

selection, and modification process for 

measures of quality and efficiency in 

hospital inpatient settings; (b) the 

reporting, collection, and validation of 

quality data; (c) the structure of 

payment adjustments, including the 

determination of thresholds of 

improvements in quality that would 

substantiate a payment adjustment, the 

size of such payments, and the sources 

of funding for the payments; and (d) the 

disclosure of information on hospital 

performance. Section 5001(b) of Pub. L. 

109–171 also calls for us to consult with 

affected parties and to consider relevant 

demonstrations in developing the plan. 

Each of these issues (measure 

development and refinement, data 

infrastructure, incentives, and public 

reporting) is discussed below, along 

with our activities to date and 

outstanding policy questions. 

In the FY 2007 IPPS proposed rule (71 

FR 24097), we sought comments on 

these issue areas and outstanding policy 

questions. We received 50 items of 

correspondence, which included 37 

comments from hospitals and health 

care systems, including the American 

Hospital Association and many State 

hospital associations, the Federation of 

American Hospitals, the National 

Association of Public Hospitals, the 

Association of American Medical 

Colleges, and the Catholic Health 

Association. From the purchaser and 

consumer perspectives, we received 

comments from The Leapfrog Group, the 

National Business Coalition on Health, 

the Consumer-Purchaser Disclosure 

Project, the National Breast Cancer 

Coalition Fund, and Consumers Union. 

The medical device and information 

technology industries also provided 

comments. 

As a preliminary matter, almost half 

of all commenters also made 

recommendations on the process for 

developing the Medicare value-based 

purchasing plan. The AHA, the State 

hospital associations, the Voluntary 

Hospital Association, and the 

Federation of American Hospitals all 

stressed that the HQA be the foundation 

for planning. Several other commenters 

noted the value of an iterative process, 

with multiple opportunities for public 

comment to build consensus. 

We present a summary of the 

comments by major issue area below 

and our response. 

a. Measure Development and 

Refinement 

As we explore the potential 

connections between performance 

measurement and incentives, we would 

like to better understand how to develop 

valid, meaningful, current performance 

measures that are aligned with other 

hospital measurement activities, and an 

enterprise for development, validation, 

consensus building, and maintenance of 

these measures. In addition, before 

measures could be used to compare the 

relative quality or cost of care provided 

by hospitals, we believe that the 

information would need to be 

appropriately adjusted to account for 

relevant differences among hospitals 

and among their patients. The 

availability of appropriate measures on 

which consensus might be achieved 

depends on the state of the art of 

research on measure development. 

We believe that it is desirable for 

performance measures to be based on 

appropriate evidence, effectively related 

to desired outcomes, derived in a 

transparent fashion involving 

consultation with experts and affected 

hospitals, and routinely updated. 

MedPAC’s 2005 Report to Congress 24

stated that measures should be 

evidence-based; that collecting and 

analyzing data should not be unduly 

burdensome for the provider or for 

CMS; that risk adjustment should be 

sufficient to deter providers from 

avoiding patients who might lower 

performance scores; that most providers 

should be able to improve on the 

measures; that measures should apply to 

a broad range of care and providers; that 

measures should capture aspects of care 

that are under the control of the 

providers being measured; and that 

areas of care being measured should be 

those needing improvement. 

The IOM’s December 2005 report, 

‘‘Performance Measurement: 

Accelerating Improvement’’ 25

recommended that measure sets should 

build on the work of key public- and 

private-sector organizations; that 

national performance measures that 

have been approved through ongoing 

consensus processes led by major 

stakeholder groups are an appropriate 

starting point; that the limited scope of 

current measures should be broadened 

to address efficiency, equity, and 

patient-centeredness; that quality, costs, 

and outcomes of care should be 

measured over longer time intervals; 

and that measures be applicable to more 

than one setting so that providers can 

share accountability for a patient’s care 

(pp. 8–11). 

The plan for hospital value-based 

purchasing mandated by Pub. L. 109–

171 must address the ongoing 

development, selection, and 

modification process for measures of 

quality and efficiency in hospital 

inpatient settings. We have worked 

collaboratively in defining consistent, 

meaningful performance measures for 

hospitals and other providers for a 

number of years. The efforts of CMS and 

its stakeholder partners to develop 

standardized performance measures 

increase the likelihood that the 

measures will be valid, reliable, and 

widely accepted as viable indicators of 

performance. Standardized measures 

also reduce the burden for hospitals that 

would otherwise have to report different 

measures to multiple entities, such as 

accrediting bodies and State agencies. 

CMS and the HQA (which includes 

representatives from consumers, 

hospitals, health professionals, 

purchasers, and accreditation 

organizations) collectively selected a 

starter set of 10 consensus-derived 

quality measures for public reporting, 

which was incorporated into the 

RHQDAPU program authorized by 

section 501(b) of Pub. L. 108–173. (See 

section IV.A. of the preamble to the FY 

2007 IPPS proposed rule (71 FR 24091) 

for a detailed discussion of the 

RHQDAPU program.) The measures 

were endorsed by the NQF, a nonprofit 

voluntary organization that represents a 

broad range of health care stakeholders 

and endorses consensus-based national 

performance standards. CMS has also 

worked with the JCAHO to align 

hospital performance measures that we 

share in common, thereby reducing 

hospitals’ reporting burden. 

In April and September 2005, CMS 

and the HQA identified additional NQFendorsed measures of hospital 

performance. In section IV.A. of the 

preamble to the FY 2007 IPPS proposed 

rule (71 FR 24093), we listed these 

measures and proposed to require 

hospital reporting on these measures 

under an expanded version of the 

RHQDAPU program authorized by 

section 5001(a) of Pub. L. 109–171. 

These measures are discussed in more 


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detail on the CMS Web site at: http:// 

www.cms.hhs.gov/HospitalQualityInits/

downloads/HospitalHQA2004

_2007200512.pdf. In this final rule, we 

have included the 20 NQF-endorsed 

measures currently reported on our 

Hospital Compare Web site, as well as 

two additional NQF-endorsed measures, 

as requirements for hospital reporting 

under the FY 2007 RHQDAPU program. 

Two additional outcome measures 

(30-day mortality for heart attack and 

heart failure) have been endorsed by the 

NQF for public reporting. Further, in 

October 2006, we will be implementing 

the HCAHPS survey of inpatient 

perceptions of their hospital care 

experiences, with the intention that an 

aggregate HCAHPS measure will 

become a publicly reported performance 

measure. HCAHPS was endorsed by 

the NQF in May 2005. Beyond these, we 

could also consider including additional 

measures from the Surgical Care 

Improvement Project, measures relating 

to a hospital’s use of information 

technology that result in improved 

patient outcomes, implementation of 

data standards, and preventable 

readmissions as quality reporting 

measures under the RHQDAPU program 

or the hospital value-based purchasing 

program. 

Comment: Virtually all of the 

commenters discussed the measures 

issues. The commenters focused on 

three major topics: (1) The use of quality 

versus efficiency measures, (2) the use 

of process versus outcome measures, 

and (3) the importance of including 

measures that capture aspects of care 

from the patient experience, including 

access, respect, and disparities/ 

differences experienced by patients of 

different races and ethnic backgrounds. 

From the perspective of virtually all 

provider associations, the hospital 

value-based purchasing program should 

focus on evidence-based process 

measures. The majority of commenters 

also believed that, for now, measures 

should focus solely on quality and that 

measures of efficiency are premature. 

Several commenters also stressed that 

the goal of the program should be to 

improve overall quality of care, rather 

than to decrease costs. 

Commenters from the medical device 

industry raised the concern that a 

reliance on process measures when 

assessing efficiency could inhibit access 

to new technologies and urged that riskadjusted outcome measures be used 

instead. Two provider associations 

urged that payment systems must 

ensure that evolving and improved 

technologies continue to be available to 

all patients and that efficiency measures 

not inhibit the adoption of new qualityenhancing technologies. 

Commenters representing the 

purchaser and consumer perspectives 

stressed the importance of including 

measures that reflect quality, efficiency, 

equity, patient experience, and structure 

and urged that all measures be 

nationally endorsed, scientifically valid, 

risk-adjusted, and regularly updated. 

Several consumer groups and safety net 

providers also noted the importance of 

including measures that could capture 

disparities in care experienced by 

patients of different races and ethnic 

backgrounds. On a related note, the 

Association of American Medical 

Colleges and safety net providers 

emphasized the importance of assuring 

a level playing field to account for 

differences among types of hospitals 

and patient demographics. 

Several commenters noted that 

developing measures is a public good 

and that substantial funding should be 

provided to support the development of 

consumer-relevant measures to fill 

existing gaps, especially for measures of 

efficiency and equity. 

Several commenters supported 

including measures from the Surgical 

Care Improvement Program (SCIP) 

because surgical wounds and infections 

are among the most common and 

harmful hospital-acquired infections. 

Regarding information technology, the 

response was mixed. Some commenters 

supported the inclusion of measures 

that would encourage IT adoption, 

while others noted the obstacle of 

ongoing issues with current health IT 

standards. 

b. Data Infrastructure 

Implementing measures on which to 

base a value-based purchasing system 

would require an infrastructure that 

could collect appropriate information 

from hospitals, store and aggregate it as 

necessary, and prepare it for use in 

determining appropriate incentives. 

Hospitals would likely need to be able 

to generate appropriate data as input for 

calculation of the measures. For some 

measures, data that hospitals already 

submit with claims for payment or for 

some other administrative purpose may 

be sufficient. For other measures, 

hospitals might need to provide 

information regarding their structure 

and resources or about the specifics of 

medical care provided to patients or the 

outcomes of that care. For that 

information, hospitals may need special 

software to assist with data collection 

and secure channels by which they can 

transmit data. In the FY 2007 IPPS 

proposed rule, we solicited comments 

on how to develop an infrastructure that 

would facilitate the efficient 

transmission and storage of data, and 

especially, as discussed in sections 

IV.A.3. and IV.B.6. of the preamble to 

that proposed rule (71 FR 24095, 

24100). We especially solicited 

comments on how electronic medical 

and health record systems could help 

improve care and be integrated into or 

facilitate the data collection process. 

We did not receive any comments 

specific to this issue. 

Implementation would require 

communication channels and data 

warehouses with sufficient capacity and 

flexibility to acquire and store data from 

hospitals. We are considering how we 

might validate the submitted data, 

determine incentives based on that data, 

and transmit these values to Medicare’s 

fiscal intermediaries. The potential 

infrastructure would need to be 

extremely secure and afford the most 

privacy protection permitted by law. It 

would also need to minimize the burden 

of data collection and transmission on 

providers. It would need to be accurate, 

efficient, and cost-effective for CMS to 

administer. 

The plan for hospital value-based 

purchasing mandated by Pub. L. 109–

171 must address the reporting, 

collection, and validation of quality 

data. Over the past few years, we have 

developed a data collection and 

reporting infrastructure for the 

RHQDAPU program that can transmit 

performance measurement data via 

secure channels for its submission, 

storage, analysis, validation, and 

reporting. Specifically, to facilitate data 

collection, we have developed the 

CART software to assist hospitals in the 

collection of clinical and administrative 

data used to measure performance 

improvement. CART, which is provided 

to hospitals free of charge, is a powerful 

application that hospitals and their 

designees can use to abstract clinical 

data needed for performance 

measurement from medical records. 

This tool was designed and developed 

by CMS with input from the JCAHO and 

the Medicare QIOs. We have also 

developed the QualityNet Exchange 

system for secure transmission of data to 

the QIO Clinical Warehouse. 

QNetExchange.org is the CMS-approved 

Web site for secure communications and 

data exchange between two or more of 

the following: Hospitals, performance 

measurement system vendors, end stage 

renal disease networks and facilities, 

QIOs, and CMS. 

For data warehousing, we have a 

claims warehouse for Medicare Part A 

data, which maintains the claims for the 

most recent 42 months. We also have a 

QIO Clinical Warehouse that currently 


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contains information on the starter set of 

10 quality measures collected under the 

RHQDAPU program, as well as 

additional voluntarily reported 

measures. We must assess the validity of 

the RHQDAPU information because of 

its use for quality improvement, public 

reporting, and determining hospitals’

annual payment updates under the 

RHQDAPU program. Validation 

activities assess the reliability of the 

data that a hospital has submitted, as 

evidenced by the consistency between a 

hospital’s abstraction and reabstraction 

by an independent party. 

We are currently using a contractor, 

the CDAC, to carry out the validation 

process under the RHQDAPU program. 

Hospitals are required to submit certain 

quality data to the QIO Clinical 

Warehouse within 4.5 months of the 

end of each quarterly reporting period. 

The steps in the validation process are: 

(1) Check for duplicates; (2) draw a 

sample; (3) obtain copies of medical 

records; (4) request and complete CDAC 

abstraction; (5) post results on 

QualityNet Exchange for hospitals’

review; and (6) resolve validation 

appeals. In the FY 2007 IPPS proposed 

rule (71 FR 24098), we sought 

comments on how the data submission 

and validation processes that we 

currently use for the RHQDAPU 

program might be adaptable to a 

hospital value-based purchasing 

program. 

We did not receive any comments 

specific to this issue. 

One of the key challenges we face in 

considering implementation of hospital 

value-based purchasing is minimizing 

the length of time between our receipt 

of data and our ability to provide 

feedback to hospitals on the data. Some 

of the hospitals that are participating in 

the RHQDAPU program and the Premier 

Hospital Quality Incentive 

Demonstration have asked for more 

timely feedback on their performance. 

We recognize that a long delay between 

the provision of services and feedback 

about the quality of those services may 

impede both improvement efforts and a 

hospital’s motivation to improve. The 

current lag time between the end of the 

quarterly reporting period and the 

availability of performance feedback 

under the RHQDAPU program is 

approximately 9 months. Hospitals have 

4.5 months to complete their paper 

medical records and to submit 

information to the QIO Clinical 

Warehouse, which roughly coincides 

with JCAHO’s timeline for submission 

of data to their ORYX Core Measure 

Performance Measurement System. 

Another 4.5 months are required to 

accomplish the steps in the validation 

process. 

We are considering options to 

decrease the overall length of time 

between our receipt of data and our 

ability to provide feedback to hospitals, 

and we are interested in comments on 

these options. First, we are considering 

whether more frequent data 

submissions, such as monthly 

submissions, would decrease the time 

between the provision of services and 

feedback about the quality of those 

services. We are aware that some 

hospitals and their vendors already 

submit quality data on a monthly basis 

to JCAHO. However, unless we reduced 

the sample size per reporting period, the 

process of validating each month the 

same number of records that are 

currently validated each quarter would 

increase costs significantly. On the other 

hand, if we reduced the sample size per 

reporting period, the monthly numbers 

might be too small to provide for 

adequate validation. Second, we could 

shorten the data submission period, 

which is a significant source of lag time. 

This option would require hospitals to 

submit information to the data 

warehouse more quickly, which could 

increase the possibility that hospitals 

would submit less complete data. In 

addition, this option would require 

coordination with JCAHO to keep 

submission timelines congruent, which 

reduces hospitals’ reporting burden. 

Third, we could eliminate the validation 

appeals process, which would reduce 

the lag time by up to 2 months. Fourth, 

we could create an expanded role for 

the third party vendors that assist 

hospitals with submitting quality data to 

CMS and JCAHO. For example, CMS 

could certify third party vendors to also 

provide standardized validation services 

and quick performance feedback to their 

hospital customers. 

Comment: Approximately half of the 

commenters’ responses included 

comments specific to data issues. The 

commenters addressed two issues in 

particular: (1) The data challenges 

confronted by small hospitals and (2) 

the timeliness of feedback versus the 

burden of submission. 

A quarter of commenters raised the 

special challenges confronted by small, 

in particular rural, hospitals because of 

the small sample sizes they often 

encounter for many measures and the 

volatility and instability in measure 

results under these circumstances. 

Regarding timeliness and the lag time 

between reporting and feedback, 

commenters from different stakeholder 

groups had opposing perspectives. 

Provider commenters were concerned 

that monthly reporting would be 

extremely burdensome, while purchaser 

and consumer advocate commenters 

suggested that monthly submission 

could improve the timeliness of data. 

All commenters stressed the importance 

of data validation. Consumers Union 

stressed that validation is critical and 

need not increase the time lag. It 

recommended the use of rolling 

publication of data with quarterly 

updates. Two commenters endorsed the 

concept that the data submission and 

validation processes could be 

streamlined through use of electronic 

health records (EHRs), which could also 

provide an incentive for adoption of 

EHRs. The Federation of American 

Hospitals found none of the options 

presented in the proposed IPPS rule for 

reducing the lag time between 

submission and feedback to be 

acceptable. 

Several commenters mentioned the 

benefits of augmenting billing forms 

with clinical data elements and cited 

the approach of the Pennsylvania 

Healthcare Cost Containment Council. 

c. Incentive Methodology 

While measurement of the quality of 

care and of resources use may be 

advantageous in itself, we are 

considering whether and what kind of 

incentives can further improve 

outcomes. The potential design of 

incentives in a value-based purchasing 

system presents many choices. The 

implementation plan for hospital valuebased purchasing mandated by Pub. L. 

109–171 must address the structure of 

payment adjustments, including the 

determination of thresholds of 

improvements in quality that would 

substantiate a payment adjustment, the 

size of such payments, and the sources 

of funding for the value-based 

payments. In the FY 2007 IPPS 

proposed rule (71 FR 24098), we sought 

comments on the merits of and 

alternatives to all of the approaches to 

the design of a value-based purchasing 

methodology that are discussed below. 

(1) How should incentives be 

structured? 

A number of options exist for the 

structure of potential incentives. The 

incentive methodology could include 

differential incentives depending on 

whether hospitals exceed a particular 

standard of performance. To reflect 

expectations of continued improvement 

among hospitals, the standard could be 

raised in predictable steps over time. 

Alternatively, incentives could be 

structured to reward hospitals that 

improve from a baseline level of 

performance. These approaches could 

be combined to develop an incentive 


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48050 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

26Budget of the United States Government, Fiscal 

Year 2007, available at: http://www.whitehouse.gov/ 

omb/budget/fy2007/. 

methodology that includes both 

attaining benchmarks and improving 

care. 

Comment: Approximately half of the 

commenters responded to at least one of 

the questions on incentives, and 

comments varied widely on these 

issues. Most commenters saw the 

combination of incentives to reward 

continuous improvement over time and 

incentives for attainment of specific 

benchmarks as most desirable. However, 

there was disagreement about the value 

of absolute benchmarks. Several 

commenters favored developing a fixed 

standard, rewarding hospitals that meet 

or exceed the standard, and when the 

majority achieves this standard, either 

raising the standard or selecting another 

measure with a fixed standard. They 

commented that the bar should be high 

enough to serve as an effective target, 

but not so high as to become attainable 

by only a small number of providers. By 

contrast, one commenter believed that a 

fixed benchmark discourages hospitals, 

particularly small and rural hospitals, 

because it might not reflect their unique 

circumstances. 

Almost half of all commenters 

emphasized the importance of aligning 

hospital and physician incentives so 

that everyone will be working toward 

the same goals of improving quality and 

providing appropriate care. 

(2) What level of incentive is needed? 

Value-based purchasing incentives 

should be targeted to that level needed 

to achieve a desired level of 

performance. Our experience with 

implementing section 501(b) of Pub. L. 

108–173 indicates that a targeted 

incentive, coupled with active 

management by CMS, can encourage 

reporting on quality measures. Nearly 

every eligible hospital has been willing 

and able to submit the required data in 

order to receive the full payment update 

under the RHQDAPU program. 

Similarly, our experience with the 

Premier Hospital Quality Incentive 

Demonstration indicates that a 1 or 2 

percent bonus, coupled with potential 

reductions for poor performance, may 

stimulate improvement. Further 

experience in ascertaining how 

hospitals respond to incentives will be 

important for examining incentives over 

time. 

Comment: A number of commenters 

across the stakeholder spectrum 

responded that the annual IPPS update 

is proving to be a sufficient incentive to 

encourage virtually all hospitals to 

participate in the RHQDAPU program 

and that the current level of a 1–2 

percent incentive is appropriate. 

Commenters noted that an additional 

portion of the update could be made 

conditional upon achieving specified 

performance goals. 

Many provider commenters stated 

that a system of rewards should increase 

payments or reduce regulatory burden 

for successful providers and urged that 

incentives involving penalties should 

not be used because the basic level of 

DRG payment does not now cover costs 

for more than one-third of hospitals. 

Several provider commenters suggested 

that rewards should be large enough to 

cover the costs of implementing process 

changes and to allow for reinvestment 

in quality improvement efforts. One 

provider commenter also urged that 

incentive structures should be gradual 

to avoid ‘‘cliff’’ effects in either rewards 

or penalties. 

(3) What should be the source of 

incentives? 

The President’s FY 2007 Budget 

indicates support for identifying and 

testing ‘‘budget-neutral incentives that 

will stimulate Medicare providers to 

improve performance on quality and 

efficiency measures.’’ 26 We do not 

believe that providing additional 

aggregate funding to finance 

performance-based incentives is either 

supportable or necessary. One approach 

might be to examine how we could 

identify and apply measurable savings 

achieved by reducing care that is 

unnecessary or otherwise inappropriate. 

For example, we may examine 

possibilities of improving care 

coordination, whether this could 

produce measurable savings, and 

whether some of the savings generated 

in one payment system could be used 

for incentives in another, as long as 

these reforms do not provide 

inappropriate incentives to stop 

providing necessary care. For instance, 

appropriate quality of care and effective 

resource use in hospitals and other 

institutional providers might generate 

savings that could be used for incentives 

for both physicians and facilities. 

Comment: Several hospital 

association and individual provider 

commenters suggested that savings from 

improved care coordination could be a 

source of funding for incentives and 

recommended studying whether savings 

generated in one payment system could 

be used for payments in another setting. 

One commenter noted the importance 

of assuring that funds designated for 

rewards be fully allocated to hospitals 

and urged that a program designed to 

reward improving quality should not 

become an arbitrary cost-cutting 

mechanism. 

The budget-neutral shared savings 

approach currently used in the Leapfrog 

Hospital Rewards Program was cited by 

several commenters as a model worth 

considering, though the commenters 

noted that savings are harder to identify 

in the Medicare DRG-based system than 

in the commercial per diem systems 

where the Leapfrog Program is currently 

operating. 

(4) What should the form of incentives 

be? 

Potential approaches for incentives 

include making an add-on payment to 

the base payment for individual 

inpatient hospital services or providing 

periodic, lump-sum payments on a 

monthly, quarterly, or annual basis. 

Under the RHQDAPU program, 

hospitals that do not submit the 

required data receive a decrease in the 

standardized payment amount made for 

all inpatient operating costs for the 

applicable fiscal year. In a hospital 

value-based purchasing system, perservice payments might be made only in 

connection with the services directly 

associated with the particular measure 

for which the hospital achieved a good 

result. Alternatively, lump-sum 

payments might be made on a periodic 

basis to hospitals that achieve particular 

performance targets. The preferable 

approach may depend on operational 

concerns, the strength of incentive 

effects, and other aspects of the design. 

In the FY 2007 IPPS proposed rule (71 

FR 24099), we sought comments on this 

issue. 

Comment: We received three 

comments on this issue, and all 

commenters favored periodic lump-sum 

payments over other options. 

(5) What should the timing of incentives 

be in relation to performance? 

Any value-based purchasing system 

should seek a balance between 

rewarding desired performance close to 

when it occurs and ensuring the 

accuracy of both performance 

measurement and incentives. Given the 

lag times for collecting and reviewing 

different types of data, some measures 

may be calculated quickly after the 

period of performance, while data lag 

times for other measures may be longer. 

For instance, structural measures could 

affect incentives soon after they are 

collected. Other measures that are based 

on experience over a time interval may 

require some time for measured events 

to manifest. An example of this type of 

measure would be the rate of mortality 

within 30 days of hospitalization. 


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27See CMS’ Hospital Compare Web site, available 

at: http://www.hospitalcompare.hhs.gov/; Nursing 

Home Compare Web site, avaialble at: http:// 

www.medicare.gov/NHCompare; Home Health 

Compare Web site, avaialble at: http:// 

www.medicare.gov/HHCompare/Home.asp; Dialysis 

Facility Compare Web site, available at: http:// 

www.medicare.gov/Dialysis. 

We did not receive any comments 

specific to this issue. 

(6) How should we develop composite 

scores? 

Encouraging improved performance 

could be facilitated by valid and reliable 

methods to aggregate performance data 

into single composite scores. Composite 

scoring may also improve consumer 

understanding of complex performance 

indicators by combining measures of 

many dimensions of care into a single 

score. One example of a composite 

scoring methodology that we used for 

the Premier Hospital Quality Incentive 

Demonstration (discussed in detail 

above) is a modification of the 

‘‘opportunity model,’’ which can be 

used to address individual weighting, 

missing data, and sensitivity to case 

volumes. For example, a hospital that 

has few or no cases for a particular 

dimension of care could receive a low 

score, yet that measure is equally 

weighted with others in the composite. 

Under the opportunity model, a 

composite may be developed for a 

disease category by dividing the total 

number of successful interventions by 

the total number of opportunities for the 

same targeted interventions. Some of the 

advantages of the opportunity model are 

that individual measures are weighted 

by the volume of opportunities for the 

associated intervention for a particular 

hospital; missing values for a particular 

aspect of care provided by an individual 

hospital would not prevent that hospital 

from being represented in a public 

report; and composite measures may 

easily accommodate the addition of 

individual measures. 

The ‘‘appropriate care measure’’

(ACM) is another composite scoring 

methodology, which we used in 

connection with the QIOs. The ACM 

scoring methodology is patient-centric. 

For a hospital to receive credit for 

treating a patient well, the hospital must 

have met the standard for every measure 

applicable to that patient’s condition. 

There are also a number of proprietary 

composite measures, such as those used 

by Solucient, Healthgrades, 

CareScience, and U.S. News & World 

Report. In the FY 2007 IPPS proposed 

rule (71 FR 24099), we solicited 

comments on the use of composite 

scoring for hospital value-based 

purchasing and on the various 

composite scoring methodologies. 

Comment: Five commenters 

supported the use of the ‘‘opportunity 

model.’’ No comments were received 

regarding the ‘‘appropriate care model.’’

Several commenters urged that further 

research and consumer testing be done 

around the development and display of 

measure composites. Several other 

commenters urged that while 

composites are useful, they should not 

be the only information available; 

instead, information should be 

presented in various ways, including 

composite scores, individual scores 

making up the composite, statistics 

supporting the score, and graphics. 

Value-based purchasing methods are 

still under development, and 

anticipating their potential effects on 

the health care system is difficult. We 

understand that unintended 

consequences may result from the 

implementation of these methods. We 

believe that we will need to assess 

incentives and evaluate their effects so 

that we can revise them quickly as we 

learn more about their impact on 

hospitals and on inpatient hospital 

services provided to Medicare 

beneficiaries. 

We did not receive any comments 

specific to this issue. 

d. Public Reporting 

The plan for hospital value-based 

purchasing mandated by Pub. L. 109–

171 must address the public disclosure 

of information on hospital performance. 

CMS currently provides public 

reporting of quality information through 

the ‘‘Compare’’ Web sites for hospitals, 

nursing homes, home health agencies, 

and dialysis facilities.27 The Compare 

Web sites provide comparative quality 

information to consumers and others to 

help guide choices and drive 

improvements in the quality of care 

delivered in these settings. Besides 

providing Medicare beneficiaries and 

their health professionals with 

information to assist them in making 

informed health care decisions, public 

reporting of comparative performance 

data also provides information that is 

useful to health care consumers who are 

not Medicare beneficiaries. For 

example, a consumer who has a Health 

Savings Account can access CMS’

Hospital Compare Web site to gather 

comparative quality information to 

assist in choosing a high quality 

hospital. CMS is contributing to the 

Administration’s Consumer-Directed 

Health Care Initiative by working with 

our private- and public-sector partners 

to make health care information more 

transparent and available to consumers 

than ever before. (Refer to section IV.M. 

of the preamble to the FY 2007 IPPS 

proposed rule (71 FR 24120) for more 

information.) In the FY 2007 IPPS 

proposed rule (71 FR 24100), we sought 

comments on how we can further 

stimulate public reporting to increase 

the transparency and meaningfulness of 

healthcare performance information. 

Comment: Five commenters made 

recommendations regarding public 

reporting. One commenter stressed that 

informed decision-making about 

performance cannot occur if reported 

costs are divorced from information 

about quality. A second commenter 

noted the importance of providing a 

formal appeals process for providers 

that disagree with their performance 

ratings. Consumers Union urged CMS to 

use multiple approaches to get 

consumers more engaged in using 

quality information, suggesting that 

Hospital Compare be promoted 

continuously, that tools be developed to 

support comparisons in different ways, 

and that information on Hospital 

Compare to be updated more frequently 

than once a year to be relevant to the 

patient and fair to the hospital. 

Response: We thank all commenters 

for their thoughtful and valuable input. 

We will use these comments to inform 

our design of the plan for Medicare 

hospital value-based purchasing, as 

mandated by Pub. L. 109–171. This 

rulemaking process is the first 

opportunity for the public to be 

involved in our planning process. We 

will also be hosting public listening 

sessions in 2007 to receive public input 

on drafts of the plan. We encourage your 

participation in those listening sessions. 

5. Considerations Related to Certain 

Conditions, Including HospitalAcquired Infections 

Medicare’s IPPS encourages hospitals 

to treat patients efficiently. Hospitals 

receive the same DRG payment for stays 

that vary in length. In many cases, 

complications acquired in the hospital 

do not generate higher payments than 

the hospital would otherwise receive for 

other cases in the same DRG. To this 

extent, the IPPS does encourage 

hospitals to manage their patients well 

and to avoid complications, when 

possible. However, complications, such 

as infections, acquired in the hospital 

can trigger higher payments in two 

ways. First, the treatment of 

complications can increase the cost of 

hospital stays enough to generate outlier 

payments. However, the outlier 

payment methodology requires that 

hospitals experience large losses on 

outlier cases (in FY 2006, hospitals must 

lose $23,600 before a case qualifies for 

outlier payments, and the hospital 


bajohnson on PROD1PC67 with RULES2
48052 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

would then only receive 80 percent of 

its costs above the outlier threshold). 

Second, there are about 121 sets of 

DRGs that split based on the presence or 

absence of a complication or 

comorbidity (CC). The CC DRG in each 

pair would generate a higher Medicare 

payment. If an infection acquired during 

the beneficiary’s hospital stay is one of 

the conditions on the CC list, the result 

may be a higher payment to the hospital 

under a CC DRG. (See section II.C. of the 

FY 2007 IPPS proposed rule (71 FR 

24006) for a detailed discussion of 

proposed DRG reforms.) 

Section 5001(c) of Pub. L. 109–171 

requires the Secretary to identify, by 

October 1, 2007, at least two conditions 

that are (a) high cost or high volume or 

both, (b) result in the assignment of a 

case to a DRG that has a higher payment 

when present as a secondary diagnosis, 

and (c) could reasonably have been 

prevented through the application of 

evidence-based guidelines. For 

discharges occurring on or after October 

1, 2008, hospitals would not receive 

additional payment for cases in which 

one of the selected conditions was not 

present on admission. That is, the case 

would be paid as though the secondary 

diagnosis was not present. Section 

5001(c) provides that we can revise the 

list of conditions from time to time, as 

long as it contains at least two 

conditions. Section 5001(c) also requires 

hospitals to submit the secondary 

diagnoses that are present at admission 

when reporting payment information for 

discharges on or after October 1, 2007. 

In the FY 2007 IPPS proposed rule (71 

FR 24100), we sought input about which 

conditions and which evidence-based 

guidelines should be selected. 

We received 44 comments on this 

section from hospitals and health care 

systems, provider associations, 

consumer groups, purchasers, medical 

device manufacturers, information 

technology companies, and health care 

research organizations. 

Comment: The majority of 

commenters addressed conceptual 

issues concerning the selection, 

measurement, and prevention of 

hospital-acquired infections. While 

most of the commenters focused on 

broad factors CMS should consider, 

some of the commenters included 

specific recommendations of conditions 

for possible inclusion in the payment 

changes. We found these comments very 

helpful and constructive, and we look 

forward to further input as we work 

towards implementation of this section. 

In the following discussion, we present 

a summary of the major themes of the 

commenters and list the specific 

hospital-acquired complications 

presented in the comments. 

Many commenters encouraged CMS 

to engage in a collaborative discussion 

with relevant experts in designing, 

evaluating, and implementing this 

section. The commenters urged CMS to 

include individuals with expertise in 

infection control and prevention, as 

well as representatives from the 

provider community, in this discussion. 

Nearly half of the commenters 

expressed concern about the difficulty 

in distinguishing between hospitalacquired and community-acquired 

infections. Multiple commenters 

indicated that community-acquired 

infections often cannot be diagnosed on 

admission and thus would not be 

included as secondary diagnoses at the 

time of admission. These commenters 

indicated that it would be costly and 

inefficient to attempt to diagnose all 

community-acquired infections at the 

time of admission. The commenters 

requested that CMS provide technical 

guidance to assist providers in 

distinguishing between hospital and 

community-acquired infections. 

Many commenters discussed the 

statutory requirement for hospitals to 

submit information regarding secondary 

diagnoses present on admission 

beginning FY 2008. Some commenters 

supported this requirement and 

suggested that it would better enable 

CMS and health care providers to more 

accurately differentiate between 

comorbidities and hospital-acquired 

complications. MedPAC, in particular, 

noted that this requirement was 

recommended in its March 2005 Report 

to Congress and indicated that this 

information is important to Medicare’s 

value-based purchasing efforts. Other 

commenters suggested that CMS delay 

implementation of this provision, given 

the significant payment changes 

contained in the FY 2007 IPPS proposed 

rule. 

Many commenters, including States, 

health care associations, and health care 

providers with experience in hospitalacquired infection prevention, 

cautioned us about potential problems 

with relying on secondary diagnosis 

codes to identify hospital-acquired 

complications. These commenters 

indicated that secondary diagnosis 

codes may be an inaccurate method for 

identifying true hospital-acquired 

complications. Some of the commenters 

referred to research showing a wide 

discrepancy between hospital-acquired 

infections identified through claims 

data and hospital-acquired infections 

identified through active surveillance 

and/or chart review. According to the 

commenters, this research found that 

active surveillance conducted by trained 

infection control practitioners was the 

most accurate method for identifying 

hospital-acquired infections. The 

commenters also noted that there is 

currently no standardized and validated 

method for using claims data to identify 

hospital-acquired infections. 

A number of commenters expressed 

concerns about the data coding 

requirements for this payment change. 

They asked for detailed guidance from 

CMS to help them identify and 

document hospital-acquired 

complications. The commenters also 

noted that there are currently no 

standard definitions or guidance to code 

the present on admission indicator. In 

addition, there was concern that the 

current system of bill coding does not 

support a present on admission 

indicator and that future versions of the 

bill coding systems may not be 

implemented in time to meet the data 

reporting requirements for this payment 

change. The commenters also urged 

CMS to allow adequate time for 

hospitals to implement the necessary 

changes to their billing and coding 

systems and to conduct appropriate staff 

training. 

Almost half of the commenters 

expressed concern that not all hospitalacquired infections are preventable. In 

particular, the commenters noted that 

sicker and more complex patients are at 

greater risk for hospital-acquired 

infections and complications. The 

commenters urged CMS to use 

discretion in implementing this section 

to ensure that the program does not 

punish hospitals taking care of sicker 

and more complex patients. 

To address this issue, many of the 

commenters suggested that CMS include 

standardized infection-prevention 

process measures, in addition to 

outcome measures of hospital-acquired 

infections. The commenters proposed 

that hospitals should not be penalized if 

they follow evidence-based infection 

prevention measures. Specifically, a 

number of commenters referenced the 

Surgical Care Improvement Program 

(SCIP) and suggested that CMS build on 

this initiative. These commenters 

recommended that CMS include 

exceptions to the payment changes for 

cases in which the hospital performed 

evidence-based infection-prevention 

measures. 

Some commenters proposed that CMS 

expand the scope of the payment 

changes beyond the statutory minimum 

of two conditions. They noted that the 

death, injury, and cost of hospitalacquired infections are too high to limit 

this provision to only two conditions. 

Commenters also recommended that 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48053 

28RAND News Release: Rand Study Says 

Computerizing Medical Records Could Save $81 

Billion Annually and Improve the Quality of 

Medical Care, September 14, 2005, available at: 

http://rand.org/news.press.05/09.14.html. 

29Transforming Health Care: The President’s 

Health Information Technology Plan, available at: 

http://www.whitehouse.gov/infocus/technology/ 

economic_policy200404/chap3.html. 

CMS annually select additional 

hospital-acquired complications for the 

payment change. 

Conversely, a number of commenters 

proposed that CMS initially begin with 

limited demonstrations to test CMS’’

methodology before nationwide 

implementation. The commenters 

specifically mentioned the Michigan 

Hospital Association Keystone Center, 

the Pittsburgh Regional Health 

Initiative, and the Maryland Patient 

Safety Center as possible models. In 

addition, several commenters suggested 

that CMS work with states that currently 

collect information on diagnoses present 

on admission. 

A commenter recommended that CMS 

include appropriate consumer 

protections to prevent providers from 

billing patients for the non-reimbursed 

costs of the hospital-acquired 

complications and to prevent hospitals 

from selectively avoiding patients 

perceived at risk for complications. 

In addition to the broad conceptual 

suggestions, some commenters 

recommended specific conditions for 

possible inclusion in the payment 

changes. The specific conditions 

mentioned in the comments are listed 

below: 

• Surgical site infections. Some 

commenters recommended including 

surgical site infections because of their 

high frequency and cost. Commenters 

also noted that evidence-based measures 

to prevent the occurrence of these 

infections are currently measured and 

reported as part of SCIP. Many 

commenters suggested that CMS work 

with SCIP partners to identify 

appropriate post-surgical hospitalacquired infections for possible 

inclusion in the payment changes. Other 

commenters expressed concern that 

administrative data may not be a 

reliable source for identifying surgical 

site infections. Commenters also 

cautioned that surgical site infections 

often do not manifest and thus cannot 

be diagnosed until after the patient has 

been discharged from the hospital. 

• Ventilator-associated pneumonia. 

Commenters also mentioned ventilatorassociated pneumonia as a possible 

condition for inclusion in the payment 

changes because this condition is 

currently measured and reported 

through SCIP. Other commenters 

recommended against this condition 

due to the subjective and labor-intensive 

nature of defining the diagnosis. 

• Catheter-associated bloodstream 

infections. Commenters recommended 

catheter-associated bloodstream 

infections, including central line 

infections, as possible conditions. 

Commenters noted that these infections 

are currently reported through SCIP. 

• Urinary tract infections. One 

commenter recommended nosocomial 

urinary tract infection for possible 

inclusion in the payment change. 

Another commenter argued against this 

condition because it has limited impact 

on patient mortality and morbidity. 

• Pressure ulcers. Multiple 

commenters suggested that CMS 

consider pressure ulcers as an 

alternative to hospital-acquired 

infections. 

• Hospital falls. Several commenters 

suggested that CMS consider hospital 

falls as an alternative to hospitalacquired infections. 

• Deep vein thromboses. Commenters 

also suggested that CMS consider deep 

vein thromboses as an alternative to 

hospital-acquired infections. 

Response: We would like to express 

our gratitude to all of the commenters 

for their thoughtful and helpful 

recommendations. We will carefully 

consider their views as we move toward 

implementing this section. CMS will be 

working closely with our colleagues at 

the Centers for Disease Control and 

Prevention over the coming months to 

select appropriate conditions to propose 

for implementation. We anticipate that 

the next opportunity for formal public 

comment will be the FY 2008 IPPS 

proposed rule-making, which will be 

published in spring of 2007. We 

encourage the public to comment on our 

proposal at that time. 

6. Promoting Effective Use of Health 

Information Technology 

We recognize the potential for health 

information technology (HIT) to 

facilitate improvements in the quality 

and efficiency of health care services. 

One recent RAND study found that 

broad adoption of electronic health 

records could save more than $81 

billion annually and, at the same time, 

improve quality of care.28 The largest 

potential savings that the study 

identified was in the hospital setting 

because of shorter hospital stays 

promoted by better coordinated care; 

less nursing time spent on 

administrative tasks; better use of 

medications in hospitals; and better 

utilization of drugs, laboratory services, 

and radiology services in hospital 

outpatient settings. The study also 

identified potential quality gains 

through enhanced patient safety, 

decision support tools for evidencebased medicine, and reminder 

mechanisms for screening and 

preventive care. Despite such large 

potential benefits, the study found that 

only about 20 to 25 percent of hospitals 

have adopted HIT systems. 

It is important to note the caveats to 

the RAND study. The projected savings 

are across the health care sector, and 

any Federal savings would be a reduced 

percentage. In addition, there are 

significant assumptions made in the 

RAND study. National savings are 

projected in some cases based on one or 

two small studies. Also, the study 

assumes patient compliance, in the form 

of participation in disease management 

programs and following medical advice. 

For these reasons, extreme caution 

should be used in interpreting these 

results. 

There are some mixed signals about 

the potential of HIT to reduce costs. 

Some studies have indicated that HIT 

adoption does not necessarily lead to 

lower costs and improved quality. In 

addition, some industry experts have 

stated that factors such as an aging 

population, medical advances, and 

increasing provider expenses would 

offset any projected savings. 

In his 2004 State of the Union 

Address, President Bush announced a 

plan to ensure that most Americans 

have electronic health records within 10 

years.29 One part of this plan involves 

developing voluntary standards and 

promoting the adoption of interoperable 

HIT systems that use these standards. 

The 2007 Budget states that ‘‘The 

Administration supports the adoption of 

health information technology (IT) as a 

normal cost of doing business to ensure 

patients receive high quality care.’’

Over the past several years, CMS has 

undertaken several activities to promote 

the adoption and effective use of HIT in 

coordination with other Federal 

agencies and with the Office of the 

National Coordinator for Health 

Information Technology. One of those 

activities is promotion of data standards 

for clinical information, as well as for 

claims and administrative data. In 

addition, through our 8th Scope of Work 

contract with the QIOs, we are offering 

assistance to hospitals on how to adopt 

and redesign care processes to 

effectively use HIT to improve the 

quality of care for Medicare 

beneficiaries, including computerized 

physician order entry (CPOE) and bar 

coding systems. In section IV.A.3. of the 

FY 2007 IPPS proposed rule (71 FR 


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24095), we again invited comments on 

streamlining the submission of clinical 

quality data by using standards-based 

electronic medical records. (We used 

the term ‘‘electronic medical records’’ in 

section IV.A.3. instead of the term 

‘‘electronic health records’’ that is used 

in this section in order to maintain 

consistency with our request for 

comments in the FY 2006 IPPS final 

rule.) Finally, our Premier Hospital 

Quality Incentive Demonstration 

provides additional financial payments 

for hospitals that achieve improvements 

in quality, which effective HIT systems 

can facilitate. 

We are considering the role of 

interoperable HIT systems in increasing 

the quality of hospital services while 

avoiding unnecessary costs. As noted 

above, the Administration supports the 

adoption of HIT as a normal cost of 

doing business. Whereas payments 

under the IPPS do not vary depending 

on the adoption and use of HIT, 

hospitals that leverage HIT to provide 

better quality services may more 

efficiently reap the reward of any 

resulting cost savings. In addition, the 

adoption and use of HIT may contribute 

to improved processes and outcomes of 

care, including shortened hospital stays 

and the avoidance of adverse drug 

reactions. 

In the preamble to the FY 2007 IPPS 

proposed rule (71 FR 24101), we sought 

comments on our statutory authority to 

encourage the adoption and use of HIT. 

We also sought comments on the 

appropriate role of HIT in any valuebased purchasing program, beyond the 

intrinsic incentives of the IPPS, to 

provide efficient care, encourage the 

avoidance of unnecessary costs, and 

increase quality of care. In addition, we 

sought comments on promotion of the 

use of effective HIT through hospital 

conditions of participation (CoPs), 

perhaps by adding a requirement that 

hospitals use HIT that is compliant with 

and certified in its use of the HIT 

standards adopted by the Secretary. We 

anticipate that the American Health 

Information Community will provide 

advice to the Secretary on these issues. 

We received 30 comments on this 

section. Below is a summary of the 

comments addressing: (1) CMS’’

statutory authority to encourage 

adoption of effective health information 

technology (HIT); (2) the role that HIT 

should play in value-based purchasing; 

and (3) whether CMS should promote 

the adoption of effective HIT through 

our CoPs. In addition to these areas in 

which we sought comments, we also 

received several comments on the 

challenges of implementing HIT, which 

were particularly focused on 

overcoming the high cost of 

implementation. We conclude the 

summary with additional commenter 

input on the adoption and use of HIT. 

Comment: Seven comments addressed 

our statutory authority to encourage 

adoption and use of HIT. Two of the 

seven commenters stated that the HHS 

has the authority to encourage adoption 

of HIT. Those commenters referred to 

the Hill Burton Act, the Medicare 

Modernization Act, the Deficit 

Reduction Act, and the FY 2006 Health 

and Human Services Appropriations 

Act as bases for our statutory authority. 

Other commenters stated that we do not 

have the authority to encourage 

adoption and use of HIT. Those 

commenters pointed out the need for 

legislation to specifically authorize 

support for HIT implementation. 

Nineteen commenters addressed the 

role of HIT in a value-based purchasing 

program. Only 2 of the 19 commenters 

stated that HIT should be directly tied 

to value-based purchasing. An 

overwhelming majority of the 

commenters believed that HIT funding 

should not be tied to value-based 

purchasing; rather those commenters 

stated that HIT implementation should 

be tied to increases in hospital payment. 

However, nearly all of the commenters 

agreed that use of effective HIT could 

increase health care quality, efficiency, 

patient safety, and care coordination. A 

few commenters recognized that HIT 

will likely reduce the burden of 

reporting to a value-based purchasing 

system. 

We received 14 comments on the 

promotion of HIT through our CoPs. Of 

those comments, only three were in 

favor of including HIT in the CoPs. Of 

these comments, only three were in 

favor of including adoption of certified, 

interoperable HIT in the CoPs. The 

majority of commenters opposed this 

proposal and termed such a requirement 

a potential ‘‘unfunded mandate.’’

There were a total of 19 comments 

addressing the high costs associated 

with HIT implementation. Commenters 

identified cost as the greatest barrier to 

HIT implementation and stated that the 

short term benefits do not justify the 

costs. Several commenters noted that 

HIT is a public good and felt strongly 

that funding for HIT implementation 

should be provided through government 

loan guarantees and grants. Two 

commenters felt that safety-net hospitals 

should be the primary beneficiaries of 

any federal funding for HIT. One 

commenter observed that the 

governments of other countries funds 

HIT. Nine commenters observed that the 

proposed rule failed to recognize that a 

major finding of the RAND study was 

that HIT investments accrue more to the 

payers and purchasers than to hospitals 

and health systems, which the 

commenters believed indicates that 

purchasers and plans should make a 

greater share of investment in HIT. 

We received 11 comments addressing 

the challenges of HIT implementation 

beyond costs. Many of the commenters 

noted that HIT adoption takes careful 

planning and requires many internal 

workflow process changes. Several 

comments addressed the variation in 

health care delivery systems and the 

vastly different needs for HIT across 

systems, as well as vastly differing 

abilities to accomplish HIT 

implementation. Many felt strongly that 

inoperability standards must precede 

implementation. 

Several thoughtful ideas were 

addressed by a small proportion of 

commenters. Two commenters felt that 

until HIT is fully implemented, 

hospitals should be required to report a 

unique identifier for each coded 

procedure, capture referring and 

ordering providers for each procedure, 

record vital signs at presentation, 

include any do not resuscitate (DNR) 

orders, and record time of admission. 

Along the same lines, another 

commenter felt that until HIT is in 

place, hospitals should be required to 

notify dialysis facilities via phone, fax, 

or e-mail, when a kidney failure patient 

is admitted. 

Response: We thank all commenters 

for their thoughtful and valuable 

discussion of the issues. In the HIT 

section of the preamble to the proposed 

rule, we recognized the potential for 

effective HIT to facilitate improvements 

in the quality and efficiency of health 

care services. We also pointed out CMS’

promotion of the adoption and effective 

use of HIT in coordination with other 

Federal agencies and the Office of the 

National Coordinator of Health 

Information Technology. Here, we will 

discuss three areas that we are 

emphasizing to promote the effective 

use of HIT, in light of the comments we 

received: (1) Value-based purchasing, 

(2) the e-prescribing rule, and (3) 

infrastructure and interoperability 

standards. We believe that these 

activities will address the barriers to 

HIT implementation that were 

presented by the commenters and will 

increase the benefits of HIT adoption 

relative to the costs. 

We continue our work toward the 

implementation of value-based 

purchasing payment system reforms 

because we believe that, among other 

advantages, value-based purchasing can 

encourage hospitals to invest in 

activities , such as effective HIT, that 


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have the potential to improve quality 

and decrease unnecessary costs. 

However, linking a portion of Medicare 

payments to valid measures of quality 

and effective use of resources could give 

hospitals more direct incentives to 

implement innovative ideas and 

approaches that may result in improved 

value of care. We agree with the 

commenters that noted that the use of 

effective HIT could increase quality, 

efficiency, patient safety, and care 

coordination. We also agree with the 

commenters that noted that effective use 

of HIT can be used to decrease the 

burden of reporting to value-based 

purchasing programs. However, we 

disagree with the commenters that 

recommended direct government 

funding of HIT. As stated in the 

President’s 2007 Budget, ‘‘the 

Administration supports the adoption of 

[HIT] as a normal cost of doing business 

to ensure patients receive high quality 

care.’’

Commenters noted that multiple 

stakeholders in the health care system, 

including purchasers and payers, 

benefit from provider adoption and use 

of effective HIT and should share in the 

cost. CMS and OIG are in the process of 

issuing final rules to allow hospitals and 

other health care providers under some 

circumstances to donate electronic 

prescribing and electronic health 

records technology to physicians and 

others without running afoul of the 

Stark (physician self-referral) and antikickback statutes. We believe that these 

rules will facilitate the adoption of HIT 

by physicians and other health care 

providers who might otherwise have 

been unable or unwilling to invest in 

the technology. We also believe that 

these regulatory changes will help to 

stimulate the adoption of effective HIT, 

and that, as HIT use spreads, the 

benefits relative to the costs of 

implementation may increase for all 

stakeholders. 

The majority of commenters pointed 

out that the current lack of HIT 

infrastructure, including lack of 

interoperability standards, is a major 

obstacle to adoption and effective use of 

HIT. To address the lack of 

infrastructure, the Secretary has 

undertaken a national strategy that calls 

for Federal agencies to collaborate with 

private stakeholders in the development 

of architecture, standards, certification 

processes, and methods of governance 

to facilitate the adoption of effective 

HIT. In September 2005, the Secretary 

selected 16 commissioners to serve on 

the American Health Information 

Community (AHIC), which is a federally 

chartered collaborative forum of private 

and public interests charged with 

advising the Secretary on how to make 

health information digital and 

interoperable. The goals of the 

Community include immediate access 

to vital medical information at the point 

of care, privacy protection, better data 

for research, and overall cost savings. 

The work of the Community has been 

divided among four workgroups: (1) the 

Electronic Health Records Workgroup, 

(2) the Chronic Care Workgroup, (3) the 

Consumer Empowerment Workgroup, 

and (4) the Biosurveillance Workgroup. 

The AHIC Workgroups have made 

recommendations, as their initial 

‘‘breakthroughs,’’ pertaining to: an 

electronic medication summary and 

registration history; secure messaging 

capabilities for individuals with chronic 

disease; biosurveillance monitoring; 

and, through secure means, broadening 

the availability and access to current 

and historical laboratory results and 

interpretations. More information about 

the Community is available at: http:// 

www.hhs.gov/healthit/ahic.html. 

In conclusion, we are not adopting at 

this time our proposal to require 

adoption of certified, interoperable HIT 

as a Medicare CoP. Rather, we are 

reserving judgment on the imposition of 

such a requirement and will continue to 

research the feasibility of doing so. We 

may revisit this issue in the FY 2008 

IPPS proposed rule or in another 

rulemaking proceeding. 

C. Sole Community Hospitals (SCHs) 

(§ 412.92) and Medicare-Dependent, 

Small Rural Hospitals (MDHs) 

(§ 412.108) 

1. Background 

Under the IPPS, special payment 

protections are provided to a sole 

community hospital (SCH). Section 

1886(d)(5)(D)(iii) of the Act defines an 

SCH as a hospital that, by reason of 

factors such as isolated location, 

weather conditions, travel conditions, 

absence of other like hospitals (as 

determined by the Secretary), or 

historical designation by the Secretary 

as an essential access community 

hospital, is the sole source of inpatient 

hospital services reasonably available to 

Medicare beneficiaries. The regulations 

that set forth the criteria that a hospital 

must meet to be classified as an SCH are 

located in § 412.92. 

Under the IPPS, separate special 

payment protections also are provided 

to a Medicare-dependent, small rural 

hospital (MDH). 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 that has a high 

percentage of Medicare discharges (not 

less than 60 percent in its 1987 cost 

reporting year or in 2 of its most recent 

3 audited and settled Medicare cost 

reporting years). The regulations that set 

forth the criteria that a hospital must 

meet to be classified as an MDH are 

located in § 412.108. 

Although SCHs and MDHs are paid 

under special payment methodologies, 

they are section 1886(d) hospitals. Like 

all section 1886(d) IPPS hospitals, SCHs 

and MDHs are paid for their discharges 

based on the DRG weights calculated 

under section 1886(d)(4) of the Act. 

Effective with hospital cost reporting 

periods beginning on or after October 1, 

2000, section 1886(d)(5)(D)(i) of the Act 

(as amended by section 6003(e) of Pub. 

L. 101–239) and section 1886(b)(3)(I) of 

the Act (as added by section 405 of Pub. 

L. 106–113 and further amended by 

section 213 of Pub. L. 106–554), provide 

that SCHs are paid based on whichever 

of the following rates yields the greatest 

aggregate payment to the hospital for the 

cost reporting period: 

• The Federal rate applicable to the 

hospital; 

• The updated hospital-specific rate 

based on FY 1982 costs per discharge; 

• The updated hospital-specific rate 

based on FY 1987 costs per discharge; 

or 

• The updated hospital-specific rate 

based on FY 1996 costs per discharge. 

For purposes of payment to SCHs for 

which the FY 1996 hospital-specific rate 

yields the greatest aggregate payment, 

payments for discharges during FYs 

2001, 2002, and 2003 were based on a 

blend of the FY 1996 hospital-specific 

rate and the greater of the Federal rate 

or the updated FY 1982 or FY 1987 

hospital-specific rate. For discharges 

during FY 2004 and subsequent fiscal 

years, payments based on the FY 1996 

hospital-specific rate are 100 percent of 

the updated FY 1996 hospital-specific 

rate. 

For each cost reporting period, the 

fiscal intermediary determines which of 

the payment options will yield the 

highest rate of payment to the SCH. 

Payments are automatically made at the 

highest rate using the best data available 

at the time the fiscal intermediary 

makes the determination. However, it 

may not be possible for the fiscal 

intermediary to determine in advance 

precisely which of the rates will yield 

the highest payment by year’s end. In 

many instances, it is not possible to 

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. The fiscal intermediary 

makes a final adjustment at the close of 

the cost reporting period after it 


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determines precisely which of the 

payment rates would yield the highest 

payment to the hospital. 

If an SCH disagrees with the fiscal 

intermediary’s determination regarding 

the final amount of program payment to 

which it is entitled, it has the right to 

appeal the fiscal intermediary’s decision 

in accordance with the procedures set 

forth in Subpart R of Part 405, which 

concern provider payment 

determinations and appeals. 

Through and including FY 2006, 

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 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 is higher. 

However, section 5003 of Pub. L. 109–

171 (DRA) modified these rules for 

discharges occurring on or after October 

1, 2006. Section 5003(c) changed the 50- 

percent adjustment to 75 percent. 

Section 5003(b) requires that an MDH 

use the 2002 cost reporting year as its 

base year (that is, the FY 2002 hospitalspecific rate), if that use results in a 

higher payment. An MDH does not have 

the option to use its FY 1996 hospitalspecific rate. We discussed our 

proposed changes to implement section 

5003 of the DRA in section IV.C.4 of the 

preamble to the FY 2007 IPPS proposed 

rule (71 FR 24104). 

2. Volume Decrease Adjustment for 

SCHs and MDHs 

Section 1886(d)(5)(D)(ii) of the Act 

requires that the Secretary make a 

payment adjustment to an SCH that 

experiences a decrease of more than 5 

percent in its total number of inpatient 

discharges from one cost reporting 

period to the next, if the circumstances 

leading to the decline in discharges 

were beyond the SCH’s control. Section 

1886(d)(5)(G)(iii) of the Act requires that 

the Secretary make a payment 

adjustment to an MDH that experiences 

a decrease of more than 5 percent in its 

total number of inpatient discharges 

from one cost reporting period to the 

next, if the circumstances leading to the 

decline in discharges were beyond the 

MDH’s control. These adjustments were 

designed to compensate an SCH or MDH 

for the fixed costs it incurs in the year 

following the reduction in discharges 

(this is, the second year), which it may 

be unable to reduce. Such costs include 

the maintenance of necessary core staff 

and services. Our records indicate that 

three to four SCHs/MDHs request this 

adjustment each year. 

However, we believe that not all staff 

costs can be considered fixed costs. 

Using a standardized formula specified 

by us, the SCH or MDH must 

demonstrate that it appropriately 

adjusted the number of staff in inpatient 

areas of the hospital based on the 

decrease in the number of inpatient 

days. This formula examines nursing 

staff in particular. If an SCH or MDH has 

an excess number of nursing staff, the 

cost of maintaining those staff members 

is deducted from the total adjustment. 

One exception to this policy is that no 

SCH or MDH may reduce its number of 

staff to a level below what is required 

by State or local law. In other words, an 

SCH or MDH will not be penalized for 

maintaining a level of staff that is 

consistent with State or local 

requirements. 

The process for determining the 

amount of the volume decrease 

adjustment can be found in section 

2810.1 of the Provider Reimbursement 

Manual. Fiscal intermediaries are 

responsible for establishing whether an 

SCH or MDH is eligible for a volume 

decrease adjustment and, if so, the 

amount of the adjustment. To qualify for 

this adjustment, the SCH or MDH must 

demonstrate that: (a) A 5 percent or 

more decrease of total discharges has 

occurred; and (b) the circumstance that 

caused the decrease in discharges was 

beyond the control of the hospital. Once 

the fiscal intermediary has established 

that the SCH or MDH satisfies these two 

requirements, it will calculate the 

adjustment. The adjustment amount is 

determined by subtracting the second 

year’s DRG payment from the lesser of: 

(a) The second year’s costs minus any 

adjustment for excess staff; or (b) the 

previous year’s costs multiplied by the 

appropriate IPPS update factor minus 

any adjustment for excess staff. The 

SCH or MDH receives the difference in 

a lump-sum payment. 

The adjustment for excess staff is 

currently broken into two parts: the 

routine acute care area (excluding 

intensive care unit areas) excess staff 

adjustment and the intensive care unit 

excess staff adjustment. (For purposes of 

this section of the preamble, any 

subsequent references to the routine 

acute care area of an SCH or MDH refer 

to the routine acute care area excluding 

any intensive care unit areas.) In order 

to determine whether or not the hospital 

is appropriately staffing its routine acute 

care and its intensive care unit area, the 

fiscal intermediary compares the 

hospital’s actual number of nursing staff 

in each area with the staffing of like-size 

hospitals in the same census region. 

Currently, fiscal intermediaries obtain 

average nurse staffing data from the 

American Hospital Association’s HAS/ 

Monitrend Data Book. (More 

information on the HAS/Monitrend Data 

Book follows.) If a hospital employs 

more than the reported average number 

of nurses in the routine acute care or 

intensive care unit area for hospitals of 

its size and census region, the fiscal 

intermediary reduces the amount of the 

adjustment by the cost of maintaining 

the additional staff. The amount of the 

reduction is calculated by multiplying 

the actual number of nursing staff above 

the reported average by the average 

nurse salary for that hospital as reported 

on the Medicare cost report. The 

complete process for determining the 

amount of the adjustment can be found 

at section 2810.1 of the Provider 

Reimbursement Manual. 

Representatives from several SCH and 

MDH hospitals have contacted CMS 

with concerns regarding the current use 

of the HAS/Monitrend data for 

determining the volume decrease 

adjustment for SCHs and MDHs. 

Because the most recent HAS/ 

Monitrend Data Book was published in 

1989 and is no longer updated, the 

hospitals expressed concern that the 

information in the publication is too 

outdated for current use. Therefore, in 

the FY 2007 IPPS proposed rule (71 FR 

24102), we presented for public 

comment a new methodology for 

calculating the adjustment for excess 

staff. 

a. HAS/Monitrend Data 

From the mid-1960’s to 1989, the 

Healthcare Administrative Services 

Division of the American Hospital 

Association (AHA) published 

biannually the HAS/Monitrend Data 

Book, a collection of aggregate hospital 

statistics. Hospitals completed surveys 

based on 6 months of data; these data 

were categorized into one of five bedsize groups and into one of nine census 

regions. The bed size groups were 0–49, 

50–99, 100–199, 200–399, and 400 or 

more beds. The census regions include: 

(1) New England (Connecticut, Maine, 

Massachusetts, New Hampshire, Rhode 

Island, and Vermont); (2) Middle 

Atlantic (New Jersey, New York, and 

Pennsylvania); (3) South Atlantic 

(Delaware, District of Columbia, Florida, 

Georgia, Maryland, North Carolina, 

South Carolina, Virginia, and West 

Virginia); (4) East North Central 

(Illinois, Indiana, Michigan, Ohio, and 

Wisconsin); (5) East South Central 

(Alabama, Kentucky, Mississippi, and 

Tennessee); (6) West North Central 

(Iowa, Kansas, Minnesota, Missouri, 

Nebraska, North Dakota, and South 

Dakota); (7) West South Central 

(Arkansas, Louisiana, Oklahoma, and 

Texas); (8) Mountain (Arizona, 

Colorado, Idaho, Montana, Nevada, New 


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Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48057 

Mexico, Utah, and Wyoming); and (9) 

Pacific (Alaska, California, Hawaii, 

Oregon, and Washington). 

The survey collected data on nearly 

400 items pertaining to utilization, 

resource allocation, departmental 

productivity, departmental direct 

expenses, and staffing. In order for 

aggregate data to be published for a 

category, at least three hospitals in the 

same census region and bed-size group 

had to have responded to the survey. 

For the final 1989 publication, 996 acute 

care hospitals completed the survey. 

CMS has used the HAS/Monitrend Data 

Book since 1984 to determine the 

volume decrease adjustment for SCHs; 

the data also have been used for the 

volume decrease adjustment for MDHs 

since 1990. In particular, CMS has used 

the HAS/Monitrend data on the number 

of paid nursing hours per patient day 

(‘‘paid hours/patient day’’) in both the 

general acute care area (‘‘Medical and 

Surgical Units’’) and the intensive care 

unit (‘‘Med & Surg Intensive Care 

Unit’’). More information on the HAS/ 

Monitrend Data Book is available from 

the American Hospital Association, 840 

North Lake Shore Drive, Chicago, 

Illinois 60611. 

b. HAS/Monitrend Data Book 

Replacement Alternative 

In the FY 2007 IPPS proposed rule (71 

FR 24102), we proposed an alternative 

method for determining an SCH’s or 

MDH’s target number of core staff using 

data from the Medicare cost report and 

the occupational mix survey. However, 

this methodology would only establish 

one combined average number of 

nursing hours per patient day for both 

the inpatient routine care and the 

intensive care unit areas. We proposed 

to use the Medicare cost report and 

occupational mix survey data beginning 

with requests for adjustments for FY 

2008 cost reports. We invited comments 

from the public on this proposal. 

(1) Occupational Mix Survey 

As discussed in the FY 2007 IPPS 

proposed rule (71 FR 24075), the CMS 

occupational mix survey collects from 

each hospital data on the mix of 

employees in the areas of the hospital 

payable under the IPPS for a limited 

number of hospital occupational 

categories. For the 2006 survey, these 

categories include registered nurses, 

licensed practical nurses, aides, 

orderlies, attendants, and medical 

assistants. The registered nurse 

subcategory includes two functional 

subcategories: management personnel 

and staff nurses or clinicians. For 

example, hospitals may choose to 

employ different combinations of 

registered nurses, licensed practical 

nurses, and nurses’ aides 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. The data collected on the 

survey are used to adjust hospitals’

wage data to account for each hospital’s 

mix within the general occupational 

categories. Hospitals completed the first 

occupational mix survey using FY 2003 

data. A second survey will be completed 

this year (FY 2006). 

Under the proposed method, we 

would calculate the nursing hours per 

inpatient day for each SCH or MDH by 

dividing the number of paid nursing 

hours (for registered nurses, licensed 

practical nurses, and nursing aides) 

reported on the occupational mix survey 

by the number of inpatient days 

reported on the Medicare cost report. 

The results would be grouped into the 

same bed-size groups and census 

regions as the HAS/Monitrend Data 

Book. CMS would publish the mean 

number of nursing hours per patient day 

for each census region and bed-size 

group in the Federal Register. (We 

proposed to include licensed practical 

nurse and nursing aide hours as well as 

registered nurse hours to reflect the 

various levels of nursing staff employed 

by hospitals to provide direct patient 

care.) 

The results that would be published 

in the Federal Register would be the 

target number of core nursing hours per 

patient day. For purposes of the volume 

decrease adjustment, the published data 

would be utilized in the same way as 

the HAS/Monitrend data: The fiscal 

intermediary would multiply the SCH’s 

or MDH’s number of inpatient days by 

the applicable published hours per 

patient day. This figure would be 

divided by the average number of 

worked hours per year per nurse (for 

example, 2,080 for a standard 40-hour 

week). The result would be the target 

number of core nursing staff for the 

particular SCH or MDH. If necessary, 

the cost of any excess staff (number of 

FTEs that exceed the published number) 

would be removed from the second 

year’s costs or, if applicable, the 

previous year’s costs multiplied by the 

IPPS update factor when determining 

the volume decrease adjustment. 

Because we would consider registered 

nurses, licensed practical nurses, and 

nursing aides, the fiscal intermediary 

would calculate the excess staff 

adjustment by multiplying the number 

of excess staff by the average salary 

among the three groups, taking into 

account how many registered nurses, 

licensed practical nurses, and nursing 

aides work at the facility. (For instance, 

if the hospital’s average salary for a 

registered nurse is $50,000 and the 

hospital’s average salary for a licensed 

practical nurse is $30,000 and the 

hospital employs 5 registered nurses, 3 

licensed practical nurses, and no 

nursing aides, the calculated average 

salary would be $42,500 for one FTE (((5 

× $50,000) + (3 × $30,000))/8 = $42,500). 

We proposed to use the results of the 

FY 2006 occupational mix survey and 

begin applying the proposed 

methodology for adjustments resulting 

from a decrease in discharges between 

FYs 2007 to 2008. Because the 

occupational mix survey is conducted 

once every 3 years, we would update 

the data set every 3 years. We proposed 

to use the FY 2006 survey results and 

not to utilize the FY 2003 survey results 

to take into account comments we 

received in response to the first set of 

results from the occupational mix 

survey, and to ensure that hospitals 

have had some experience with the 

occupational mix survey before it is 

used in determining these adjustments. 

Because we have used the HAS/ 

Monitrend data for so many years, we 

stated our belief that it was appropriate 

to continue to use these data for one 

more year and wait for the results of the 

FY 2006 survey. We stated that this 

would give hospitals an opportunity to 

have some experience with the 

occupational mix survey before it is 

used in these adjustments, and would 

allow us to compare the data from the 

FY 2006 occupational mix survey with 

the data reported in the 2003 survey, if 

necessary. However, for purposes of 

describing how we would implement 

this methodology, we applied the 

proposed calculation to the FY 2003 

occupational mix survey data. While we 

did not propose to use the FY 2003 data, 

we stated our belief that it was the best 

data available at the time to help 

explain our proposed methodology. 

To calculate the results below, we 

merged the FY 2003 occupational mix 

survey results into the FY 2003 cost 

report file. We eliminated all 

observations for non-IPPS providers, 

providers who failed to complete the 

occupational mix survey, and providers 

for which provider numbers, bed counts 

and/or day counts were missing. We 

also only included providers with 12 

months’ worth of data. This resulted in 

a pool of approximately 3,541 providers. 

For each provider in this pool, we 

calculated the number of nursing hours 

by adding the number of registered 

nurse, license practical nurse, and 

nursing aide hours reported on the 

occupational mix survey. We divided 


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the result of this calculation by the total 

number of inpatient days reported on 

the cost report to determine the number 

of nursing hours per patient day. 

For purposes of calculating the census 

regional averages for the various bedsize groups, we proposed to only 

include observations that fall within 3 

standard deviations of the mean of all 

observations, thus removing potential 

outliers in the data. Below are the 

results of this calculation. 

We realize that, in the chart, some 

results may appear to be anomalous (for 

example, 0–49 beds for census regions 

4, 6, and 8). We believe a small number 

of outlier data may have skewed the 

mean, which was the basis for 

identifying data within 3 standard 

deviations to include in the 

calculations. Therefore, we solicited 

comments on whether we should 

consider another method for 

determining the appropriateness of 

using available data in calculating the 

average number of nursing hours per 

patient day. For instance, in this case, 

the results are based on the inclusion of 

data within 3 standard deviations of the 

mean. Alternatively, we stated that we 

could use another measure of central 

tendency. 

PAID NURSING HOURS PER PATIENT DAY

Number of beds 

Census region 

1 2 3 4 5 6 7 8 9 

0–49 ................................................................................. 16.38 8.33 19.26 30.76 11.72 26.70 20.50 31.00 17.39 

50–99 ............................................................................... 13.71 11.07 15.66 17.37 13.69 15.53 12.51 16.63 16.11 

100–199 ........................................................................... 11.98 10.99 14.38 13.44 11.93 17.03 13.91 14.33 13.32 

200–399 ........................................................................... 12.40 12.19 14.19 13.00 10.57 16.20 11.35 14.06 15.33 

400 or more ...................................................................... 13.32 9.42 12.77 15.39 9.51 19.70 12.36 17.64 13.32 

(2) American Hospital Association 

Annual Hospital Survey 

In the process of evaluating different 

sources of data to replace the HAS/ 

Monitrend Data Book, we considered 

using the results of the AHA’s Annual 

Hospital Survey. This survey includes 

over 700 data fields that cover facilities 

and services, utilization, finances, and 

staffing. On average, 6,000 hospitals 

complete the survey each year. Section 

E of the Annual Survey Database 

includes total facility staffing data. FTE 

counts are available for registered 

nurses, practical and vocational nurses, 

nursing assistive personnel, and other 

personnel. However, FTEs in outpatient 

areas, excluded units, and nursing home 

units within the hospital are also 

included in the aggregated FTE counts. 

It is not possible to separately identify 

how many of the total reported nursing 

FTEs are attributable to the general 

acute care facility and how many to a 

distinct part unit or outpatient facility. 

Due to varying staffing needs in distinct 

part units and outpatient areas, in the 

proposed rule we stated our belief that 

it would be best for any calculation of 

average staffing for the inpatient acute 

care area to consist of data solely from 

the inpatient acute care area of the 

hospital. In the FY 2007 IPPS proposed 

rule (71 FR 24104), we requested 

comments on this issue. 

We received 16 public comments on 

our proposal. 

Comment: Many commenters believed 

that it is not appropriate to use the FY 

2006 occupational mix survey for 

making determinations under the 

volume decrease adjustment. The 

commenters believed the FY 2006 

occupational mix survey consists of 

unreliable data due to the rushed nature 

of the collection. The commenters 

suggested that CMS use the AHA 

Annual Survey data to determine 

nursing levels per patient day. One 

commenter expressed concern that the 

data from the occupational mix survey 

and the hospital cost report data were 

not for the same time period and that 

annualizing the data from the 

occupational mix survey may distort the 

data. Another commenter noted that the 

occupational mix survey collects data 

from ancillary areas similar to the AHA 

Annual Survey data and, therefore, use 

of either data source would result in a 

similar calculation. One commenter 

recommended that CMS work with the 

AHA to develop a new survey tool to 

collect this information. In the interim, 

the commenter recommended 

continuing to use the latest HAS 

Monitrend data. 

One commenter suggested that CMS 

no longer require fiscal intermediaries 

to compare a hospital’s nursing staff per 

patient day with other hospitals of like 

size in the same area. Rather, the 

commenter suggested that fiscal 

intermediaries should be able to 

evaluate a hospital’s individual needs 

and circumstances. The commenter also 

suggested that CMS only consider 

registered nurse and licensed practical 

nurse hours and eliminate nursing aide 

hours from the calculation. The 

commenter further suggested that CMS 

compare SCHs and MDHs to a smaller 

sample than the current census regions; 

for instance, CMS could compare 

hospitals in the same State. 

Response: We do not agree with the 

commenters who stated that the 

occupational mix survey results are 

unreliable. The data is supplied solely 

by hospitals, and because this is the 

second time hospitals have completed 

the survey, we believe they are familiar 

with the requirements and are providing 

accurate information. In addition, 

although the collection may have been 

more hurried in 2006 due to the 

Bellevue decision, as explained in 

section III.C. of this preamble, hospitals 

had opportunities to review, validate 

and correct their occupational mix data. 

For 2006, the occupational mix 

collection will include three months of 

data. Therefore, it will be necessary to 

annualize the data to reflect staffing 

levels for a one year period. We do not 

believe this distorts an individual 

hospital’s average staffing levels 

throughout the year unless the hospital 

experiences a unique event that either 

greatly increases or reduces hospital 

utilization and/or the hospital’s ability 

to recruit and maintain staff. However, 

it is for this reason that we require a 

minimum number of hospitals in each 

bed-size/census group to have reported 

staffing data before calculating an 

average for that category. We believe 

that by combining the results of at least 

three hospitals of like size in an area, we 

reduce the chance of unique events 

affecting individual hospitals distorting 

the averages. 

As previously mentioned, we stated 

in the proposed rule that it would be 

best to collect nursing data from only 

the inpatient, acute care portion of the 

hospital and that this would be a 

justification for using occupational mix 

survey data. However, in this final rule, 

we are correcting this statement, since 

the occupational mix survey—like the 

wage survey—collects data on both the 


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inpatient and outpatient areas of the 

hospital. Also, it is our understanding 

that hospital nursing staff may, and 

often do, rotate between the inpatient 

and outpatient areas of the hospital as 

necessary. In addition, inpatients often 

utilize services in the outpatient (or 

ancillary) areas of the hospital. Given 

that the occupational mix survey 

collects data on both outpatient and 

inpatient areas of the hospital, and 

given that most commenters stated that 

they preferred to use the AHA Annual 

Survey data and not the occupational 

mix data, our final policy will be to 

allow an SCH or MDH that has 

experienced a 5 percent or greater 

reduction in the number of discharges 

from one cost reporting period to the 

next the option of using either the AHA 

Annual Survey results or the 

occupational mix data to compare the 

number of hospital’s core staff with 

other like-sized hospitals in its 

geographic area. 

We recognize that the AHA data 

includes staffing data from distinct part 

units and skilled nursing facilities. 

While it is possible to identify which 

hospitals have skilled nursing facilities, 

it is not possible to distinguish between 

those hospitals with distinct part units 

and those without. Our data indicate 

that there are currently 1230 hospitalbased skilled nursing facilities. If we 

eliminated all hospitals with skilled 

nursing facilities from the pool of 

comparison hospitals that responded to 

the FY 2004 AHA Annual Survey, 

roughly 3,000 hospitals would remain. 

We believe this is a sufficient number of 

hospitals with which to calculate 

staffing averages and our final policy 

will be that when using the AHA 

Annual Survey, we will eliminate 

hospitals with hospital-based skilled 

nursing facilities. Also, consistent with 

the HAS/Monitrend Databook, we will 

only calculate the average number of 

nursing staff for a bed-size/census group 

if there are data available for three or 

more hospitals. 

In order to account for staff in the 

distinct part units, we would include in 

the patient day count the number of 

inpatient days from these units. While 

this may still lower the average number 

of staff per patient day, as discussed in 

more detail later in this section, a 

hospital may decide whether this data 

most closely resembles its staffing or 

whether the HAS/Monitrend data or 

occupational mix data better represents 

hospitals in its bed-size/census group. 

In light of this, we do not believe it is 

necessary for the AHA to develop a new 

survey tool to collect staffing 

information for purposes of this 

adjustment. 

In response to the commenter who 

suggested that the fiscal intermediaries 

take into account the individual 

circumstances of each SCH/MDH that 

experiences a decrease in discharges, we 

note that the commenter failed to 

suggest how this may be achieved. In 

light of our goal of maintaining a 

uniform standard for calculating the 

amount of the volume decrease 

adjustments, we believe that it is more 

appropriate for the fiscal intermediaries 

to utilize either the same or comparable 

data sources for all hospitals. The AHA 

Annual Survey, occupational mix 

survey, and HAS/Monitrend Databook 

offer this standard. We note, however, 

that the AHA Annual Survey, the 

occupational mix survey and the HAS/ 

Monitrend Databook are not identical 

data sources, as described above. 

Therefore, fiscal intermediaries and 

hospitals should work together to 

determine which data source best 

represents the staffing needs of the 

hospital. In addition, the fiscal 

intermediaries must consider any 

minimum staffing requirement set by 

the State. If the average number of 

nursing hours per patient day for a bedsize/census group is below the State’s 

minimum staffing requirement, the 

fiscal intermediaries may not reduce the 

amount of a hospital’s volume decrease 

adjustment to reflect a core number of 

nursing staff below what is required by 

law. In addition, we are continuing to 

employ the census areas defined by the 

AHA in the HAS/Monitrend Databook. 

The larger size of the census areas 

ensures that a sufficient number of 

hospitals respond in every bed-size 

category for each census region. 

We have considered the commenter’s 

statement that we should only consider 

registered nurse and licensed practical 

nurse staff when computing the number 

of nursing staff per patient day. 

However, we believe that nursing aides 

play an integral part in the delivery of 

nursing care and, therefore, should be 

considered part of the hospital’s nursing 

staff for purposes of this determination. 

Therefore, we will continue to calculate 

the average number of reported 

registered nurse, licensed practical 

nurse, and nursing aide hours per 

patient day. As previously noted, the 

registered nurse, licensed practical 

nurse, and nursing aide FTEs in the 

AHA Annual Survey data include 

employees from outpatient areas and 

distinct part units of the hospital. 

Therefore, the fiscal intermediaries will 

include SCH or MDH registered nurse, 

licensed practical nurse, and nursing 

aide FTEs for all areas of the hospital, 

including any distinct part units, when 

conducting the comparison. 

We had proposed to use the results of 

the 2006 occupational mix survey but 

not until FY 2008. At that time, we were 

not aware that we would have the 

results of the FY 2006 survey available 

to use for adjustments for decreases in 

discharges occurring in 2006. However, 

due to the shortened collection period 

necessitated by the decision in Bellevue 

Hospital Center v. Leavitt, these data 

will now be available for use for volume 

decrease adjustments for decreases in 

discharges between the 2005 and 2006 

cost reporting periods. These data will 

be updated every 3 years. The results of 

the FY 2006 survey may be used for 

volume decrease adjustment 

calculations for decreases in discharges 

occurring during the 2006, 2007 and 

2008 cost reporting periods. 

After consideration of the public 

comments received, we are finalizing a 

policy to allow SCHs and MDHs the 

option of using the results of (1) the 

occupational mix survey, (2) the AHA 

Annual Survey, or (3) the HAS/ 

Monitrend Databook for purposes of 

determining the amount of the volume 

decrease adjustment for any open 

adjustment requests. Beginning with 

adjustment requests for decreases in 

discharges occurring beginning with 

2007, the amount of the volume 

decrease adjustment will be based on 

either the AHA Annual Survey or the 

occupational mix survey results. 

Therefore a SCH or MDH that has 

experienced a decrease in discharges in 

2007 as compared to 2006 will no longer 

be permitted to use the HAS/Monitrend 

Databook results to calculate the amount 

of the volume decrease adjustment. 

If the SCH/MDH opts to use the 

results of the occupational mix survey, 

the fiscal intermediaries will determine 

the SCH’s or MDH’s total hospital 

nursing staff per inpatient day for the 

year of the volume decrease and 

compare that figure to the number 

published for the hospital’s census area 

and bed-size division. As described in 

the FY 2007 proposed rule, we will 

calculate the average number of nursing 

hours per patient day for all IPPS 

hospitals that responded to the 

occupational mix survey. We will begin 

by annualizing the results. We will then 

divide this figure by the number of 

inpatient days reported on the hospital 

cost report. At this point, we will 

eliminate results that fall outside three 

standard deviations of the mean in order 

to eliminate any potential outlier data. 

Hospitals will then be grouped by bedsize and census area and the average 

number of nursing hours per patient day 

will be calculated. We will post the 


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results of the occupational mix survey 

grouped by census division and bed-size 

group on the CMS Web site. Core 

staffing results and salaries will be 

compared to the salaries reported for 

both the inpatient and outpatient areas 

of the hospital. 

In place of the occupational mix 

survey results (or the HAS/Monitrend 

Databook, which may be used only for 

open adjustment requests) hospitals 

may also opt to use the AHA Annual 

Survey results. Where available, these 

AHA Annual Survey Results may be 

used for all open adjustment requests, as 

well as for requests involving decreases 

experienced in 2007 or thereafter. 

Currently, the AHA has published the 

annual results including the FY 2004 

survey. Fiscal intermediaries will use 

the survey results from the year in 

which the decrease occurred. For 

instance, if a hospital experiences a 

decrease between its 2002 and 2003 cost 

reporting periods, the fiscal 

intermediaries will compare the 

hospital’s 2003 staffing with the results 

of the FY 2003 AHA Annual Survey. We 

will calculate the results of the Annual 

Survey in a similar method to the 

occupational mix survey (eliminating 

from our data-set any hospitals with 

hospital-based SNFs). We will begin by 

multiplying the number of reported 

nurse FTEs by 2080 to derive the 

number of nursing hours per year (based 

on a 40 hour work week). We will then 

divide this number by the total number 

of inpatient days, including inpatient 

days from distinct part units, as 

reported on the hospital cost report. We 

will then eliminate all providers with 

results outside of three standard 

deviations from the mean. The hospitals 

will then be grouped by bed-size and 

census area and the average number of 

nursing hours per patient day will be 

calculated for each category. If the 

hospital chooses to use the results of the 

AHA Annual Survey, the fiscal 

intermediary will include the hospital’s 

number of nursing staff in the distinct 

part units, as well as distinct part unit 

inpatient days, in the determination. 

Bed-size groups will also be determined 

based on the total number of beds in the 

inpatient areas and distinct part units as 

reported on the hospital cost report. We 

will post the results of the Annual 

Survey grouped by census division and 

bed-size group on the CMS Web site. If 

a particular year is unavailable on the 

Web site or there are no results for a 

particular bed-size/census group, the 

fiscal intermediaries may contact CMS 

for the data. 

If the fiscal intermediary determines 

that the SCH or MDH has a 

disproportionately high number of staff 

on a per inpatient day basis as 

compared to area hospitals, the fiscal 

intermediary will modify the amount of 

the adjustment to reflect the cost of the 

excess staff. As stated above, because we 

are including registered nurses, licensed 

practical nurses, and nursing aides in 

this determination, the fiscal 

intermediary will calculate the excess 

staff adjustment by multiplying the 

number of excess staff by the average 

weighted salary among the three groups, 

taking into account the number of 

registered nurses, licensed practical 

nurses, and nursing aides at the facility. 

3. Mandatory Reporting Requirements 

for Any Changes in the Circumstances 

Under Which a Hospital Was 

Designated as an SCH or MDH 

Under § 412.92(b)(3) and 

§ 412.108(b)(4) respectively, once a 

facility has been designated as an SCH 

or MDH, the classification remains in 

effect without need for reapproval 

unless there is a change in the hospital’s 

circumstances. Currently, the 

regulations do not contain an explicit 

requirement that an SCH report to CMS 

or the fiscal intermediary a change in 

circumstances that would affect its 

status as an SCH. Likewise, the current 

regulations for MDHs do not contain an 

explicit requirement that an MDH report 

to CMS or the fiscal intermediary a 

change in the circumstances affecting its 

MDH status. However, the fiscal 

intermediary is required to evaluate on 

an ongoing basis whether a hospital 

continues to qualify for MDH status. 

We have become aware of several 

hospitals that have been paid based on 

SCH or MDH status even after the 

original circumstances that led to the 

respective classification changed. In the 

FY 2007 IPPS proposed rule (71 FR 

24104), we proposed to amend 

§ 412.92(b)(3) for SCHs and 

§ 412.108(b)(4) for MDHs to require an 

SCH or MDH to report to its appropriate 

CMS Regional Office when the 

circumstances under which the hospital 

was approved for SCH or MDH status 

have changed. The CMS Regional Office 

would then determine whether the SCH 

or MDH continues to meet the criteria 

for classification under § 412.92 or 

§ 412.108. If an SCH or MDH no longer 

meets these criteria, the CMS Regional 

Office would issue a letter canceling the 

classification within 30 days of its 

determination. If the circumstances 

affecting a hospital’s SCH or MDH 

classification change and the hospital 

does not disclose the information to the 

CMS Regional Office, CMS would 

cancel the hospital’s SCH or MDH 

designation effective on the earliest 

discernable date on which the fiscal 

intermediary can determine that the 

hospital no longer met the criteria for 

classification. 

For MDHs, this reporting requirement 

is in addition to the fiscal 

intermediary’s ongoing evaluations of 

whether a hospital continues to qualify 

for MDH status as set out in our existing 

regulations at § 412.108(b)(5). 

We received 41 comments on this 

proposal. 

Comment: Most commenters agreed 

that hospitals that no longer meet the 

qualification criteria for either SCH or 

MDH status should not continue to be 

paid as SCHs or MDHs. However, 

several commenters disagreed with the 

proposed requirement that an SCH or 

MDH notify the CMS Regional Office 

when any change in the circumstances 

that led to their classification occurs. 

They contended that the fiscal 

intermediary should be responsible for 

monitoring such conditions. One 

commenter argued that hospitals should 

not be required to report changes they 

cannot control, such as the building of 

new roads or hospitals. 

Another commenter noted that some 

of the criteria are very difficult for 

hospitals to monitor, such as patient 

stays at other hospitals in the area. The 

commenter stated that to monitor these 

criteria would impose a tremendous 

administrative burden on SCHs and 

MDHs. 

One commenter suggested that if CMS 

is to require that an SCH or MDH report 

on changes in the circumstances that led 

to its classification, the circumstances 

required to be reported be limited to 

those for which the hospital has readily 

available data, such as the opening of a 

new hospital within an SCH’s mileage 

criterion. One commenter suggested that 

CMS not finalize any reporting 

requirement for SCHs or MDHs. 

Response: We understand that some 

criteria may be difficult for hospitals to 

monitor. However, because a hospital 

cannot control the changes in 

circumstances should not imply that the 

hospital not be required to report 

changes of which it becomes aware. We 

agree with the commenters who 

suggested that certain criteria may be 

excessively burdensome for a hospital to 

monitor because they do not have ready 

access to the necessary data. For 

instance, we recognize that a hospital 

may not have the resources available to 

determine what percentage of patients 

in their service area has been admitted 

to other facilities in that area. For this 

reason, CMS often provides this data to 

hospitals seeking initial SCH 

classification. Therefore, we are 

modifying the change to the regulations 

to specify that SCHs will only be 


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expected to report changes that would 

effect the distance between it and 

another like-hospital, its geographic 

classification status (urban/rural), the 

number of beds (if the SCH was eligible 

under § 412.92(a)(1)(ii)), and travel time 

between itself and a like-provider. For 

instance, an SCH would be expected to 

report the opening of a new hospital or 

road, whether its geographic 

classification changed from rural to 

urban, and/or an increase in the number 

of beds at the hospital if the SCH was 

eligible under § 412.92(a)(1)(ii). An 

MDH would only be required to report 

if there is a change to the number of 

beds in the facility that increase the bed 

count to more than 100 and/or if its 

geographic classification changed from 

rural to urban. We will not expect an 

SCH or MDH to have knowledge of 

other factors that could affect SCH or 

MDH status. However, if it is 

subsequently shown that the hospital 

had knowledge of those factors, we 

would terminate SCH or MDH status as 

of the date the hospital became aware of 

the event. For example, we would not 

expect an SCH to be aware of the 

conversion of a nearby CAH to a short 

term acute care hospital. However, if 

there is documentation clearly 

indicating that the SCH had prior 

knowledge of the CAH’s conversion and 

the converted hospital is located within 

the mileage criterion precluding SCH 

status, we will rescind the SCH 

designation to the time when the 

documentation indicates the SCH 

became aware of the conversion. The 

SCH/MDH must report any changes of 

which it becomes aware that affect SCH 

or MDH status within 30 days of the 

event occurring. We are updating the 

regulations text at § 412.92 and 

§ 412.108 to reflect these requirements. 

We are also modifying the proposed 

change to the regulations to require that 

an SCH or MDH report any changes to 

the fiscal intermediary and not the 

regional office. Fiscal intermediaries are 

responsible for accepting and reviewing 

applications for SCH and MDH 

designations. Therefore, we believe it is 

appropriate for all documentation to 

continue to be sent to the fiscal 

intermediary. The fiscal intermediary 

will forward the information submitted 

by the SCH or the MDH and its 

recommendation to the appropriate 

regional office. 

Comment: Several commenters 

disagreed with the proposal to 

‘‘retroactively’’ withdraw SCH or MDH 

classification if it could be expected that 

the hospital was aware of a change in 

the circumstances that led to its 

classification but did not report those 

changes to the fiscal intermediary. The 

commenters noted that such a change in 

reimbursement could be financially 

devastating to a hospital and 

recommended that CMS develop a 

prospective process for withdrawing the 

hospital’s special payment status. One 

commenter suggested that an SCH or 

MDH in such a position lose their status 

immediately, but not retroactively. 

Several commenters requested 

clarification of how far back CMS would 

retroactively terminate SCH or MDH 

status. 

Response: As explained earlier, we 

have modified the proposal to withdraw 

SCH or MDH status when the provider 

was expected to be aware of limited 

changes in circumstances that caused 

the provider to be no longer eligible for 

such designation or when 

documentation shows that an SCH or 

MDH was aware of a change outside of 

those listed in the revised regulations at 

§ 412.92(b)(3)(ii) and § 412.108(b)(4)(ii) 

that would affect its classification and 

did not report these changes to the fiscal 

intermediary. In those circumstances, 

we believe it is appropriate to withdraw 

the special payment rate effective with 

the date the change occurred or, with 

respect to changes that an SCH or MDH 

is not required to report, when the 

provider becomes aware of the event. 

However, we understand the need to 

establish a limit to how far back CMS 

may rescind SCH or MDH status. We 

believe that withdrawal of the 

classification status falls within the 

framework of the reopening rules at 42 

CFR 405.1885. Accordingly, we will 

withdraw such status for cost reporting 

periods that are within the 3-year 

reopening period. Therefore, if the 

triggering event (as noted in the revised 

regulations) changes the circumstances 

under which the SCH or the MDH 

received such designation occurs within 

the three-year reopening period, under 

the reopening rules, we will withdraw 

the SCH or MDH designation for those 

periods. If the event occurred prior to 

the 3-year reopening period, we will 

only withdraw SCH or MDH designation 

for those cost reporting periods subject 

to the reopening period. 

Comment: Several commenters 

expressed concern that an SCH or MDH 

would be penalized for a change in 

circumstances even if it were unaware 

of such a change. 

Response: If an SCH or an MDH is not 

expected to be aware of a change in 

circumstances, they will not be 

penalized if one has occurred and it is 

not reported. We acknowledge the 

commenter’s concern and as noted 

above revised the regulations to take his 

concern into account. If due to the 

change in circumstances the SCH or the 

MDH is out of compliance with the 

criteria for classification and the change 

was not one of those specifically listed 

above and the SCH or MDH was not 

previously aware of the change, the 

provider’s status will be terminated 30 

days after the Regional Office has 

determined that the provider no longer 

meets the criteria for classification. 

Comment: Several commenters 

disagreed with the termination of SCH 

or MDH status within 30 days of the 

determination that the hospital no 

longer met the qualifications for such 

status. One commenter suggested that 

CMS continue to pay the provider as an 

SCH or MDH for either 6 months or to 

the end of the cost reporting period, 

whichever comes later. Several 

commenters suggested that CMS extend 

the period to 12 months. One 

commenter requested that CMS only 

finalize these policies for future SCHs 

and MDHs, in effect grandfathering all 

current SCHs and MDHs. 

Response: We do not agree that an 

SCH or an MDH that no longer meets 

the eligibility requirements for such 

designation should continue to receive 

enhanced payments. Currently, when 

the Regional Office determines that an 

SCH or MDH no longer meets the 

classification criteria, it issues a letter 

informing the provider that in 30 days 

the SCH or MDH status will terminate. 

As noted above, we will only terminate 

the provider’s status 30 days after the 

Regional Office has determined that the 

provider no longer meets the criteria for 

classification if due to a change in 

circumstances the SCH or the MDH is 

out of compliance with the criteria for 

classification and the change was not 

one of those specifically listed above 

and the SCH or MDH was not 

previously aware of the change. 

Comment: One commenter requested 

that CMS retain the current 

grandfathering provision for SCHs that 

permits any hospital that was an SCH as 

of December 19, 1989 to maintain that 

status despite any change of 

circumstances. 

Response: Section 6003(e)(1) of 

Pub. L. 101–239 modified the criteria for 

being eligible for SCH status by 

reducing the number of miles between 

providers from 50 to 35 and by requiring 

the Secretary to establish a criterion that 

takes into consideration the travel time 

between two providers. Section 

6003(e)(3) of Pub. L. 101–239 exempted 

hospitals that already had SCH status 

from meeting either of these 

requirements. In other words, any 

hospital that was an SCH in 1989 is 

protected under this grandfathering 

provision from the mileage criterion and 

whether or not it meets the criterion for 


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classification concerning travel time at 

§ 412.92(a)(3). However, we note that 

this grandfathering provision is limited 

to these two circumstances. Hospitals 

with SCH designation in effect prior to 

1989 can lose SCH status if they fail to 

meet any of the other eligibility criteria. 

Comment: One commenter suggested 

that CMS use this rule to change the 

regulation at § 412.92(a)(1)(i), which 

requires that no more than 25 percent of 

residents who become hospital 

inpatients or 25 percent of Medicare 

beneficiaries who become hospital 

inpatients in the hospital’s service area 

are admitted to other like hospitals 

within a 35-mile radius, or, if larger, the 

hospital’s service area. The commenter 

suggested that CMS require that either 

an SCH initially meet this requirement 

but later meet a lower threshold or that 

the SCH be required to demonstrate 

compliance in two out of the three most 

recent cost reporting periods. 

Response: We believe that this 

comment falls outside the scope of the 

proposed change in policy. However, 

we will keep this comment in mind 

when evaluating SCH policy in the 

future. 

Comment: Several commenters 

requested that CMS revise the definition 

of ‘‘like hospital,’’ especially in 

response to the growing number of 

specialty hospitals. Several commenters 

recommended that CMS not consider a 

specialty hospital to be a ‘‘like hospital’’

for purposes of determining eligibility 

and compliance with SCH criteria. One 

commenter expressed concern that the 

policy of considering any hospital 

whose number of inpatient days from 

units or wards generally payable under 

the IPPS is 8 percent or more of the total 

number of inpatient days from units or 

wards generally payable under the IPPS 

at the SCH a ‘‘like hospital’’ is arbitrary 

and should be reviewed. The 

commenter suggested that CMS increase 

the 8-percent threshold to at least 10 

percent. Another commenter requested 

that CMS allow SCHs to retain its status 

even if a like hospital opens in its 

service area as long as the SCH’s case 

mix index exceeds those of the like 

hospitals. 

Response: While we understand the 

commenters’ concerns, we believe that 

this comment is outside of the scope of 

the proposed policy change. However, 

we will keep this comment in mind 

when evaluating SCH policy in the 

future. In the meantime, we refer 

commenters to the discussion of ‘‘like 

hospital’’ in the preamble of the FY 

2003 IPPS final rule (67 FR 50053–56). 

As we noted in that preamble, our goal 

for defining ‘‘like hospital’’ was to strike 

a balance between the need to ensure 

that SCHs do not lose their special 

status due to specialty hospitals opening 

nearby and the need to ensure that only 

hospitals that are the sole source of 

short-term acute hospitals services for 

their community qualify as SCHs. We 

originally proposed to consider any 

hospital that overlapped on 3 percent of 

more of services rendered to be 

considered a like hospital. However, in 

response to the public comments 

received, we finalized a definition of 

‘‘like hospital’’ as a hospital paid under 

the IPPS with 8 percent or more of the 

total number of inpatient days as the 

SCH. 

After consideration of the public 

comments received, we are finalizing a 

change to the regulations to specify that 

SCHs and MDHs will be required to 

report to the fiscal intermediary specific 

changes it becomes aware of that would 

affect the criteria under which it was 

eligible for such designation. For an 

SCH, the changes are as follows: 

distance between it and another like 

hospital, its geographic classification 

status (urban/rural), the number of beds 

if the SCH was eligible under 

§ 412.92(a)(1)(ii), and the travel time 

between itself and a like-provider. An 

MDH will be required to report if there 

is a change to the number of beds in the 

facility that increase the bed count to 

more than 100 and/or if its geographic 

classification changed from rural to 

urban. 

4. Payment Changes for MDHs Under 

the DRA of 2005 (§ 412.79, § 412.90(j) 

and § 412.108) 

a. Background 

Under § 412.108(a) of our regulations, 

in order to be classified as an MDH, a 

hospital must: (1) Be located in a rural 

area (as defined in 42 CFR Part 412, 

Subpart D); (2) have 100 or fewer beds 

(as defined at § 412.105(b)) during the 

cost reporting period; (3) must not be 

classified as an SCH (as defined in 

§ 412.92); and (4) have no less than 60 

percent of its inpatient days or 

discharges attributable to inpatients 

receiving Medicare Part A benefits 

during either its cost reporting period 

beginning in FY 1987, or in two of the 

last three of its audited cost reports that 

have been settled. 

MDHs have been eligible for a series 

of special payment rates under the IPPS. 

Section 6003(f) of Pub. L. 101–239 

created the first IPPS special payment 

methodology for MDHs. Effective for 

cost reporting periods beginning on or 

after April 1, 1990, and ending on or 

before March 31, 1993, an MDH was 

paid based on whichever of the 

following rates yielded the greatest 

aggregate payment for the cost reporting 

period: 

• The Federal payment rate 

applicable to the MDH; 

• The MDH’s updated hospitalspecific rate based on its FY 1982 base 

period costs per discharge; or 

• The MDH’s updated hospitalspecific rate based on its FY 1987 base 

period costs per discharge. 

Section 13501(e)(1) Pub. L. 103–66 

extended the MDH payment provisions 

through 1994 and provided that, for 

discharges occurring after March 31, 

1993, if an MDH’s applicable hospitalspecific rate exceeded the Federal 

payment rate, the additional payment 

was limited to 50 percent of the amount 

by which the applicable updated 

hospital-specific rate exceeded the 

Federal rate. These provisions expired 

effective for cost reporting periods 

beginning on or after October 1, 1994. 

Section 4204(a)(3) of Pub. L. 105–33 

amended sections 1886(d)(5)(G)(i) and 

(d)(5)(G)(ii)(II) of the Act to reinstate 

these special MDH payment provisions, 

including the 50-percent limitation, for 

cost reporting periods ‘‘beginning on or 

after October 1, 1997, and before 

October 1, 2001.’’ Section 321(b)(1) of 

Pub. L. 106-113 made a technical 

amendment to these provisions of the 

Act (which describes the time periods 

for which some of the special payment 

provisions apply and the time periods 

during which a hospital may be 

considered an MDH under section 

1886(d)(1)(G)(iv) of the Act) by striking 

the language ‘‘beginning on or after 

October 1, 1997, and before October 1, 

2001’’ and replacing it with ‘‘discharges 

occurring on or after October 1, 1997, 

and before October 1, 2001’’. This 

change was made effective as if 

included in Pub. L. 105-33. Pub. L. 106–

113 also provided for a 5-year extension 

of the MDH special payment provisions. 

Section 404(a) of that law further 

amended sections 1886(d)(1)(G)(i) and 

(d)(1)(G)(ii)(II) of the Act by striking the 

phrase ‘‘and before October 1, 2001’’

and inserting the phrase ‘‘and before 

October 1, 2006’’. 

Section 5003(a) of Pub. L. 109–171 

(DRA of 2005) amended the MDH 

special payment provisions in the Act. 

It amended section 1886(d)(5)(G) of the 

Act and made a conforming amendment 

under section 1886(b)(3)(D) of the Act to 

provide for another 5-year extension of 

the special MDH payment methodology. 

Under this extension, a revised special 

MDH payment methodology will apply 

for discharges occurring on or after 

October 1, 2006, and before October 1, 

2011. 

As stated earlier, MDHs currently are 

paid using whichever rate yields the 


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greatest aggregate payment: the Federal 

payment rate or, if higher, the Federal 

payment rate plus 50 percent of the 

difference between the Federal payment 

rate and the updated hospital-specific 

rate based on FY 1982 or FY 1987 base 

period costs per discharge. 

Section 5003(b) of Pub. L. 109–171 

provides that, for discharges occurring 

on or after October 1, 2006, and before 

October 1, 2011, an MDH’s updated 

hospital-specific rate will be the FY 

2002 base period costs per discharges if 

the FY 2002 based hospital-specific rate 

results in a payment increase. In cases 

where no payment increase results from 

using FY 2002 hospital-specific rate, an 

MDH will continue to be paid based on 

the higher of its updated FY 1982 or FY 

1987 hospital-specific rates, if using one 

of those rates results in a payment 

higher than that under the Federal 

payment rate. (Unlike an SCH, an MDH 

does not have the option of using its 

updated FY 1996 hospital-specific rate.) 

Under section 5003(c) of Pub. L. 109–

171, for discharges occurring on or after 

October 1, 2006, and before October 1, 

2011, if an MDH’s applicable hospitalspecific rate exceeded the Federal 

payment rate, the additional payment is 

limited to 75 percent (as opposed to the 

previous 50 percent) of the amount by 

which the applicable updated hospitalspecific rate exceeded the Federal rate. 

Section 5003(d) of Pub. L. 109–171 

enhances the DSH adjustment for MDHs 

for discharges occurring on or after 

October 1, 2006. Further discussion 

concerning the implementation of this 

provision can be found in section 

IV.F.4. of the preamble to the FY 2007 

IPPS final rule. 

b. Regulation Changes 

In this FY 2007 IPPS final rule, we are 

amending our regulations to implement 

section 5003(a) through (c) of Pub. L. 

109–171. We are adding a new § 412.79 

that describes how we will compute and 

update the MDH hospital-specific rate 

based on its FY 2002 base period. In 

addition, we are revising § 412.90(j) to 

reflect the extension of the MDH special 

payment provisions to discharges 

occurring before October 1, 2011. We 

also are amending § 412.108 by revising 

paragraph (a) and adding a new 

paragraph (c)(2)(iii) to reflect the 

changes to the special payment 

methodology effective for discharges 

occurring on or after October 1, 2006, 

and before October 1, 2011. 

Comment: One commenter pointed 

out that the proposed language in the 

new § 412.79(a) in the proposed rule 

differs from the language provided in 

section 5003 of the statute. That is, the 

proposed regulatory language reads 

‘‘ending on or before October 1, 2001’’; 

however, the commenter believed it 

should read ‘‘beginning on or after 

October 1, 2001’’ as specified in the 

statute. 

Response: We agree with the 

commenter that the regulatory language 

should mirror the statutory language 

and are making the appropriate changes 

to the regulatory language in this final 

rule. 

Comment: One commenter supported 

the proposed changes made as well as 

CMS’ timely implementation of the 

provisions from the DRA of 2005. 

Response: We appreciate the 

commenter’s support. 

We received no other comments on 

these proposed changes. Therefore, we 

are adopting the proposed changes to 

the regulations as final, with the 

indicated change to the regulatory text 

to reflect the FY 2002 base period 

statutory language. 

In addition, as we proposed, in this 

FY 2007 IPPS final rule, as a part of the 

amendments to § 412.90(j) and 

§ 412.108(a), we are making two 

technical corrections. Section 412.90(j) 

describes when an MDH may receive a 

special payment adjustments, while 

§ 412.108(a) discusses the definition of 

an MDH. Each of these sections now 

refers to ‘‘cost reporting periods 

beginning on or after April 1, 1990 and 

before October 1, 1994, or beginning on 

or after October 1, 1997 and before 

October 1, 2006’’. However, as noted 

above, sections 1886(d)(5)(G)(i) and 

(d)(5)(G)(ii)(II) of the Act, the provisions 

of the Act from which these time 

periods were drawn, were amended by 

Pub. L. 106–113. Sections 321(b)(1) and 

404(a) of Pub. L. 106–113 amended 

sections 1886(d)(5)(G)(i) and (d)(5)(ii)(II) 

of the Act so that the phrase in each 

section ‘‘beginning on or after October 1, 

1997, and before October 1, 2001’’ was 

replaced with the phrase ‘‘discharges 

occurring on or after October 1, 1997, 

and before October 1, 2006’’. (Section 

5003(a)(1) of Pub. L. 109–171 changed 

the ending date in these provisions from 

‘‘before October 1, 2006’’ to ‘‘before 

October 1, 2011’’.) 

Therefore, we are removing the 

incorrect phrase ‘‘beginning on or after 

October 1, 1997’’ from each of these 

regulations and inserting the phrase, 

‘‘discharges occurring on or after 

October 1, 1997’’, to conform the 

regulations to the statute. 

We did not receive any public 

comments on these technical changes. 

5. Technical Change 

As we proposed, in this final rule, we 

are correcting the spelling of the word 

‘‘adjustment’’ in paragraph (b)(2)(iv) of 

§ 412.92, by changing it to 

‘‘adjustment’’. 

We did not receive any public 

comments on this technical change. 

D. Rural Referral Centers (§ 412.96) 

Under the authority of section 

1886(d)(5)(C)(i) of the Act, the 

regulations at § 412.96 set forth the 

criteria that a hospital must meet in 

order to qualify under the IPPS as a 

rural referral center. For discharges 

occurring before October 1, 1994, rural 

referral centers received the benefit of 

payment based on the other urban 

standardized amount rather than the 

rural standardized amount. Although 

the other urban and rural standardized 

amounts are the same for discharges 

occurring on or after October 1, 1994, 

rural referral centers continue to receive 

special treatment under both the DSH 

payment adjustment and the criteria for 

geographic reclassification. 

Section 402 of Pub. L. 108–173 raised 

the DSH adjustment for other rural 

hospitals with less than 500 beds and 

rural referral centers. Other rural 

hospitals with less than 500 beds are 

subject to a 12-percent cap on DSH 

payments. Rural referral centers are not 

subject to the 12 percent cap on DSH 

payments that is applicable to other 

rural hospitals (with the exception of 

rural hospitals with 500 or more beds). 

Rural referral centers are not subject to 

the proximity criteria when applying for 

geographic reclassification, and they do 

not have to meet the requirement that a 

hospital’s average hourly wage must 

exceed 106 percent of the average 

hourly wage of the labor market area 

where the hospital is located. 

Section 4202(b) of Pub. L. 105–33 

states, in part, ‘‘[a]ny hospital classified 

as a rural referral center by the Secretary 

* * * for fiscal year 1991 shall be 

classified as such a rural referral center 

for fiscal year 1998 and each subsequent 

year.’’ In the August 29, 1997 final rule 

with comment period (62 FR 45999), we 

also reinstated rural referral center 

status for all hospitals that lost the 

status due to triennial review or MGCRB 

reclassification, but not to hospitals that 

lost rural referral center status because 

they were now urban for all purposes 

because of the OMB designation of their 

geographic area as urban. However, 

subsequently, in the August 1, 2000 

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 a rural referral center and 

lost their status due to OMB 

redesignation of the county in which 

they are located from rural to urban to 

be reinstated as a rural referral center. 


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Otherwise, a hospital seeking rural 

referral center status must satisfy the 

applicable criteria. We used 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 a rural referral 

center is to have 275 or more beds 

available for use (§ 412.96(b)(1)(ii)). A 

rural hospital that does not meet the bed 

size requirement can qualify as a rural 

referral center 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) 

(§ 412.96(c)(1) through (c)(5)). (See also 

the September 30, 1988 Federal Register 

(53 FR 38513).) With respect to the two 

mandatory prerequisites, a hospital may 

be classified as a rural referral center 

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 

Section 412.96(c)(1) provides that 

CMS will establish updated national 

and regional CMI values in each year’s 

annual notice of prospective payment 

rates for purposes of determining rural 

referral center status. The methodology 

we use to determine the national and 

regional CMI values is set forth in 

regulations at § 412.96(c)(1)(ii). The 

national median CMI value for FY 2007 

includes all urban hospitals nationwide, 

and the regional values for FY 2007 are 

the median values of urban hospitals 

within each census region, excluding 

those hospitals with approved teaching 

programs (that is, those hospitals 

receiving indirect medical education 

payments as provided in § 412.105(f)). 

These values are based on discharges 

occurring during FY 2005 (October 1, 

2004 through September 30, 2005) and 

include bills posted to CMS’ records 

through March 2006. 

In the FY 2007 IPPS proposed rule (71 

FR 24106), we proposed that, in 

addition to meeting other criteria, if 

they are to qualify for initial rural 

referral center status for cost reporting 

periods beginning on or after October 1, 

2006, rural hospitals with fewer than 

275 beds must have a CMI value for FY 

2005 that is at least—

• 1.3365; or 

• The median CMI value (not 

transfer-adjusted) for urban hospitals 

(excluding hospitals with approved 

teaching programs as identified in 

§ 412.105(f)) calculated by CMS for the 

census region in which the hospital is 

located. (See the table set forth in the 

proposed FY 2007 IPPS proposed rule at 

71 FR 24106.) 

Based on the latest data available (FY 

2005 bills received through March 

2006), in addition to meeting other 

criteria, if they are to qualify for initial 

rural referral center status for cost 

reporting periods beginning on or after 

October 1, 2006, rural hospitals with 

fewer than 275 beds must have a CMI 

value for FY 2005 that is at least—

• 1.3132; or 

• The median CMI value (not 

transfer-adjusted) for urban hospitals 

(excluding hospitals with approved 

teaching programs as identified in 

§ 412.105(f)) 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: 

Region 

Case-mix 

index 

value 

1. New England (CT, ME, MA, 

NH, RI, VT) ............................... 1.2313 

2. Middle Atlantic (PA, NJ, NY) .... 1.2619 

3. South Atlantic (DE, DC, FL, 

GA, MD, NC, SC, VA, WV) ...... 1.3252 

4. East North Central (IL, IN, MI, 

OH, WI) ..................................... 1.3118 

5. East South Central (AL, KY, 

MS, TN) ..................................... 1.2926 

6. West North Central (IA, KS, 

MN, MO, NE, ND, SD) .............. 1.2344 

7. West South Central (AR, LA, 

OK, TX) ..................................... 1.3872 

8. Mountain (AZ, CO, ID, MT, NV, 

NM, UT, WY) ............................ 1.3877 

9. Pacific (AK, CA, HI, OR, WA) .. 1.3366 

Hospitals seeking to qualify as rural 

referral centers or those wishing to 

know how their CMI value compares to 

the criteria should obtain hospitalspecific CMI values (not transferadjusted) from their fiscal 

intermediaries. Data are available on the 

Provider Statistical and Reimbursement 

(PS&R) System. In keeping with our 

policy on discharges, these CMI values 

are computed based on all Medicare 

patient discharges subject to the IPPS 

DRG-based payment. 

2. Discharges 

Section 412.96(c)(2)(i) provides that 

CMS will set forth the national and 

regional numbers of discharges in each 

year’s annual notice of prospective 

payment rates for purposes of 

determining rural referral center 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 2007 IPPS 

proposed rule (71 FR 24106), we 

proposed to update the regional 

standards based on discharges for urban 

hospitals’ cost reporting periods that 

began during FY 2003 (that is, October 

1, 2002 through September 30, 2003), 

which is the latest available cost report 

data we had at that time. 

Therefore, in the FY 2007 IPPS 

proposed rule (71 FR 24106), we 

proposed that, in addition to meeting 

other criteria, a hospital, if it is to 

qualify for initial rural referral center 

status for cost reporting periods 

beginning on or after October 1, 2006, 

must have as the number of discharges 

for its cost reporting period that began 

during FY 2003 a figure that is 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. (See 

the table set forth in the FY 2007 IPPS 

proposed rule at 71 FR 24106.) 

Based on the latest discharge data 

available at this time, that is, for cost 

reporting periods that began during FY 

2003, the final median number of 

discharges for urban hospitals by census 

region area are as follows: 

Region 

Number 

of discharges 

1. New England (CT, ME, MA, 

NH, RI, VT) ............................... 7,366 

2. Middle Atlantic (PA, NJ, NY) .... 10,307 

3. South Atlantic (DE, DC, FL, 

GA, MD, NC, SC, VA, WV) ...... 10,546 

4. East North Central (IL, IN, MI, 

OH, WI) ..................................... 9,200 

5. East South Central (AL, KY, 

MS, TN) ..................................... 7,519 

6. West North Central (IA, KS, 

MN, MO, NE, ND, SD) .............. 7,441 

7. West South Central (AR, LA, 

OK, TX) ..................................... 7,239 

8. Mountain (AZ, CO, ID, MT, NV, 

NM, UT, WY) ............................ 10,419 

9. Pacific (AK, CA, HI, OR, WA) .. 7,965 

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. 

We reiterate that if an osteopathic 

hospital is to qualify for rural referral 


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center status for cost reporting periods 

beginning on or after October 1, 2006, 

the hospital would be required to have 

at least 3,000 discharges for its cost 

reporting period that began during FY 

2003. 

Comment: Commenters indicated the 

case-mix index values that are used as 

criteria for rural referral center status 

have been fluctuating significantly in 

the past few years (2005 through 2007), 

where they had been relatively stable in 

prior years. They questioned the 

methodology used to calculate the 

values. 

Response: While we agree that there 

have been changes in the case-mix 

index values over the past few years, in 

our view, they have not been significant. 

The methodology for determining the 

case-mix index values for rural referral 

center status has not changed. The FY 

2007 final case-mix index values are 

based on a more complete file than the 

proposed values and are more in line 

with the prior year’s values. Although 

the methodology for calculating the 

indices has not changed, in response to 

the commenters’ concerns, we will 

continue to evaluate whether there are 

other factors that would cause the 

observed shift in the values. 

Comment: One commenter 

recommended that CMS clarify the last 

sentence of the ‘‘Case-Mix Index’’

section which states that ‘‘In keeping 

with our policy on discharges, these 

case-mix index values are computed 

based on all Medicare patient discharges 

subject to DRG-based payment.’’ The 

commenter believed it would be 

inappropriate to include discharges paid 

under the LTC DRG payment system. 

The commenter recommended that, 

assuming that discharges paid under the 

LTC DRG-based payment system are 

excluded, this sentence should be 

changed to specify ‘‘under the inpatient 

PPS DRG-based payment system.’’

Response: We agree with the 

commenter and have revised the 

preamble language in this final rule. The 

sentence now states, ‘‘In keeping with 

our policy on discharges, these case-mix 

index values are computed based on all 

Medicare patient discharges subject to 

the IPPS DRG-based payment.’’

Comment: Two commenters 

addressed the issue of which cost 

reporting period is to be used to 

determine the number of discharges of 

a hospital applying for initial rural 

referral center status. One commenter 

referenced 42 CFR 412.96(c)(2)(ii), 

which states that an osteopathic 

hospital applying for rural referral 

center status ‘‘must have at least 3,000 

discharges during its most recently 

completed cost reporting period to meet 

the number of discharges criterion.’’

This commenter believed that the 

preamble language in the proposed rule 

should be corrected to reflect the use of 

the hospital’s most recently completed 

cost reporting period, rather than a cost 

reporting period specified by a fiscal 

year. The second commenter expressed 

an opposite view and stated that the 

cost reporting period specified by a 

fiscal year in the rule should apply and 

not the ‘‘most recently completed cost 

reporting period’’ specified in the 

regulations. 

Response: We have considered this 

issue and have decided to clarify the 

regulations to be consistent with our 

longstanding practice as well as the 

policy we proposed in the FY 2007 IPPS 

proposed rule of using the same cost 

reporting period used to develop the 

regional medians. In this way, we derive 

the regional medians (to which the 

hospital’s discharges may be compared) 

as well as the hospital’s own discharge 

data using the same time period. 

Because we use the FY 2003 data for 

developing the regional medians, we 

will also use this data for determining 

the hospital’s own discharges. This is in 

keeping with our longstanding and 

consistent policy of publishing in our 

preamble a specific cost reporting 

period that we consider to have the 

latest available cost report data at the 

time of publication of the rule. We have 

made technical revisions to § 412.96 to 

reflect our proposed policy. The 

language at § 412.96(c)(2)(i) will now 

state, ‘‘the hospital’s cost reporting 

period that began during the same fiscal 

year as the cost reporting periods used 

to compute the regional median 

discharges under paragraph (i) of this 

section.’’ We are also making similar 

revisions to the references to ‘‘the 

hospital’s most recently completed cost 

reporting period’’ in § 412.96(c)(2)(ii) 

and 412.96(i)(3). In addition, in 

§ 412.96(c)(2)(ii), we are deleting the last 

sentence that references ‘‘the triennial 

review.’’

E. Indirect Medical Education (IME) 

Adjustment (§ 412.105) 

1. Background 

Section 1886(d)(5)(B) of the Act 

provides that prospective payment 

hospitals that have residents in an 

approved graduate medical education 

(GME) program receive an additional 

payment 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 § 412.105. 

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 full-time equivalent 

(FTE) resident count for direct GME and 

IME payment purposes. Under section 

1886(h)(4)(F) of the Act, a hospital’s 

unweighted FTE count of residents 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, the limit on 

the FTE resident count for IME purposes 

is effective for discharges occurring on 

or after October 1, 1997. A similar limit 

is effective for direct GME purposes for 

cost reporting periods beginning on or 

after October 1, 1997. 

2. IME Adjustment Factor for FY 2007 

The IME adjustment to the DRG 

payment is based in part on the 

applicable IME adjustment factor. The 

IME adjustment factor is calculated 

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 × [{1 + r} .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 Pub. L. 108–173 

modified the formula multiplier (c) to be 

used in the calculation of the IME 

adjustment. Prior to the enactment of 

Pub. L. 108–173, the formula multiplier 

was fixed at 1.35 for discharges 

occurring during FY 2003 and 

thereafter. Section 502(a) modified the 

formula multiplier beginning midway 

through FY 2004 and provided for a 

new schedule of formula multipliers for 

FY 2005 and thereafter. In the FY 2005 

IPPS 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 § 412.105(d)(3)(viii) 

through (d)(3)(xii). In the FY 2007 IPPS 

proposed rule (71 FR 24107), we 

specified that for any discharges 

occurring during FY 2007, the 

statutorily mandated formula multiplier 

is 1.32. Previously, for FY 2007, the 

mandated formula multiplier was 1.42. 

We estimate that application of the 

mandated formula multiplier for FY 

2007 will result in an increase of 5.35 

percent in IME payment for every 

approximately 10-percent increase in 

the resident-to-bed ratio. 

Comment: While acknowledging that 

the formula multiplier for FY 2007 is 

mandated in law, several commenters 

expressed opposition to the reduced 


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IME payment resulting from the 

application of the formula multiplier. 

Response: As noted by the 

commenters, the schedule of formula 

multipliers to be used in the calculation 

of the IME adjustment is mandated in 

law. In this rule, we are simply 

reiterating that, for any discharges 

occurring during FY 2007, the formula 

multiplier is 1.32. 

3. Technical Change to Revise CrossReference 

In the FY 2007 IPPS proposed rule (71 

FR 24107), we proposed to revise the 

cross-references included in paragraph 

(f)(1)(ii)(C) of § 412.105 that specify the 

criteria for counting FTE residents who 

spend time in nonprovider settings for 

IME payment adjustment purposes. 

Currently, this paragraph only cites the 

criteria set forth in §§ 413.78(c) or 

413.78(d). We should have also cited the 

provisions of § 413.78(e), which state 

that the time residents spend in 

nonprovider settings such as 

freestanding clinics, nursing homes, and 

physicians’ offices in connection with 

approved programs may be included in 

determining the number of FTE 

residents in the calculation of a 

hospital’s resident count if other 

applicable conditions specified in 

paragraph (e) are met. 

We did not receive any specific public 

comments on the proposed addition of 

a cross-reference to § 413.78(e) to 

§ 412.105(f)(1)(ii)(C) and are therefore 

adopting it as final without 

modification. 

We note that in sections IV.H.2.,3.,4., 

and 5. of the FY 2007 IPPS proposed 

rule (71 FR 24111), we discussed other 

policy changes and clarifications to the 

methodology for counting FTE residents 

for the purposes of direct GME 

payments, which also would be 

applicable to IME payments. We 

respond to public comments received 

on those proposals below in the 

specified sections. 

F. Payment Adjustment for 

Disproportionate Share Hospitals 

(DSHs) (§ 412.106) 

1. Background 

Section 1886(d)(5)(F) of the Act 

provides for additional payments to 

subsection (d) hospitals that serve a 

disproportionate share of low-income 

patients. The Act specifies two methods 

for a hospital to 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 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 indigent patients. These 

hospitals are commonly known as 

‘‘Pickle hospitals.’’ The second method, 

which is also the most commonly used 

method for a hospital to qualify, is 

based on a complex statutory formula 

under which payment adjustments are 

based on the level of the hospital’s DSH 

patient percentage, which is the sum of 

two fractions: the ‘‘Medicare fraction’’

and the ‘‘Medicaid fraction.’’ The 

Medicare fraction is computed by 

dividing the number of patient days that 

are furnished to patients who were 

entitled to both Medicare Part A and 

Supplemental Security Income (SSI) 

benefits by the total number of patient 

days furnished to patients entitled to 

benefits under Medicare Part A. The 

Medicaid fraction is computed by 

dividing the number of patient days 

furnished to patients who, for those 

days, were eligible for Medicaid but 

were not entitled to benefits under 

Medicare Part A by the number of total 

hospital patient days in the same 

period. 

DSH

Patient

Percentage

Medicare SSI Days

Total Medicare Days

= + , Medicaid Non Medicare Days

Total Patient Days

, -

2. Technical Corrections 

In the FY 2007 IPPS proposed rule (71 

FR 24108), we proposed to make a 

technical correction to 

§ 412.106(a)(1)(iii) to reflect the 

statutory requirement at section 

1886(d)(8)(E) of the Act that, as of 

January 1, 2000, hospitals reclassified 

under § 412.103 are considered rural for 

purposes of this DSH regulation. We 

also proposed to correct the regulation 

to eliminate the reference to § 412.62(f). 

These corrections reflect current policy 

and already-existing statutory 

requirements. 

We did not receive any public 

comments regarding the proposed 

corrections to § 412.106(a)(1)(iii) to 

reflect the statutory requirement that 

section 1886(d)(8)(E) of the Act that 

hospitals reclassified under § 412.103 

are considered rural for purposes of this 

DSH regulation and to eliminate the 

reference to § 412.62(f). Therefore, we 

are adopting the corrections as final 

without modification. 

3. Reinstatement of Inadvertently 

Deleted Provisions on DSH Payment 

Adjustment Factors 

In an interim final rule published in 

the Federal Register on June 13, 2001 

(66 FR 32174 and 32194) (which was 

finalized in the Federal Register on 

August 1, 2001 (66 FR 39827)), we 

incorporated into our regulations at 

§ 412.106(d)(2) the provisions of section 

211(b) of Pub. L. 106–554. Section 

211(b) amended section 1886(d)(5)(F) of 

the Act to revise the calculation of the 

disproportionate share percentage 

adjustment for hospitals affected by the 

revised DSH qualifying threshold 

percentages specified in section 211(a) 

of Pub. L. 106–554. When the section 

211 changes were incorporated into the 

Code of Federal Regulations at 

§ 412.106(d)(2), the regulation text at 

§ 412.106(d)(2)(v) was inadvertently 

deleted during the transcribing of the 

new text into the existing regulations. 

Section 412.106(d)(2)(v) specifies the 

payment adjustment factors for 

hospitals that meet the following criteria 

under § 412.106(c)(2) for discharges 

occurring on or after April 1, 1990, and 

before October 1, 1991, and on or after 

October 1, 1991: Hospitals located in an 

urban area, that have 100 or more beds, 

and that can demonstrate that, during 

their cost reporting period, more than 30 

percent of their net inpatient care 

revenues are derived from State and 

local government payments for care 

furnished to indigent patients. 

In the FY 2007 IPPS proposed rule (71 

FR 24108), we proposed to reinstate the 

inadvertently deleted text of 

§ 412.106(d)(2)(v). We noted that this is 

a correction to the regulations; we did 

not propose to change the payment 

adjustment factors for hospitals that 

meet the criteria under § 412.106(c)(2). 

We did not receive any public 

comments on this proposal and are, 

therefore, adopting it as final without 

modifications. 


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4. Enhanced DSH Adjustment for MDHs 

The DSH adjustment factor for most 

categories of hospitals is capped at 12 

percent. Urban hospitals with more than 

100 beds, rural hospitals with more than 

500 beds, and rural referral centers, are 

exempt from this cap. 

Section 5003(d) of Pub. L. 109–171 

(DRA of 2005) amended section 

1886(d)(5)(F) of the Act to revise the 

DSH payment adjustment factor for 

MDHs, effective for discharges occurring 

on or after October 1, 2006. Specifically, 

section 5003(d) amended section 

1886(d)(5)(F)(xiv)(II) of the Act to 

exclude MDHs from the 12-percent DSH 

adjustment factor cap. 

For all discharges occurring on or 

after October 1, 2006, the fiscal 

intermediary will not apply the cap 

when calculating the DSH payments. 

These payments will be subject to 

revision upon final settlement of the 

cost reporting period. We note that this 

change will not affect the calculation of 

the disproportionate patient percentage. 

In the FY 2007 IPPS proposed rule (71 

FR 24108), we proposed to amend the 

regulations at § 412.106 to include this 

provision under proposed new 

paragraph (d)(2)(iv)(D). 

We did not receive any public 

comments of the proposed addition of 

§ 412.106(d)(2)(iv)(D) to our regulations 

to reflect the revision to section 

1886(d)(5)(F)(xiv)(II) of the Act made by 

section 5003 of Pub. L. 109–171. 

Therefore, we are adopting the proposed 

revision as final. 

G. Geographic Reclassifications 

(§§ 412.103, 412.230, and 412.234) 

1. Background 

With the creation of the MGCRB, 

beginning in FY 1991, under section 

1886(d)(10) of the Act, hospitals could 

request reclassification from one 

geographic location to another for the 

purpose of using the other area’s 

standardized amount for inpatient 

operating costs or the wage index value, 

or both (September 6, 1990 interim final 

rule with comment period (55 FR 

36754), June 4, 1991 final rule with 

comment period (56 FR 25458), and 

June 4, 1992 proposed rule (57 FR 

23631)). As a result of legislative 

changes under section 402(b) of Pub. L. 

108–7, section 402 of Pub. L. 108–89, 

and section 401 of Pub. L. 108–173, the 

standardized amount reclassification 

criterion for large urban and other areas 

is no longer necessary or appropriate 

and has been removed from our 

reclassification policy. We implemented 

this policy in the FY 2005 IPPS final 

rule (69 FR 49103). As a result, hospitals 

can request reclassification for the 

purposes of the wage index only and not 

the standardized amount. Implementing 

regulations in Subpart L of 42 CFR Part 

412 (§§ 412.230 et seq.) set forth criteria 

and conditions for reclassifications for 

purposes of the wage index from rural 

to urban, rural to rural, or from an urban 

area to another urban area, with special 

rules for SCHs and rural referral centers. 

Under section 1886(d)(8)(E) of the 

Act, an urban hospital may file an 

application to be treated as being 

located in a rural area if certain 

conditions are met. The regulations 

implementing this provision are located 

under § 412.103. 

Effective with reclassifications for FY 

2003, section 1886(d)(10)(D)(vi)(II) of 

the Act provides that the MGCRB must 

use the average of the 3 years of hourly 

wage data from the most recently 

published data for the hospital when 

evaluating a hospital’s request for 

reclassification. The regulations at 

§ 412.230(d)(2)(ii) stipulate that the 

wage data are taken from the CMS 

hospital wage survey used to construct 

the wage index in effect for prospective 

payment purposes. To evaluate 

applications for wage index 

reclassifications for FY 2007, the 

MGCRB used the 3-year average hourly 

wages published in Table 2 of the 

August 12, 2005 IPPS final rule (70 FR 

47508). These average hourly wages are 

taken from data used to calculate the 

wage indexes for FY 2004, FY 2005, and 

FY 2006, based on cost reporting 

periods beginning during FY 2000, FY 

2001, and FY 2002, respectively. 

2. Reclassifications under Section 508 of 

Pub. L. 108–173 

Under section 508 of Pub. L. 108–173, 

a qualifying hospital could appeal the 

wage index classification otherwise 

applicable to the hospital and apply for 

reclassification to another area of the 

State in which the hospital is located 

(or, at the discretion of the Secretary, to 

an area within a contiguous State). Such 

reclassifications are applicable to 

discharges occurring during the 3-year 

period beginning April 1, 2004, and 

ending March 31, 2007. Under section 

508(b), reclassifications under this 

process do not affect the wage index 

computation for any area or for any 

other hospital and cannot be achieved 

in a budget neutral manner. 

Some hospitals currently receiving a 

section 508 reclassification are eligible 

to reclassify to that same area under the 

standard reclassification process as a 

result of the new labor market 

definitions that we adopted for FY 2005. 

In applying for a 3-year MGCRB 

reclassification beginning in FY 2007, 

hospitals that are already reclassified to 

the same area under section 508 should 

have indicated in their MGCRB 

reclassification requests that if they 

receive the MGCRB reclassification, 

they would forfeit the section 508 

reclassification for the first 6 months of 

FY 2007. 

We refer readers to section III.H. of 

this preamble for a discussion of our 

updated procedural rules established 

under section 1886(d)(10)(D)(v) of the 

Act in which a section 508 hospital may 

retain its section 508 reclassification 

through its expiration on March 31, 

2007, and accept a reclassification 

approved by the MGCRB for the second 

half of FY 2007 (April 1, 2007, through 

September 30, 2007). We also clarified 

the procedural rules for an already 

individually reclassified hospital that is 

part of a group that includes a section 

508 hospital. For nonsection 508 

hospitals in a group with a pending 

individual geographic reclassification, 

we will apply one of the following for 

the first half of FY 2007: (a) The area 

wage index where the hospital is 

physically located if there is no 

reclassification pending, or (b) the 

hospital’s individual reclassification 

wage index if the hospital was part of 

a group awarded a group reclassification 

and the group followed the procedural 

rules for postponing reclassification 

until April 1, 2007. Final Table 9B will 

include a final list of section 508 

reclassifications for the 1st half of FY 

2007 and will be included in a 

subsequent Federal Register notice as 

well as posted to the CMS Web site after 

August 1, 2006, and before October 1, 

2006. 

3. Multicampus Hospitals 

(§ 412.230(d)(2)(iii)) 

Subsequent to the publication of the 

FY 2005 IPPS final rule, we became 

aware of a situation in which, as a result 

of the new labor market areas 

implemented in FY 2005 for the IPPS, 

a multicampus hospital previously 

located in a single MSA is now located 

in more than one CBSA. Under our 

existing policy, a multi-campus hospital 

with campuses located in the same labor 

market area receives a single wage 

index. However, if the campuses are 

located in more than one labor market 

area, payment for each discharge is 

determined using the wage index value 

for the MSA (or Metropolitan Divisions, 

where applicable) in which the campus 

of the hospital is located. Prior to FY 

2006, the criteria for a hospital being 

reclassified to another wage area by the 

MGCRB did not address the 

circumstances under which a single 

campus of a multicampus hospital may 

seek reclassification. The regulations 


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require that a hospital provide data from 

the CMS hospital wage survey for the 

average hourly wage comparison that is 

used to support a request for 

reclassification. Because a multicampus 

hospital is required to report data for the 

entire hospital on a single cost report, 

there is no wage survey data for the 

individual hospital campus that can be 

used in a reclassification application. 

In the FY 2006 IPPS final rule (70 FR 

47444 through 47446 and 47487), we 

modified the reclassification rules at 

§ 412.230(d)(2)(iii) to allow campuses of 

multicampus hospitals located in 

separate wage index areas to support a 

reclassification application to an area 

where another campus is located using 

the average hourly (composite) wage 

data submitted on the cost report for the 

entire multi-campus hospital as its 

hospital-specific data. This special rule 

applies for reclassification applications 

for FY 2006, FY 2007, and FY 2008 and 

will not be in effect for FY 2009 

reclassification requests and beyond. 

Because reclassification applications to 

the MGCRB for FY 2009 must be filed 

in September 2007, or 1 month before 

the effective date of the FY 2008 IPPS 

rule, we addressed whether to extend 

the special rule for multicampus 

hospitals beyond FY 2008 in this FY 

2007 final rule. In the FY 2006 IPPS 

final rule, we indicated that we would 

continue to explore options that would 

allow individual campuses of multicampus hospitals to submit wage data 

necessary for geographic reclassification 

and also monitor the number of multicampus hospitals affected by this 

provision (70 FR 47445 and 47446). 

After reviewing this situation further, 

we are finalizing our proposed policy. 

Beginning with FY 2009 

reclassifications, we will no longer 

allow a campus of a multicampus 

hospital to use the average hourly wage 

the entire hospital system to support its 

reclassification application. Because a 

cost report is filed for an entire hospital, 

the campus would have to obtain a 

separate provider number and be treated 

for Medicare payment purposes as an 

independent entity in order to be able 

to provide wage data for the specific 

campus. If a hospital were to make a 

change in FY 2007 to its organizational 

structure to provide campus specific 

data to support a reclassification 

application, the earliest fiscal year that 

the campus would be eligible to 

reclassify would be FY 2012 because the 

cost report data that are used for 

geographic reclassification precede the 

payment year by 5 years (that is, FY 

2003 cost report data will be used to 

determine the FY 2008 geographic 

reclassifications). 

To our knowledge, only one hospital 

has used the special rule for 

multicampus hospitals. This hospital 

has since joined a successful FY 2007 

urban county group reclassification 

application to the same area to which it 

was approved under the multicampus 

hospital rule. Thus, this hospital is no 

longer required to meet the 

multicampus hospital rule. Given that 

there is only one hospital that has used 

this rule and this hospital was able to 

reclassify under the normal 

reclassification rules, we believe the 

special reclassification rule that applies 

to multi-campus hospitals is no longer 

needed. We proposed in the FY 2007 

IPPS proposed rule, to not extend the 

special rule beyond FY 2008. After 

considering comments (discussed 

below) we have decided to adopt the 

proposal not to extend the multicampus 

rule beyond 2008. For reclassification 

requests for FY 2009 and thereafter, a 

campus of a multicampus hospital 

would be required to obtain a separate 

provider number in order to provide the 

required wage data from the CMS 

hospital wage survey for the average 

hourly wage comparison in its MGCRB 

reclassification application. 

Comment: Several commenters 

requested that CMS continue to allow 

multi-campus hospitals to use the 

average hourly wage for the entire 

hospital system as its wage data to 

support a reclassification application to 

an area where another one of the 

campuses is located. One commenter 

argued that, once the new census data 

are available, there may be more 

hospitals in need of the provision. Two 

commenters asked CMS to retain the 

provision because they believed 

eliminating the multi-campus hospital 

rule will preclude both reclassifications 

of groups from areas where one of the 

hospital campuses is located as well as 

a campus of a multicampus provider 

from reclassifying as an individual 

hospital. These commenters argued that 

the multicampus hospital rule is 

necessary in order for an individual 

campus of a multi-campus hospital to 

provide wage data to join a group 

reclassification. Given how few 

hospitals are expected to use this 

option, the commenters asked that CMS 

extend the current rule for at least 5 

more years. 

Response: The next decennial census 

is in 2010. Using past experience as a 

guide, we would not be developing new 

labor market areas based on the 

decennial census until FY 2014 or FY 

2015 and it is unknown whether such 

a special rule will be needed at that 

time. We do not believe a special time 

limited rule that was intended to give us 

time to address the particular 

circumstances of a situation should be 

retained for nearly 10 more years merely 

on the possibility that it will be needed. 

We can reconsider whether to 

reestablish this special rule if necessary 

when OMB publishes new MSA 

definitions following the 2010 Census. 

Further, as stated in the proposed rule, 

we believe that hospitals should have to 

support an individual reclassification 

application with their own data. 

With respect to the comments about 

group reclassifications, we believe the 

commenters misunderstand our current 

rules on reclassification. We are not 

changing these already existing rules, 

under which a satellite campus of a 

multicampus hospital located in a CBSA 

different from the main hospital would 

not be required to provide campusspecific wage data in order to join the 

group and for the MGCRB to approve a 

group reclassification application. 

(When a campus of a multicampus 

hospital joins a group reclassification, 

the group uses average hourly wage 

information for the county that was 

used to develop the wage index for the 

labor market area. These data do not 

include wage information for an 

individual campus of a multicampus 

hospital.) As we stated in the proposed 

rule, a campus of a multicampus 

hospital can join a group reclassification 

under our normal rules (71 FR 24109). 

That is, the special rule for multicampus 

hospitals would not be needed when a 

campus of a multicampus hospital joins 

a group reclassification application. As 

we allow for new hospitals that are part 

of group reclassifications, an individual 

campus of a multicampus hospital may 

join a group reclassification under 42 

CFR 412.234 without having to provide 

campus-specific wage data. The 

rationale for this policy was explained 

in the proposed rule and is the same for 

both new hospitals and individual 

campuses of multicampus hospitals that 

join group reclassifications (71 FR 

24110). 

After consideration of the public 

comments received, we are not making 

any further changes in this final rule to 

our policy relating to multicampus 

hospitals. 

4. Urban Group Hospital 

Reclassifications (§ 412.234(a)(3)(iii)) 

Section 412.234(a)(3)(iii) of the 

regulations sets forth criteria for urban 

hospitals to be reclassified as a group for 

FY 2007 and thereafter. Under these 

criteria, ‘‘hospitals located in counties 

that are in the same Combined 

Statistical Area (CSA) (under the MSA 

definitions announced by the OMB on 

June 6, 2003) as the urban area to which 


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they seek redesignation qualify as 

meeting the proximity requirement for 

reclassification to the urban area to 

which they seek redesignation.’’

Last year, several commenters brought 

to our attention that, while the CSA 

standard allows for urban county group 

reclassifications in large urban areas 

throughout the United States (including 

10 of the 11 CBSAs containing 

Metropolitan Divisions), the CSA 

standard precludes urban county group 

reclassifications between three 

Metropolitan Divisions within one 

CBSA in Florida. They urged us to 

modify our policy to also allow 

hospitals located in counties that are in 

the same CBSA (in the case of 

Metropolitan Divisions) as the area to 

which they seek redesignation to be 

considered to have met the proximity 

requirement. We agree with the 

commenter’s proposed modification. 

The proximity standard for group 

reclassifications is intended to allow all 

of a county’s hospitals to reclassify to an 

adjacent area where there is sufficient 

economic integration that there can be 

an expectation that both areas are 

competing in a similar labor market 

area. We believe there is sufficient 

economic integration between 

Metropolitan Divisions within a CBSA 

that urban county reclassifications 

within a CBSA or a CSA should be 

permitted. A CBSA, as defined by the 

OMB, is a ‘‘geographic entity associated 

with at least one core of 10,000 or more 

population, plus adjacent territory that 

has a high degree of social and 

economic integration with the core as 

measured by commuting ties.’’

Therefore, in the FY 2007 IPPS 

proposed rule (71 FR 24110), we 

proposed to revise § 412.234(a)(3) by 

adding a new paragraph (iv) to expand 

the proximity criteria to allow urban 

county groups to apply for 

reclassification to another area within 

the same CBSA. We proposed to require 

that, beginning with FY 2008, hospitals 

must be located in counties that are in 

the same CSA or CBSA (under the MSA 

definitions announced by OMB on June 

6, 2003) as the urban area to which they 

seek redesignation to qualify as meeting 

the proximity requirement for 

reclassification to the urban area to 

which they seek redesignation. 

Comment: Several commenters 

supported CMS’ proposal to allow 

hospitals located in counties that are in 

the same CBSA as the county in which 

they seek redesignation to be considered 

to have met the proximity requirement 

for an urban county group 

reclassification. These commenters 

indicated that use of the CBSA criteria 

appropriately recognizes economic 

integration among different 

metropolitan divisions for purposes of 

applying the proximity standard within 

the urban county group reclassification 

regulations. Commenters further 

indicated that the new proximity 

criteria should be applied retroactively 

and be effective for urban group 

reclassifications beginning on October 1, 

2006 (as opposed to October 1, 2007) 

under specified circumstances. 

Response: We appreciate the 

commenters’ support for our proposed 

change to the regulations, but we do not 

believe the changes should be made 

retroactively. The IPPS system, 

including any wage indices associated 

with a hospital’s geographic 

classification or reclassification is a 

prospective system. In addition, under 

section 1886(d)(10) of the Act, the 

MGCRB makes decisions about 

reclassifications, not CMS. Applications 

for reclassifications for a fiscal year are 

required to be submitted in September, 

13 months before the reclassification 

would go into effect (for example, a 

reclassification application for FY 2007 

would have had to be submitted by 

September 2005). Reclassification 

decisions issued through the statutory 

process are final and binding and are 

not subject to judicial review. Making a 

reclassification criterion retroactive 

would interfere with the prospective 

nature of the MGCRB reclassification 

decisions, and we believe would 

conflict with the prospective nature of 

the entire IPPS system. In addition, it 

could require a recalculation of the 

budget neutrality adjustment required 

by section 1886(d)(8)(C) of the Act. 

Modifying the FY 2006 reclassification 

budget neutrality adjustment for all 

hospitals nationwide, we believe would 

not be feasible at this late date. 

After consideration of the public 

comments received, we are adopting as 

final, without modification, the 

proposed revision to § 412.234(a)(3) to 

add a new paragraph (iv) to expand the 

proximity criteria to allow urban county 

groups to apply for reclassification to 

another area within the same CBSA. 

5. Effect of Change of Ownership on 

Urban County Group Reclassifications 

(§§ 412.230, 412.234, and 489.18) 

We have received questions asking for 

clarification of our policy regarding 

whether newly constructed hospitals 

and hospitals that do not accept 

assignment of the previous owner’s 

provider agreement can join an urban 

county group reclassification. 

The Medicare regulations at § 412.230 

require that, for individual hospital 

reclassifications, a hospital must 

provide a weighted 3-year average of its 

average hourly wages using data from 

the CMS hospital wage survey used to 

construct the wage index in effect for 

prospective payment purposes. Section 

489.18(c) of the regulations provides 

that, when there is a change of 

ownership, the existing provider 

agreement will automatically be 

assigned to the new owner when there 

is a change of ownership as defined in 

the rules. Section 412.230(d)(2)(iv) of 

the regulations specifies that, in 

situations where a hospital becomes a 

new provider and the existing hospital’s 

provider agreement is not assigned 

under § 489.18, the wage data associated 

with the previous hospital’s provider 

number will not be used in calculating 

the new hospital’s 3-year average hourly 

wage. This policy is consistent with 

how we treat hospitals whose 

ownership has changed for other 

Medicare payment purposes. The 

regulations also state that once a new 

hospital has accumulated at least 1 year 

of wage data using survey data from the 

CMS hospital wage survey used to 

determine the wage index, it is eligible 

to apply for reclassification on the basis 

of those data. 

While the regulations preclude a new 

provider from individually reclassifying 

until the hospital accumulates at least 1 

year of wage data from the CMS hospital 

wage survey used to determine the wage 

index, a new provider may join a group 

reclassification under § 412.234. Under 

§ 412.234, all hospitals in an urban 

county must apply for redesignation as 

a group. If we did not permit a new 

hospital to join group reclassifications, 

all hospitals in the county would not be 

part of the reclassification application 

and the urban county group would be 

precluded from reclassifying for 3 years 

until the new hospital accumulated at 

least 1 year of wage data. We believe it 

would be inequitable to preclude a 

group reclassification merely because 

there was one newly constructed 

hospital or one hospital in the county 

changed ownership and did not accept 

the prior owner’s provider agreement. 

Alternatively, we believe that allowing 

group applications without a new 

hospital would be inconsistent with our 

regulations and unfair to new hospitals 

because it would put them at a 

competitive disadvantage with other 

hospitals in the county. Because such 

reclassifications are effective for 3 years, 

a new hospital that was not allowed to 

join a group reclassification would have 

to accept a lower wage index than all 

other hospitals in the county with 

which it competes for labor for up to 3 

years. 

Comment: One commenter suggested 

that where there is already an approved 


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group reclassification, the new provider 

should be automatically granted the 

wage index of all the other hospitals in 

the county. Alternatively, the 

commenter suggested that the Secretary 

could use the broad authority provided 

in the statute to grant an urban county 

group reclassification already in 

progress to a new hospital in the same 

county. 

Response: There is currently no 

provision that allows a hospital to join 

a county-wide group reclassification 

already in effect. The existing 

regulations at § 412.234 provide that all 

hospitals in an urban county must apply 

for redesignation as a group. The 

MGCRB decision applies to only those 

hospitals listed on the application. 

However, it is possible that the urban 

county group can apply for another 

reclassification to a different area with 

the new provider. 

6. Requested Reclassification for 

Hospitals Located in a Single Hospital 

MSA Surrounded by Rural Counties 

In the FY 2006 IPPS final rule (70 FR 

47448), we presented a commenter’s 

concern about the special circumstances 

of a hospital located in a single hospital 

MSA surrounded by rural counties in 

relation to the wage index and the rules 

governing geographic reclassification. 

The commenter stated that an isolated 

hospital in a single hospital MSA is at 

a competitive disadvantage because the 

rural hospitals that surround the 

hospital have been reclassified to higher 

wage index areas or have been 

designated as rural referral centers, 

SCHs, MDHs, or CAHs. The urban 

hospital is ineligible for reclassification 

to a higher wage index area either as an 

individual hospital or as part of a group 

under the existing regulations. The 

commenter emphasized that this 

concern is especially significant given 

the fact that an isolated hospital in a 

single hospital MSA is the only hospital 

in its urban area, and, therefore, has an 

even greater obligation to the 

communities it serves. 

The commenter advocated a change to 

the urban county group reclassification 

regulations whereby a hospital in a 

single hospital MSA surrounded by 

rural counties would be able to 

reclassify to the closest urban area that 

is part of a CSA located in the same 

State as the hospital. We did not adopt 

this suggested policy for FY 2006 

because we did not believe it would be 

prudent to adopt the suggested policy in 

a final rule without first soliciting 

public comment. In the FY 2007 IPPS 

proposed rule, we solicited comments 

on this issue. 

Comment: Commenters supported 

allowing a hospital that is the only 

hospital in its MSA to reclassify to the 

closest urban area that is part of a CSA 

located in the same State, when the 

hospitals in surrounding areas have all 

been reclassified to and/or are located in 

areas that receive wage index 

reimbursement significantly higher than 

the surrounding hospitals’ actual wages. 

Without this reclassification, the 

commenters indicated that the hospital 

must continually work to keep wages 

competitive, purchase new technology, 

and provide services needed by 

Medicare beneficiaries in its 

community. The commenters also stated 

that a single hospital in an urban county 

must offer a broad range of services to 

meet the needs of the Medicare 

beneficiaries in its large service area, 

while potentially competing with 

hospitals that offer fewer services yet 

receive increased reimbursement due to 

their ability to reclassify. Some 

commenters also recommended that 

proximity criteria should focus more on 

competition as demonstrated through 

economic connection, rather than 

location. The commenters argued that 

there is an anomaly in the 

reclassification rules that allows a 

reclassified hospital to receive a wage 

index that is higher than its own average 

hourly wage. Such a hospital has an 

advantage relative to its competitors in 

the single hospital MSA by being able 

to take the excess revenue and invest in 

technology and services. One 

commenter stated that making an 

exception for the hospital addressed 

here would be an unnecessary 

expansion of the geographic 

reclassification provisions. The 

commenter indicated that it was not 

unsympathetic to the situation 

described of a hospital that is 

surrounded by rural hospitals that have 

all received special payment status. The 

commenter opposed allowing the 

hospital to reclassify to a distant area 

but indicated that it might support some 

accommodation that was particularized 

to this situation. 

Response: We disagree with the 

notion that receiving a higher wage 

index than a hospital’s own average 

hourly wage is an anomaly of 

reclassification. The wage index 

represents an average of all hospitals in 

a labor market area. Using the 

commenter’s logic, such an ‘‘anomaly’’

would not be limited to reclassification. 

It would also be a feature of the wage 

index in a labor market area with 

multiple hospitals. Some hospitals 

would have higher wages than the labor 

market area average, and others, lower. 

The only policy option for addressing 

such a concern would be to have a 

hospital-specific wage index. We 

believe such an option would not be 

permitted under the section 

1886(d)(3)(E) of the Act, which requires 

us to adjust IPPS rates for ‘‘area 

differences in hospital wage levels’’ to 

reflect the ‘‘relative hospital wage level 

in the geographic area of the hospital 

compared to the national average 

hospital wage level.’’ The statute clearly 

directs the Secretary to use area, and not 

hospital-specific, differences in wage 

levels in creating the wage index. 

We believe that allowing hospitals in 

single hospital MSAs surrounded by 

rural counties to reclassify to the closest 

urban area that is part of a CSA located 

in the same State as the hospital would 

be an unnecessary expansion of the 

geographic reclassification provisions. If 

we adopted the commenters’ change to 

the reclassification provisions, we 

would be allowing a hospital group to 

reclassify to a labor market area that is 

farther away from, rather than closer to, 

urban market areas. Such a change 

would be inconsistent with the 

geographic reclassification regulations 

that require a hospital to demonstrate 

proximity to the area where it requests 

reclassification. For individual hospital 

reclassifications, the proximity 

requirement is demonstrated by either 

meeting a mileage requirement or 

showing that at least 50 percent of the 

hospital’s employees reside in the area 

to which it wishes to reclassify. For 

group reclassifications, the proximity 

requirement is met if the county 

demonstrates that it is adjacent to the 

area where it is seeking reclassification 

and has a sufficient degree of economic 

integration to suggest that both areas 

compete for the same labor. The 

commenter’s approach would allow a 

hospital to reclassify to a labor market 

that is more than 75 miles away from 

the requested area. In general, we 

believe it is highly unlikely that two 

areas more than 75 miles apart compete 

for the same labor. 

In accord with the comment from a 

national hospital association, we agree 

that the geographic reclassification rules 

should not be revised to accommodate 

this situation. However, as suggested in 

the comment, we considered an 

accommodation to address the 

particular circumstances of this 

situation. In this situation, a number of 

the surrounding hospitals benefit from 

being an MDH, SCH, or RRC. There are 

also two hospitals within approximately 

35 miles of the hospital in the single 

hospital urban area that do not receive 

special payment under these provisions 

but receive a special wage index under 


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section 508 of Pub. L. 108–173. 

Therefore, the hospital in the single 

hospital urban area has neighboring 

hospitals that either receive special 

payment provisions such as RRC and 

SCH status or benefit from the special 

circumstances of section 508 that 

provided them with temporary higher 

wage indices. The section 508 

reclassifications were special one-time 

reclassification provisions that 

permitted certain hospitals to reclassify 

that ordinarily would not be able to. 

Thus, the reclassification of the two 

neighboring hospitals, in conjunction 

with the special payment of the other 

surrounding hospitals, represents a 

situation that would not ordinarily 

occur under our reclassification of labor 

market area rules. Due to the 

combination of these factors and the 

unique circumstances surrounding the 

section 508 reclassifications, we are 

invoking our special exceptions and 

adjustment authority under section 

1886(d)(5)(I)(i) of the Act for this 

situation. The special exceptions and 

adjustment authority authorizes us to 

provide ‘‘for such other exceptions and 

adjustments to [IPPS] payment amounts 

* * * as the Secretary deems 

appropriate.’’ We believe it is 

appropriate in these circumstances to 

give the hospital in the single hospital 

urban area the same wage index as the 

nearby 508 hospitals until the 

expiration of the provision on March 31, 

2007. We note that in somewhat 

analogous circumstances, we used the 

special exceptions authority to address 

hospitals co-located with other hospitals 

that received a special temporary wage 

index increase. In that case, a special 

exception was granted where individual 

hospitals were part of a failed group 

application, where a significant 

proportion of the group (one-third) was 

able to otherwise reclassify, and where 

the hospitals that did reclassify received 

wage indices at least 10 percent higher 

than the wage index of the MSA where 

the hospital was located (69 FR 49105). 

Comment: One commenter indicated 

that when competing hospitals are 

geographically located in two separate 

MSAs they may experience large 

differences in their wage indices, thus 

leading to reimbursement differentials. 

The commenter stated that a hospital in 

a single hospital MSA could not rectify 

its situation simply by increasing labor 

compensation, thereby resulting in a 

higher hospital-specific wage index, 

because the wage index is based on 

wage data from 3 years earlier and, in 

addition, the wage index is only paid on 

the labor-related share of the 

standardized amount. Thus, the 

commenter concluded, a hospital could 

not receive dollar-for-dollar returns on 

its own labor costs for any particular 

year, even though it receives a wage 

index based on its own wage data. 

Response: We disagree with the 

commenter’s suggestion that the use of 

MSAs do not provide a sound basis for 

identifying hospital labor market areas. 

As noted in the FY 2005 IPPS final rule 

(69 FR 29027), exhaustive research has 

been completed since the mid-1990’s on 

use of alternatives to using MSA 

definitions for inpatient hospital labor 

market. While individual hospitals may 

sometimes be disadvantaged by the use 

of OMB statistical area definitions for 

the Medicare IPPS labor market areas, 

there has been no consensus among 

interested parties that there are any 

better alternatives. Dividing the country 

into geographic areas used to determine 

wage indices, as is required by section 

1886(d)(3)(E) of the Act, will necessarily 

result in different wage indices across 

different labor market areas. The 

commenter is correct that hospitals can 

neither change the proportion of their 

payment that is adjusted by the wage 

index nor shorten the period between 

when hospitals pay wages to their 

employees and when those wages are 

used in determining the wage index. 

However, these circumstances are not 

unique to hospitals in single-hospital 

MSAs. All hospitals experience a delay 

between the date hospital wage costs are 

incurred and the date those costs are 

used to determine the wage index. 

Similarly, all hospitals are paid based 

upon a set labor-related share. 

Commenters: provided the following 

suggestions for revising the 

reclassification rules for single hospital 

MSAs: 

• Exempt the hospital from the 

requirement that its wages be at least 

108 percent of the average hourly wage 

of all other hospitals in its area, since a 

single hospital alone in its MSA could 

not, by definition, meet this test. 

• Combine single hospital areas with 

neighboring MSAs, for the same reasons 

CMS treated micropolitan areas as rural 

when it adopted new labor market areas 

in FY 2005. 

• Allow urban hospitals that qualify 

to be SCHs or rural referral centers other 

than being located in a rural area to 

reclassify using the special rules that 

apply to hospitals with such a status. 

Response: We are not adopting any of 

the above recommendations in this final 

rule. We do not believe the 

reclassification rules should be 

modified to abolish the 108 percent test 

in the case of a hospital in a singlehospital MSA. The 108-percent test 

exists precisely to create a specific 

threshold for reclassifying and to ensure 

that a reclassifying hospital’s own wages 

are significantly higher than the wages 

used in calculating the index of its 

home area. Allowing a hospital 

receiving 100 percent of its area wages 

to be exempt from this test, we believe, 

could potentially undermine the 108- 

percent test for all hospitals, and we are 

not certain how we would distinguish 

between a hospital with wages at, for 

example, 105 or 107 percent of its area 

wages and the single hospital with a 

wage index at 100 percent of its area 

wages. We note that section 

1886(d)(10)(D)(i)(I) of the Act 

specifically directs us to include in our 

reclassification guidelines ‘‘guidelines 

for comparing wages * * * in the area 

in which the hospital is classified.’’

We also disagree with the suggestion 

that we should combine adjacent urban 

areas into one labor market area where 

one of the MSAs has a single hospital. 

As we indicated above, the MSAs have 

consistently been used by CMS to 

designate geographic areas and there has 

been no consensus among interested 

parties in favor of any alternatives. 

Combining MSAs could also potentially 

disadvantage hospitals in the urban area 

with multiple hospitals. For the same 

reason, we also disagree with the 

suggestion of the commenter that 

indicated a hospital that meets all of the 

requirements to be an SCH or a rural 

referral centers except rural status 

should be able to take advantage of the 

special reclassification provisions that 

apply to hospitals with these 

designations. As rural hospitals, these 

hospitals are afforded advantages that 

do not apply to urban hospitals. 

Congress has repeatedly recognized the 

special circumstances of rural hospitals. 

For example, Congress, in section 

1886(d)(10)(D)(iii) of the Act, exempted 

rural referral centers from certain wage 

comparison rules used in 

reclassification. 

Finally, hospitals in single hospital 

MSAs already have another 

reclassification option available where 

the 108-percent test does not need to be 

met. A hospital in a single hospital MSA 

can apply to an adjacent area using the 

group reclassification rules. Under these 

rules, the hospital must be located in a 

county that is in the same CSA or CBSA 

as the urban area where they are seeking 

reclassification. The CSA and CBSA 

requirement is intended to identify 

economic integration among different 

areas. To be part of an optional CSA, the 

OMB standard requires that there be at 

least a 15-percent employment 

interchange between the areas (25 

percent for CBSAs). We do not see a 

need to exempt a hospital in a single 


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hospital MSA from wage data 

comparison because it can apply to an 

adjacent MSA within the same CSA 

using the group reclassification rules 

without having to meet the 108-percent 

test. If a hospital in a single hospital 

MSA cannot meet group reclassification 

criteria because of the CSA standard, it 

means there is not a sufficient degree of 

employment interchange to suggest that 

the areas compete for the same labor. 

7. Special Adjustment for Hospital 

Group Reclassification Denied on the 

Basis of Incomplete CSA Listing 

In this final rule, we are also invoking 

our special exceptions and adjustment 

authority under section 1886(d)(5)(I)(i) 

of the Act to adjust the wage index of 

a hospital group that failed to reclassify 

on the basis of incomplete OMB 

guidance for FY 2007 only. The hospital 

group in question timely applied to the 

MGCRB for geographic reclassification. 

On December 5, 2005, the OMB issued 

a bulletin, Bulletin 06–01, listing the 

MSAs that comprise various CSAs 

throughout the country. The bulletin 

did not include the hospital group’s 

county as being part of the CSA to 

which the group sought reclassification. 

CMS regulations at 42 CFR 412.234 

require a group to be in the same CSA 

as the urban area to which it seeks 

reclassification. Thus, the MGCRB 

properly denied the hospital group’s 

request. 

However, subsequent to the MGCRB 

denial, the OMB corrected its December 

5, 2005 bulletin. On April 25, 2006 and 

then again on May 26, 2006, OMB 

issued correction bulletins stating that it 

had omitted from Bulletin 06–01 certain 

MSAs that should have been part of the 

CSA listing. The correction bulletin 

resulted in the hospital group becoming 

part of the same CSA as the urban area 

to which it had sought reclassification. 

However, by the time OMB issued its 

correction, the deadline for appealing 

the MGCRB denial to the Administrator 

(15 days from the date of the MGCRB 

decision) under 42 CFR 412.276(a) had 

passed. In addition, the time for the 

Administrator to issue a decision on his 

or her own motion (105 days following 

the issuance of an MGCRB decision) had 

also expired. As provided under 

§ 412.276(b), MGCRB decisions are final 

and binding unless reviewed and 

changed by the Administrator. 

Four other hospital groups were 

affected by OMB’s correction bulletin(s). 

However, all of these groups were able 

to receive a positive determination by 

the Administrator. In one case, the 

Administrator was able to toll the 

timeframe for deciding the group’s 

appeal under § 412.278(f)(2)(i). In the 

other three cases, the Administrator 

affirmed the MGCRB’s decision but then 

amended the decision on May 30 within 

the 15 days allotted under 

§ 412.278(g)(2). 

The special exceptions and 

adjustment authority authorizes us to 

provide ‘‘for such other exceptions and 

adjustments to [IPPS] payment amounts 

* * * as the Secretary deems 

appropriate.’’ We believe it is 

appropriate in these circumstances to 

adjust the hospital group’s wage index 

to reflect the reclassification it would 

have received had OMB’s initial CSA 

listing been complete. First, of the five 

hospital groups affected by the OMB 

bulletin(s), four were granted 

reclassifications under the procedures 

for Administrator review. Only the 

remaining hospital group was unable to 

reclassify because the deadline for the 

Administrator discretionary review 

expired on May 17, 2006, and the OMB 

did not issue its correction bulletin until 

May 26, 2006. The circumstances of the 

five cases are identical in that each was 

denied reclassification by the MGCRB 

by virtue of not meeting the CSA 

standard that was later corrected by 

OMB. We believe it would be 

inequitable for the one remaining 

hospital group to be the only group of 

the five similarly situated not to benefit 

from the correction of the errors to OMB 

Bulletin 06–01. Second, the MGCRB’s 

decision was based upon an incomplete 

OMB listing. We do not believe the 

hospital group should experience an 

adverse determination solely on the 

basis of OMB omissions. Third, OMB 

issued its correction only 9 days after 

expiration of the discretionary review 

period for the Administrator to take 

review. Taken in conjunction, we 

believe that these three factors, the 

reclassification of all other similarly 

situated hospital groups; the 

governmental omission; and the 

closeness in time between OMB’s 

correction and the expiration of the 

Administrator discretionary review 

period, support a special adjustment. 

We note that we are not retroactively 

granting a reclassification to the hospital 

group in question. Rather, we will 

adjust payment to reflect the wage index 

it would have received (for example, we 

will give the hospital group that wage 

index for hospitals reclassified to the 

requested area). The hospitals in the 

group will not receive the section 505 

out-migration adjustment in FY 2007. 

Finally, we note that the hospital 

group in question may reapply for 

geographic reclassification to the same 

area for the period FY 2008 through FY 

2010. As specified in section III.H. of 

the preamble of this final rule, the 

deadline for FY 2008 reclassification 

applications is September 1, 2006. We 

encourage hospitals to closely review 

the special instructions provided in 

section III.H. of this preamble elsewhere 

in this final rule affecting the 

procedures for applying for 

reclassification for FY 2008, considering 

the unique circumstances of 

occupational mix wage adjusted average 

hourly wages not being available until 

after August 1 and prior to October 1. 

H. Payment for Direct Graduate Medical 

Education 

1. Background 

Section 1886(h) of the Act, as added 

by section 9202 of the Consolidated 

Omnibus Budget Reconciliation Act 

(COBRA) of 1985 (Pub. L. 99–272) and 

implemented in regulations at existing 

§§ 413.75 through 413.83, establishes a 

methodology for determining payments 

to hospitals for the costs of approved 

graduate medical education (GME) 

programs. Section 1886(h)(2) of the Act, 

as added by COBRA, 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 costs 

of GME for a base period by its number 

of residents in the base period. The base 

period is, for most hospitals, the 

hospital’s cost reporting period 

beginning in FY 1984 (that is, the period 

beginning between October 1, 1983, 

through September 30, 1984). Medicare 

direct GME payments are calculated by 

multiplying the PRA times the weighted 

number of full-time equivalent (FTE) 

residents working in all areas of the 

hospital (and nonhospital sites, when 

applicable), and the hospital’s Medicare 

share of total inpatient days. The base 

year PRA is updated each year for 

inflation. However, as specified in 

section 1886(h)(2)(D)(ii) of the Act, for 

cost reporting periods beginning on or 

after October 1, 1993, through 

September 30, 1995, each hospitalspecific PRA for the previous cost 

reporting period is not updated for 

inflation for any FTE residents who are 

not either a primary care or an obstetrics 

and gynecology resident. As a result, 

hospitals that train primary care and 

obstetrics and gynecology residents, as 

well as nonprimary care residents in FY 

1994 or FY 1995, have two separate 

PRAs: one for primary care and 

obstetrics and gynecology residents and 

one for nonprimary care residents. 

Pub. L. 106–113 amended section 

1886(h)(2) of the Act, effective October 

1, 2000, to establish a methodology for 

the use of a national average PRA in 

computing direct GME payments for 


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cost reporting periods beginning on or 

after October 1, 2000. Specifically, Pub. 

L. 106–113 established a ‘‘floor’’ for FY 

2001 such that a hospital-specific PRA 

should not be less than 70 percent of the 

locality-adjusted national average PRA. 

In addition, it established a ‘‘ceiling’’

that froze or limited the annual inflation 

adjustment to a hospital-specific PRA if 

the PRA exceeded 140 percent of the 

locality-adjusted national average PRA. 

Section 511 of Pub. L. 106–554 

increased the ‘‘floor’’ established by 

Pub. L. 106–113 to equal 85 percent of 

the locality-adjusted national average 

PRA for PRAs in existence in FY 2002. 

Existing regulations at § 413.77(d)(2)(iii) 

specify that, for purposes of calculating 

direct GME payments, each hospitalspecific PRA is compared to the floor 

(for FY 2001 and FY 2002) and the 

ceiling (for FY 2001 through 2013) to 

determine whether a hospital-specific 

PRA should be revised. We note that, 

under existing regulations at § 413.77(c), 

if a hospital-specific PRA for FY 2001 or 

FY 2002 is revised due to application of 

the floor PRA, the revised PRA is the 

starting point for the PRA in future 

years, subject to the annual inflation 

adjustment and any other applicable 

adjustments. 

Section 1886(h)(4)(F) of the Act 

established caps on the number of 

allopathic and osteopathic residents that 

hospitals may count for purposes of 

calculating direct GME payments. For 

most hospitals, the caps were the 

number of allopathic and osteopathic 

FTE residents training in the hospital’s 

most recent cost reporting period ending 

on or before December 31, 1996. Section 

422 of Pub. L. 108–173 added section 

1886(h)(7) of the Act which provided for 

one-time reductions to the resident caps 

of teaching hospitals that were training 

a number of FTE residents below their 

cap in a reference period, and 

authorized a one-time ‘‘redistribution’’

of FTE resident slots to hospitals that 

could demonstrate a likelihood of using 

the additional resident slots within the 

first three cost reporting periods 

beginning on or after July 1, 2005. 

2. Determination of Weighted Average 

Per Resident Amounts (PRAs) for 

Merged Teaching Hospitals (§ 413.77) 

As stated in the background section 

above, in accordance with section 

1886(h) of the Act, Medicare pays 

teaching hospitals for the direct costs of 

GME based on the per resident direct 

GME costs in a base year. For most 

hospitals, the base year is FY 1984 (cost 

reporting periods beginning between 

October 1, 1983, and September 30, 

1984). Although section 1886(h) of the 

Act provides for the establishment of a 

PRA for a hospital that trained residents 

in the 1984 base year, the statute does 

not address how to treat the PRA(s) of 

teaching hospitals that subsequently 

merge. 

Our policy has always been that when 

two or more teaching hospitals merge, 

we determine a weighted average PRA 

for the surviving merged hospital using 

direct GME costs and resident data from 

the base year cost report for each 

teaching hospital involved in the 

merger. This policy was detailed in 

Questions and Answers on Medicare 

GME Payments issued on November 8, 

1990: ‘‘[When] two hospitals merge 

* * * the merged hospital’s per resident 

amount * * * [is] based on the 

weighted average of the per resident 

amounts of both hospitals.’’ We believe 

this is an equitable way to determine a 

PRA for the surviving merged hospital 

because it is based on the relative costs 

and sizes of the GME training programs 

in the respective facilities. Moreover, we 

believe this policy minimizes the role 

Medicare GME payments play in the 

choice of the surviving hospital entity. 

For example, there is no incentive to 

choose the surviving hospital based in 

part on the hospitals’ relative PRAs. 

To calculate the weighted average 

PRA for the merged entity, the fiscal 

intermediary begins by determining the 

base year PRAs and the base year FTE 

resident counts of the hospitals that 

merge. The weighted average PRA is 

calculated by adding the product of 

each hospital’s base year PRA and its 

base year FTE resident count, and 

dividing that number by the total 

number of the base year FTE residents 

for those hospitals. 

When our current methodology was 

first established for calculating the new 

PRA for a merged hospital, we adopted 

a policy to use base year PRAs and FTE 

resident counts. It was appropriate and 

workable to use data from the PRA base 

year because the base year data (usually 

for the 1984 fiscal year) associated with 

the hospital-specific PRAs were easily 

accessible. However, these data are now 

often over 20 years old and it has 

become administratively burdensome 

for both CMS and the fiscal 

intermediaries to access base year 

information in calculating the weighted 

average of the PRAs for merged 

hospitals. 

In addition to it being 

administratively burdensome to use 

base year cost report data, where a 

hospital has two PRAs (one for primary 

care and obstetrics and gynecology 

residents and another for nonprimary 

care residents), these two PRAs are not 

being taken into account in developing 

the weighted average PRA for the 

merged hospital. As discussed earlier, 

hospitals that were training nonprimary 

care residents in FYs 1994 and 1995 

have a separate nonprimary care PRA 

because there was no update for 

inflation applied to the PRA for 

nonprimary care residents in those years 

(§ 413.77(c)(2)). Accordingly, many 

teaching hospitals currently have two 

PRAs: one for primary care and 

obstetrics and gynecology residents and 

one for all other residents. (Hospitals 

that first train residents after FY 1995 

would only have a single PRA, even if 

they train both primary care residents 

and nonprimary care residents.) Because 

the current methodology for calculating 

the weighted average PRA for a merged 

teaching hospital is based solely on data 

from the PRA base year (which is 

usually prior to the years during which 

the PRAs were not adjusted for inflation 

to reflect nonprimary care residents), 

this methodology does not take into 

account that the merged hospitals may 

currently have more than one PRA. 

In the FY 2007 IPPS proposed rule (71 

FR 24111 through 24113), we proposed, 

effective for cost reporting periods 

beginning on or after October 1, 2006, 

rather than using the direct GME FTE 

resident count and PRA from hospitals’

base year cost reports, to simplify and 

revise the weighted average PRA 

methodology for determining a merged 

teaching hospital’s PRA by using FTE 

resident data and PRA data from the 

most recently settled cost reports of the 

merging hospitals. We believe it is less 

administratively burdensome to use 

these data because these data are more 

recent and, therefore, more accessible. 

In addition, these data would reflect 

both a primary care and obstetrics and 

gynecology PRA and, if applicable, a 

nonprimary care PRA. 

We noted that, prior to FY 2003, our 

policy for calculating the PRA for a new 

teaching hospital was to calculate the 

PRA based on the lower of the new 

teaching hospital’s actual cost per 

resident in its base period or a weighted 

average of all the PRAs of existing 

teaching hospitals in the same 

geographic wage area, as that term is 

used under the prospective payment 

system (existing § 413.77(e)(1)). (For 

ease of discussion, we refer to a hospital 

that did not participate in Medicare or 

that did not have any approved medical 

residency training programs during the 

period beginning between October 1, 

1983, through September 30, 1984, and 

has since commenced participating in 

Medicare and begun training residents 

in an approved program, as a ‘‘new 

teaching hospital.’’) The weighted 

average PRA of teaching hospitals 

within a particular geographic wage area 


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was determined using the base year PRA 

and the base year FTE resident count of 

each respective teaching hospital within 

the geographic wage area. However, as 

discussed in the August 1, 2002 IPPS 

final rule (67 FR 50067) effective 

October 1, 2002, we revised our policy 

to use PRAs and FTE resident data from 

the most recently settled cost reports of 

teaching hospitals in the same CBSA as 

the new teaching hospitals, rather than 

data from the 1984 base year (existing 

§ 413.77(e)(1)(ii)(B)). We revised this 

policy for establishing PRAs for new 

teaching hospitals because it is less 

administratively burdensome to use 

data from the hospitals’ most recently 

settled cost reports and because the 

more recent data takes into account that 

hospitals have a primary care PRA and 

a nonprimary care PRA. In the FY 2007 

IPPS proposed rule, we proposed a 

similar policy revision for establishing a 

merged teaching hospital’s PRA. 

We proposed that the fiscal 

intermediaries would use the following 

steps to calculate the weighted average 

PRA for the merged teaching hospital: 

Step 1: Identify the primary care and 

obstetrics and gynecology FTE resident 

count, the nonprimary care FTE resident 

count for hospitals with two PRAs, or 

the single FTE resident count for 

hospitals with a single PRA, for each 

teaching hospital involved in the 

merger. (Use the sum of the FTE 

resident counts from Line 3.07, Line 

3.08, and Line 3.11 of the hospital’s 

most recently settled Medicare cost 

report, CMS 2552–96, Worksheet E–3, 

Part IV.) 

Step 2: Identify the PRAs (either a 

hospital’s primary care and obstetrics 

and gynecology PRA and nonprimary 

care PRA or, if applicable, a hospital’s 

single PRA) from the most recently 

settled cost report for each hospital 

involved in the merger, and update the 

PRAs using the CPI–U inflation factor to 

coincide with the fiscal year end of the 

surviving teaching hospital. For 

example, if the surviving teaching 

hospital’s fiscal year end is December 

31, 2006, and the most recently settled 

cost report of the teaching hospital(s) 

involved in the merger is June 30, 2003, 

the PRAs from this cost report would be 

updated for inflation to December 31, 

2006. 

Step 3: Calculate the weighted average 

PRA for the single merged hospital 

using the PRAs and FTE resident counts 

from Step 1 and Step 2. For each 

teaching hospital in the merger: 

(a) For hospitals with two PRAs, 

multiply the primary care PRA by the 

number of primary care and obstetrics 

and gynecology FTE residents. 

(b) For hospitals with two PRAs, 

multiply the nonprimary care PRA by 

the number of nonprimary care FTE 

residents. 

(c) For hospitals with a single PRA, 

multiple the single PRA by the 

hospital’s total number of FTE residents. 

(d) Add the products from applicable 

Steps 3(a), (b), and (c) for all teaching 

hospitals that merged. 

(e) Add the number of FTE residents 

from Step 1 for all hospitals. 

(f) Divide the sum from Step 3(d) by 

the sum from Step 3(e). The result is the 

weighted average PRA for the merged 

hospital. 

As mentioned above, many hospitals 

currently have two PRAs, one for 

primary care residents and another for 

nonprimary care residents. An 

advantage to using data from the most 

recently settled cost reports of the 

hospitals involved in a merger is that 

the two PRAs are taken into account in 

determining the weighted average PRA 

for the merged hospital. Because two 

PRAs would be taken into account 

under this proposal, we considered 

whether a primary care PRA and a 

nonprimary care PRA should, therefore, 

be determined for the merged hospital. 

Although it would be possible to 

determine and retain two PRAs for a 

merged hospital when one or more 

hospitals involved in the merger had 

two PRAs, we did not propose to do so. 

We proposed that a single PRA also be 

determined for the merged hospital in 

this situation because it is more 

administratively straightforward for the 

fiscal intermediaries and the merged 

hospitals and since the merged hospital 

itself was not in existence in the years 

that the two PRAs were established (FY 

1994 and FY 1995), we do not believe 

it is necessary to retain the two PRAs. 

Furthermore, because the two existing 

pre-merger PRAs are taken into account 

when establishing the single PRA for the 

merged hospital, and the statutory 

provision that resulted in the creation of 

two PRAs has no continuing effect 

(because the updates were prohibited 

only for FY 1994 and FY 1995), we see 

no compelling reason to continue to 

carry two PRAs for a merged hospital. 

The following was presented as an 

example of how to calculate a weighted 

average PRA under the proposed revised 

methodology: 

Example: Assume that Hospital A, 

Hospital B, and Hospital C merge and 

Hospital B with a fiscal year end of 

December 31, 2006, is the surviving 

hospital. In their respective most 

recently settled cost reports, Hospital A 

has 200 primary care and obstetrics and 

gynecology FTE residents and 150 

nonprimary care FTE residents, and 

Hospital B has 50 primary care and 

obstetrics and gynecology FTE residents 

and 60 nonprimary care FTE residents. 

Hospital C became a teaching hospital 

in 2000 and has 25 FTE residents. After 

updating the primary care and 

nonprimary care PRAs for inflation by 

the CPI–U to December 31, 2006, 

Hospital A has a primary care PRA of 

$120,000 and a nonprimary care PRA of 

$115,000, Hospital B has a primary care 

PRA of $100,000 and a nonprimary care 

PRA of $97,000, and Hospital C has a 

single PRA of $90,000. 

(a) Primary care: 

Hospital A: $120,000 × 200 FTEs = 

$24,000,000 

Hospital B: $100,000 × 50 FTEs = 

$5,000,000 

(b) Nonprimary care: 

Hospital A: $115,000 × 150 FTEs = 

$17,250,000 

Hospital B: $97,000 × 60 FTEs = 

$5,820,000 

(c) Single PRA: Hospital C: $90,000 × 

25 FTEs = $2,250,000 

(d) $24,000,000 + $5,000,000 + 

$17,250,000 + $5,820,000 + $2,250,000 

= $54,320,000 

(e) 200 + 50 + 150 + 60 + 25 = 485 

total FTEs 

(f) $54,320,000/485 FTEs = $112,000, 

the weighted average of the hospitals 

involved in the merger for fiscal year 

end December 31, 2006. 

Comment: One commenter 

commended our proposal to revise the 

weighted average PRA methodology for 

determining a merged teaching 

hospital’s PRA by using direct GME FTE 

resident data and PRA data from the 

most recently settled cost reports of the 

merging hospitals. However, the 

commenter suggested that because a 

teaching hospital’s reimbursement is 

calculated using the hospital’s rolling 

average FTE count, and not the 

hospital’s current year FTE count, the 

rolling average FTE count of merging 

hospitals (Lines 3.16 and 3.22 of 

Worksheet E–3, Part IV) should be used 

to determine a merged teaching 

hospital’s PRA. The commenter also 

pointed out that a new teaching 

hospital’s FTE count only appears on 

Lines 3.16 and 3.22 and in the case 

where one of the hospitals involved in 

a merger is a new teaching hospital, if 

CMS were to use the current year FTE 

counts, the new teaching hospital’s PRA 

would not be taken into account in the 

weighted average PRA determination for 

the merged hospital. 

Response: We appreciate the 

commenter’s support for the proposed 

policy revision; however, we disagree 

with the commenter’s suggestion. The 

intent of the policy revision is to ease 


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the administrative burden for hospitals 

and fiscal intermediaries by using more 

accessible cost reporting data for 

determining a merged hospital’s 

weighted average PRA. We do not 

believe it is appropriate to change 

which FTE counts are used to make a 

PRA determination for a merged 

hospital. While it is true that the statute 

requires that direct GME payment be 

determined based on a 3-year rolling 

average of the hospital’s FTE counts, 

that provision is intended by Congress 

to moderate the impact of year-to-year 

changes in hospitals’ FTE counts. 

However, to calculate a weighted PRA 

for merging teaching hospitals, we 

believe it is appropriate to weight each 

hospital’s PRA based on the FTE 

resident count for each hospital’s 

current year. We do agree with the 

commenter that in the case of a merger 

that involves a new teaching hospital or 

an existing teaching hospital which, in 

accordance with 42 CFR 413.79(d)(5), 

included residents in ‘‘new teaching 

programs’’ on Lines 3.16 and/or 3.22 of 

Worksheet E–3, Part IV, the merged 

hospital’s weighted average PRA will be 

computed by including the ‘‘new 

teaching program’’ FTE residents from 

those lines. 

Comment: One commenter suggested 

that a separate primary care PRA and 

nonprimary care PRA be determined for 

a merged hospital. The commenter 

believed that because most existing 

teaching hospitals currently have two 

PRAs, it would be appropriate to 

determine two PRAs for a merged 

teaching hospital as well. In addition, 

the commenter believed that 

determining one PRA for a merged 

hospital might result in inaccurate 

reimbursement should the surviving 

hospital’s mix of primary and 

nonprimary care residents or programs 

change significantly. 

Response: Although we initially 

proposed to determine a single PRA for 

the merged hospital, after considering 

this comment, we are convinced that it 

is appropriate to determine two PRAs 

for a merged teaching hospital. 

Although we do not believe the 

determination of a single PRA for a 

merged hospital would necessarily 

result in ‘‘inaccurate reimbursement,’’

we do recognize the commenter’s point 

that the application of a single PRA for 

a merged hospital would be inconsistent 

with the application of two PRAs for 

most other teaching hospitals (typically, 

a lower one for residents in nonprimary 

care specialties), and could produce 

some unintended incentives. 

Specifically, we recognize that the two 

PRAs have the continuing effect of 

discouraging shifts from primary care 

and obstetrics and gynecology programs 

to nonprimary care programs. Therefore, 

we are revising the steps for calculating 

the weighted average PRAs for a merged 

teaching hospital. The following steps 

should be used by fiscal intermediaries 

to calculate the primary care weighted 

average PRA for a merged teaching 

hospital for mergers that occur on or 

after October 1, 2006: 

Step 1: From the most recently settled 

cost report of each hospital involved in 

the merger, identify the primary care 

and obstetrics and gynecology FTE 

resident count (Line 3.07 and ‘‘new 

program’’ residents from Line 3.22 of 

Worksheet E–3, Part IV). 

Step 2: From the most recently settled 

cost report of each hospital involved in 

the merger, identify the hospital’s 

primary care and obstetrics and 

gynecology PRA (or a hospital’s single 

PRA when applicable). Update the 

hospitals’ PRAs to the midpoint of the 

surviving provider’s cost reports that 

precede the cost report in which the 

merger occurs using a special CPI–U 

inflation factor obtained from the CMS 

Central Office. All of the merging 

hospitals’ PRAs should be updated to 

coincide with the surviving hospital’s 

fiscal year end for the cost reporting 

period prior to the merger. (For 

example, if the surviving teaching 

hospital’s cost reporting period fiscal 

year end prior to the merger is 

December 31, 2006, and the most 

recently settled cost report of the 

teaching hospital(s) involved in the 

merger is June 30, 2003, the PRAs from 

this cost report would be updated for 

inflation to December 31, 2006). 

Step 3: Calculate the weighted average 

primary care PRA for the merged 

hospital using the PRAs and FTE 

resident counts from Steps 1 and 2. 

(a) For hospitals with two PRAs, 

multiply the primary care PRA by the 

number of primary care and obstetrics 

and gynecology FTE residents. 

(b) For hospitals with a single PRA, 

multiply the single PRA by the number 

of primary care FTE residents. 

(c) Add the products from each 

hospital from Steps 3(a) and (b). 

(d) Add the number of FTE residents 

from each hospital from Step 1. 

(e) Divide the sum from Step 3(c) by 

the sum from Step 3(d). The result is the 

weighted average primary care PRA for 

the merged hospital. 

Fiscal intermediaries will follow these 

same steps to calculate the weighted 

average nonprimary care PRA for a 

merged teaching hospital. For the 

weighted average nonprimary care PRA, 

the merging hospitals’ nonprimary care 

FTE counts (Lines 3.08 and 3.11 and 

‘‘new program’’ residents on Line 3.22 

from Worksheet E–3, Part IV) and 

nonprimary care PRAs (or a single PRA 

for a hospital with one PRA) should be 

used. 

Comment: One commenter requested 

that CMS provide a detailed example 

that includes the merger date and the 

fiscal year ends for each merging 

hospital’s cost report. 

Response: The following is a detailed 

example of how a weighted average 

primary care PRA would be determined 

for a merged hospital. The changes to 

the proposed policy revision discussed 

previously have been incorporated into 

this example. 

Example: Assume that Hospital A, 

Hospital B, and Hospital C will merge 

on February 1, 2007. On their most 

recently settled cost reports, Hospital A 

has 200 primary care and obstetrics and 

gynecology FTE residents, Hospital B 

has 50 primary care and obstetrics and 

gynecology FTE residents, and Hospital 

C has 10 primary care and obstetrics and 

gynecology FTE residents. The 

surviving hospital is Hospital C whose 

fiscal year end prior to the merger is 

December 31, 2006. Hospital A’s and 

Hospital B’s most recently settled cost 

report is September 30, 2002 and 

Hospital C’s most recently settled cost 

report is December 31, 2003. Since 

Hospital C is the surviving provider and 

Hospitals A and B have fiscal year ends 

(that is, September 30, 2006) that differ 

from the fiscal year end of Hospital C 

(that is, December 31, 2006), Hospitals 

A and B’s PRAs must be made 

concurrent with the PRA of Hospital C 

for fiscal year end December 31, 2006. 

The fiscal intermediary should contact 

the CMS Central Office for special 

update factors and for instructions on 

making the PRAs concurrent. 

Additional special update factors will 

be necessary to determine the direct 

GME payment, pre-merger and postmerger, as indicated in response to the 

next comment. After updating the PRAs 

for inflation by the appropriate CPI–U 

update factor to December 31, 2006, 

Hospital A has a primary care PRA of 

$120,000, Hospital B has a primary care 

PRA of $100,000, and Hospital C has a 

single PRA of $90,000. 

(a) Hospital A: $120,000 × 200 FTEs 

= $24,000,000 

Hospital B: $100,000 × 50 FTEs = 

$5,000,000 

(b) Hospital C: $90,000 × 10 FTEs = 

$900,000 

(c) $24,000,000 + $5,000,000 + 

900,000 = $29,900,000 

(d) 200 + 50 + 10 = 260 total FTEs 

(e) $29,900,000/260 FTEs = $115,000, 

the weighted average primary care PRA 

for Hospital C, the surviving hospital, 

effective February 1, 2007, the date of 


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the merger. The weighted average 

nonprimary care PRA would be 

calculated using the merging hospitals’

nonprimary care FTE counts and 

nonprimary care PRAs (or single PRA 

for Hospital C). 

Comment: One commenter requested 

clarification on how CMS would treat a 

merger that occurs in the middle of the 

surviving hospital’s cost reporting 

period. More specifically, the 

commenter questioned whether, in such 

a situation, the surviving hospital would 

have two PRAs, a pre-merger PRA and 

post-merger PRA. 

Response: In the case described by the 

commenter, the surviving hospital 

would indeed be reimbursed with two 

sets of PRAs, a set of pre-merger PRAs 

and a set of post-merger PRAs. To 

calculate the direct GME payment for 

the surviving hospital for the cost 

reporting period in which the merger 

occurred, the fiscal intermediary 

performs a series of off-the-cost-report 

calculations, treating the pre-merger and 

post-merger periods of the surviving 

hospital’s cost reporting period as if 

they are two short cost reporting 

periods. The fiscal intermediary would 

first calculate the direct GME 

reimbursement for the surviving 

hospital for the portion of the cost 

reporting period prior to the merger 

using only the surviving hospital’s FTEs 

and PRA(s) and Medicare utilization 

rate. Second, the fiscal intermediary 

would calculate the surviving hospital’s 

post-merger direct GME reimbursement 

using the weighted average PRA(s) 

updated with special CPI–U factors, a 

combined rolling average FTE count 

reflecting the merged hospitals’ FTEs, 

and a combined Medicare utilization 

rate reflecting the portion of the cost 

reporting period after the merger. Then 

the fiscal intermediary would add the 

pre-merger and post-merger payments to 

determine the surviving hospital’s total 

reimbursement for that cost reporting 

period. (Note that, although not the 

topic of this discussion, similar premerger and post-merger calculations are 

done for the resident-to-bed ratio for 

IME purposes as well). 

Comment: One commenter believed 

that varying methodologies have been 

used in the past to determine the PRA 

for a merged teaching hospital and that 

our statement in the proposed rule that 

CMS’ policy ‘‘has always been that 

when two or more teaching hospitals 

merge, we determine a weighted average 

PRA for the surviving merged hospital’’

is inaccurate. The commenter further 

believed that the reference to the 1990 

GME Questions and Answers is poor 

evidence that CMS’ current policy is to 

determine a weighted average PRA for 

the surviving merged hospital. Finally, 

the commenter believed that CMS 

should promulgate a policy that gives 

latitude to a merged hospital to have a 

PRA determined that takes into 

consideration the surviving hospital’s 

post-merger operations. The commenter 

suggested that CMS adopt a policy that 

provides a merged hospital the option of 

having its PRA determined as the 

weighted average PRA or the surviving 

provider’s PRA. 

Response: We disagree with the 

commenter’s assertion that varying 

policies have been used in the past to 

determine the PRA for a merged 

hospital. In addition to the 1990 

Questions and Answers on Medicare 

GME Payments, we have consistently 

expressed our policy to determine a 

weighted average PRA for a merged 

hospital. For example, our policy was 

clearly cited in the May 12, 1998 

Federal Register (63 FR 26239) in which 

we state that ‘‘in implementing the 

COBRA 1985 provision establishing a 

hospital-specific per resident amount in 

the situation of a merger, we have 

calculated the revised per resident 

amount for the merged hospital using an 

FTE weighted average of each of the 

respective hospital’s per resident 

amount which is part of the merger.’’

We have worked with numerous fiscal 

intermediaries in determining weighted 

average PRAs for merged hospitals and 

are unaware of any instance that a 

weighted average PRA was not 

determined for a merged hospital. 

Our current policy, as revised by this 

final rule, applies prospectively for cost 

reporting periods beginning on or after 

October 1, 2006. Our main concern in 

making these clarifications and changes 

to our policy is to adopt a policy that 

can be applied consistently and that 

recognizes the nature of a merger of 

hospital entities. We believe it is 

appropriate to adopt a policy that takes 

into account each of the various merging 

hospitals’ preexisting, statutorily 

established PRAs. We have adopted a 

policy under which the PRA(s) 

determined for a merged hospital is 

based on the weighted average of the 

different merging hospitals’ PRAs 

precisely because it takes all of the 

merging hospitals’ PRAs into account. 

We do not believe it is appropriate to 

provide a merged hospital the option of 

adopting the surviving hospital’s PRA 

instead of the average weighted PRA 

because, aside from the fact that such a 

policy would ignore the fact that the 

merger is a result of multiple hospitals 

with individual PRAs joining together, 

such a policy could inappropriately 

provide an incentive to choose the 

surviving hospital based on which 

surviving hospital’s PRA would yield 

the highest reimbursement. 

Comment: Several commenters 

requested that this policy revision be 

included as a provision in the regulatory 

text of § 413.77, the regulation that deals 

with the determination of PRAs. 

Response: We agree with the 

commenters. In this final rule, we are 

revising § 413.77 by adding a new 

paragraph (h) to reflect the policy on 

determining the PRA for the surviving 

hospital when multiple hospitals merge, 

effective October 1, 2006. 

3. Determination of Per Resident 

Amounts (PRAs) for New Teaching 

Hospitals (§ 413.77(e)) 

As we discussed earlier in the 

background portion of this section, the 

hospital-specific, base-period PRA used 

in the payment methodology for 

determining Medicare direct GME 

payments is calculated by dividing a 

hospital’s allowable direct costs of GME 

in a base period by its number of 

residents in that base period. In the case 

of a hospital that did not train residents 

in its FY 1984 cost reporting period, a 

PRA is determined by comparing and 

taking the lower of a PRA based on 

direct GME costs and FTE residents in 

a base year or the updated weighted 

mean value of PRAs of all hospitals 

located in the same geographic wage 

area. For ease of discussion, we refer to 

a hospital that did not participate in 

Medicare or have any approved medical 

residency training programs during the 

base period beginning between October 

1, 1983, through September 30, 1984, 

and has since commenced participating 

in Medicare and begun training 

residents in an approved program, as a 

‘‘new teaching hospital.’’ A new 

teaching hospital’s PRA is established 

by using the lower of its hospitalspecific PRA based on the actual 

allowable direct GME costs and FTE 

residents during a base period as 

defined in § 413.77(e) or the updated 

weighted mean value of PRAs of other 

teaching hospitals in the same 

geographic area. 

Existing regulations at § 413.77(e) 

specify that the base year for 

establishing a PRA for a new teaching 

hospital is the first cost reporting period 

in which the new teaching hospital 

participates in Medicare and the 

residents are on duty during the first 

month of that period. If the new 

teaching hospital begins training 

residents but does not have residents on 

duty during the first month of the first 

cost reporting period in which training 

occurs, the new teaching hospital is 

paid on a reasonable cost basis under 

§ 413.77(e) for any GME costs incurred 


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by that hospital during that period. The 

intent of this policy for new teaching 

hospitals is to make a more accurate 

determination of a PRA based on the 

hospital’s per resident direct GME costs 

in a cost reporting period in which GME 

costs have been incurred for that entire 

period. As we noted in a response to 

comments in a final rule published in 

the Federal Register on September 29, 

1989 (54 FR 40310), we believe that 

where the new teaching hospital’s cost 

reporting period begins on a date other 

than July 1 (the beginning of the 

academic year), for example, October 1 

or January 1, the cost reporting period 

that includes costs and resident counts 

from the first year of the training 

program may not be reflective of the 

actual average costs per resident of the 

program because the full complement of 

residents might not be on duty, and 

those that are on duty might be 

receiving a salary for as few as 1 or 2 

months of the cost reporting period. In 

the usual case, training in the program 

would continue into the following cost 

reporting period and residents would 

thus be on duty in the first month of this 

next cost reporting period. 

Consequently, our existing regulations 

at § 413.77(e)(1) specify that the PRA is 

to be determined by using the cost and 

resident data from the first cost 

reporting period during which residents 

are training in the first month of the cost 

reporting period. 

It has come to our attention that, in 

rare instances, it is possible for a new 

teaching hospital, either through 

happenstance or by purposeful gaming 

of the policy, to continue to be 

reimbursed for direct GME costs on a 

reasonable cost basis even beyond the 

first cost reporting period during which 

residents begin training at the hospital 

as long as no residents are on duty at the 

new teaching hospital in the first month 

of the subsequent cost reporting 

period(s). We believe this scenario is 

contrary to the statutory intent of 

section 1886(h) of the Act, which 

instructs that instead of payment on a 

reasonable cost basis, the Secretary is to 

determine and base direct GME 

payments on a PRA for each hospital 

with a residency program. For that 

reason, in the FY 2007 IPPS proposed 

rule (71 FR 24113), we proposed to 

revise § 413.77(e)(1) and (e)(1)(i) to 

provide that we will make a PRA 

determination even where residents are 

not on duty in the first month of a cost 

reporting period but where residents 

began training at the hospital in the 

prior cost reporting period. We 

proposed that, effective for cost 

reporting periods beginning on or after 

October 1, 2006, if a new teaching 

hospital begins training residents in a 

cost reporting period beginning on or 

after October 1, 2006, and no residents 

are on duty during the first month of 

that period, the fiscal intermediary 

establishes a PRA for the hospital using 

the lesser of: (1) The cost and resident 

data from the cost reporting period 

immediately following the one for 

which GME training at the hospital was 

first reported (that is, the base period); 

or (2) the updated weighted mean value 

of PRAs of all hospitals located in the 

same geographic wage area. We note 

that, as with existing policy, the base 

year need not be a full cost reporting 

year. 

Comment: One commenter noted that 

CMS should clarify that the PRA will be 

based on ‘‘the lesser of’’ the cost and 

resident data from the cost report, or the 

updated weighted mean value of PRAs 

of all hospitals located in the same 

geographic wage area. 

Response: We agree with the 

commenter and have revised the 

language in the preamble of this final 

rule accordingly. 

After consideration of the public 

comments received, we are adopting as 

final, without modifications, the 

proposed changes to § 413.77(e)(1) and 

(e)(1)(i) to provide that ‘‘effective for 

cost reporting periods beginning on or 

after October 1, 2006, if a new teaching 

hospital does not have residents on duty 

during the first month of that period, the 

PRA will be determined using 

information from the cost reporting 

period immediately following the cost 

reporting period during which the 

hospital participates in Medicare and 

residents began training at the hospital 

even if the residents are not on duty 

during the first month of that period.’’

4. Requirements for Counting and 

Appropriate Documentation of FTE 

Residents: Clarification (§§ 412.105(f), 

413.75(d), 413.78(b) and (e), 413.80, and 

413.81) 

Despite the fact that current policies 

concerning the counting of FTE 

residents for IME and direct GME 

payment purposes have been in effect 

since October 1985, we continue to 

receive questions on the proper 

counting and appropriate 

documentation for FTE residents for 

IME and direct GME payment purposes. 

As a result of these continuing 

questions, in the FY 2007 IPPS 

proposed rule (71 FR 24113), we 

included a clarification of policies that 

apply in determining hospitals’ FTE 

resident counts for Medicare GME 

payment purposes. 

In the existing regulations at 

§ 413.78(b) for direct GME payments, we 

specify that no individual may be 

counted as more than one FTE, and that 

a hospital cannot claim the time spent 

by residents training at another hospital. 

Therefore, if a resident spends time 

training in more than one hospital, the 

residents counts as a partial FTE based 

on the portion of time the resident trains 

at the hospital (and a nonhospital 

setting if the hospital meets the 

requirements of § 413.78(e)) to the total 

time worked. (The same provisions 

apply to part-time residents as specified 

in § 413.78(b)). A similar policy exists at 

§ 412.105(f)(1)(ii) and (iii) for purposes 

of counting FTE residents for IME 

payment purposes. As we have 

explained in previous Federal Register 

documents (55 FR 36064 and 67 FR 

50077), these policies apply even when 

a hospital actually incurs the cost of 

training the resident(s) at another 

hospital(s). For example, during a cost 

reporting year, a full-time resident trains 

at Hospital A for 6 months and trains at 

Hospital B for 6 months. Hospital A is 

paying the salary and fringe benefits of 

the resident for the entire year. In this 

case, each hospital would only count 

0.5 of an FTE at the most for that 

resident. Hospital A would not be able 

to count the entire FTE for that resident, 

regardless of the fact that it incurred all 

of the training costs for the resident 

during that training year. 

We also have become aware of issues 

that have arisen due to a hospital’s 

failure to document the number of FTE 

residents claimed on its cost report. 

Proper documentation is required so 

that Medicare fiscal intermediaries can 

determine where and when a resident(s) 

is training and to allow the fiscal 

intermediary to make payment to the 

hospital based on the time the 

resident(s) spends at the hospital, which 

may be a percentage of the total time 

trained. A rotation schedule is the 

primary documentation that can be used 

to support the direct GME and IME 

resident counts but other similar 

documentation may be acceptable. The 

following is a situation about which we 

learned that illustrates how inadequate 

documentation resulted in 

inappropriate counting of FTEs. Two 

hospitals, Hospital C and D, were 

‘‘associated’’ with each other, with 

residents training at both hospitals. 

However, instead of differentiating 

between the number of FTEs and the 

actual amount of time spent at each 

hospital, Hospitals C and D split the 

FTEs 50/50. Since, in reality, the 

number of residents actually training at 

each hospital differed, splitting the FTE 


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count 50/50 resulted in inappropriate 

payment to both hospitals. Hospitals are 

not permitted to decide among 

themselves how their FTEs will be 

counted. A hospital may not count a 

greater number of FTE residents than is 

actually training at the hospital (or its 

nonhospital sites) during the year. Each 

hospital must have documentation 

which demonstrates, for the entire cost 

reporting period, the amount of time 

that the resident trained at the hospital 

and, if applicable, a nonhospital site. 

Furthermore, to the extent that residents 

train in nonhospital sites, the hospital 

claiming the FTEs in the nonhospital 

site must meet the requirements at 

§ 413.78(e). 

Situations such as the one described 

above involving Hospital C and Hospital 

D are particularly harmful when one or 

more of the hospitals involved 

incorrectly reported FTEs in the cost 

reporting period used to establish one or 

more of the hospitals’ FTE resident 

caps, and as a result, the caps were 

established incorrectly. Unless the 

incorrect caps can be revised pursuant 

to our regulations regarding review and 

revision of agency determinations, those 

caps must be applied to the hospital(s) 

in future years. For instance, we have 

learned of situations where a hospital’s 

FTE resident caps were established 

incorrectly a number of years earlier 

and, due to administrative finality of 

settled cost reports, can no longer be 

adjusted. However, going forward, that 

cap will be applied to the hospital’s 

count of FTEs, which must reflect the 

number of FTE residents actually 

training in the hospital (or in 

nonhospital sites where applicable). 

In order to ensure that FTEs are being 

properly counted, hospitals are required 

to furnish specific documentation to 

support the number of FTE residents 

included in the hospital’s FTE count. 

Section 413.75(d) specifies the 

requirements concerning documentation 

of FTE residents. Proper documentation 

must include the following information: 

The name and social security number of 

the resident; the type of residency 

program in which the individual 

participates and the number of years the 

resident has completed in all types of 

residency programs; the dates the 

resident is assigned to the hospital and 

any hospital-based providers (similar to 

the rotation schedule); the dates the 

resident is assigned to other hospitals, 

or other freestanding providers, and any 

nonprovider setting during the cost 

reporting period, if any; and the name 

of the employer paying the resident’s 

salary. In addition, the documentation 

should include the name of the medical, 

osteopathic, dental, or podiatric school 

from which the resident graduated and 

the date of graduation, and whether the 

resident is a foreign medical graduate, 

including documentation concerning 

whether the resident has satisfied the 

regulatory requirements for foreign 

medical graduates at § 413.80. The 

information must be certified by an 

official of the hospital and, if different, 

an official responsible for administering 

the residency program. Again, proper 

documentation on where and when a 

FTE resident is training during a cost 

reporting period is essential in order for 

the hospital to receive direct GME and 

IME payments based on the correct 

number of FTE resident(s). Inaccurate, 

incomplete, or inappropriate 

documentation will lead to Medicare 

disallowing certain FTE residents from 

being counted for purposes of direct 

GME and IME payments. We note that 

we are not expanding or making any 

changes to current policy for proper 

documentation of FTEs. Rather, we are 

clarifying the existing regulations 

concerning proper counting and 

documentation of FTEs. 

Comment: Several commenters noted 

that the issue of proper documentation 

has been a frequent topic of discussion 

between teaching hospitals and fiscal 

intermediaries and that concerns 

involving the ‘‘lack of uniform 

standards’’ for documentation, burdens 

related to ‘‘duplicative documentation 

requests,’’ and matters pertaining to the 

‘‘Medicare audit process’’ have been 

communicated to the CMS central 

office. Several commenters asserted that 

the Medicare Intern and Resident 

Information System (IRIS) is used by 

many teaching hospitals as a means of 

documentation and verification of FTE 

resident rotations and counts. One 

commenter noted further that since 

teaching hospitals and fiscal 

intermediaries use the IRIS ‘‘* * *as 

the key reporting tool for resident 

information * * *’’ CMS should 

contribute further resources and 

consideration to maintaining the IRIS 

and ensuring that the program itself and 

its technical support systems are ‘‘stateof-the-art.’’ Specifically, the commenter 

stated that because CMS is the agency 

responsible for the management of the 

Medicare program, it has the 

responsibility to update the IRIS so that 

it is a ‘‘user-friendly’’ tool for teaching 

hospitals. In addition, the commenter 

noted that because the IRIS has not 

recently been updated, teaching 

hospitals have had to rely on private 

software in order to use the IRIS. The 

commenter stated that it is 

inappropriate that teaching hospitals 

have had to rely on private software to 

make the IRIS work. The commenter 

suggested that CMS form an IRIS task 

force comprised of ‘‘* * * CMS policy 

staff, CMS audit staff, and industry and 

intermediary representation * * *’’ to 

attend to concerns involving the IRIS. 

Response: We believe that § 413.75(d) 

clearly specifies the documentation that 

is required to allow a hospital to count 

FTE residents for Medicare payment 

purposes. However, we encourage 

hospitals and fiscal intermediaries to 

contact CMS with questions they have 

about proper documentation. With 

regards to the use of the IRIS in 

determining a hospital’s FTE resident 

count and as a source for documentation 

purposes, we note that currently the 

IRIS does not contain all of the specific 

documentation requirements cited 

under § 413.75(d) and § 412.105(f)(1). 

Furthermore, the IRIS does not serve as 

the evidence/documentation that 

supports the accuracy of the FTE 

resident counts reported in the cost 

report, which is the subject of section 

IV.H.4. of this preamble. The hospitals 

prepare the IRIS using actual records 

(for example, rotation schedules or 

similar documentation) that could be 

proper evidence/documentation to 

support the accuracy of the FTE resident 

counts reported in the cost report. In 

addition, we are aware that, for 

whatever reasons, the FTE resident 

counts computed using the IRIS 

information do not always match the 

FTE resident counts reported in the 

related cost reports. Thus, the IRIS is 

not, in itself, a sufficient mechanism for 

hospitals to meet their obligation to 

furnish information required under 

§ 413.75(d) to support the FTE resident 

counts reported in the cost report. We 

emphasize that rotation schedules or 

other similar documentation should 

stand as the primary evidence to 

support hospitals’ FTE resident counts. 

Regarding the commenter’s assertion 

that it is inappropriate that teaching 

hospitals have had to rely on a private 

software program for IRIS use, we note 

that CMS does not mandate that fiscal 

intermediaries purchase separate 

software packages to supplement the 

IRIS. Where the hospitals or the fiscal 

intermediaries utilize a private software 

program for the IRIS, those fiscal 

intermediaries can use the IRIS in 

conjunction with the rotation schedule 

or similar documentation as an audit 

tool to identify duplicates, that is, the 

counting of the same resident by more 

than one hospital. 

Comment: One commenter noted that 

in order for hospitals and intermediaries 

to determine proper GME 

reimbursement improved guidance and 

reporting systems are necessary, and 


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that, without better guidance, mistakes 

will continue to be made by hospitals 

and intermediaries. Furthermore, the 

commenter stated that in order to 

maintain a cost effective policy, GME 

payment policy should be evaluated 

from time to time ‘‘* * * to determine 

operational efficiency and 

effectiveness.’’ The commenter stated 

that maintaining a cost effective 

approach includes limiting 

disagreements between teaching 

hospitals and fiscal intermediaries 

which requires that Medicare direct 

hospitals and fiscal intermediaries, 

‘‘* * * on the spirit and intent of the 

law.’’ The commenter stated that, 

although the law imparts that payment 

be rooted in rules of nongovernmental 

organizations, ‘‘* * * such as the 

American Council of Graduate Medical 

Education (ACGME) and American 

Board of Medical Specialties (ABMS),’’

the rules of these organizations ‘‘* * * 

are not enforced rigidly and do not have 

the force of the law.’’ The commenter 

understands that policy cannot cover 

every issue but stated that ‘‘* * * 

financial auditors will not allow a 

situation unless it is specifically 

addressed in regulation and other 

directives.’’

The commenter asserted that, 

‘‘improper payment is usually due to 

the intermediaries’ lack of knowledge 

about a policy or misunderstanding 

about the GME rules and, [t]o remedy 

the fact that intermediaries are not well 

versed in many of the basic principles 

required for GME audit work, there is a 

need for Medicare GME payment 

specialists.’’ In addition, the commenter 

stated that hospitals must deal with 

inconsistencies from year to year due to 

different auditors and the auditors’

requirements for documentation. The 

commenter further stated that Medicare 

policies established to adhere with the 

law are instituted without an adequate 

understanding of how teaching 

programs and hospitals function. The 

commenter asserted that it is time to 

provide further guidance to fiscal 

intermediaries and hospitals on 

Medicare GME payment policy and one 

way CMS could provide further 

guidance is to revise the Provider 

Reimbursement Review Manual (PRM) 

instead of issuing instructions through 

multiple Federal Registers. 

In addition, the commenter stated that 

a cost effective measure to take to 

correctly count FTE residents would be 

to modify the IRIS because the system 

currently does not incorporate sufficient 

information to meet the regulatory 

requirement to report all training 

locations for an individual resident, and 

only identifies a range of dates where 

some FTE time is counted for the same 

resident by more than one hospital. 

Furthermore, the commenter stated that 

fiscal intermediaries interpret software 

limitations as the need for hospitals to 

provide supplementary documentation. 

The commenter noted that ‘‘[i]n 

practice, neither the intermediary nor 

the hospitals have followed the 

regulatory requirement to report all 

training locations of a resident’’ and 

therefore recommended that ‘‘* * * 

CMS clarify that hospitals must obtain 

a report from the entity sponsoring the 

training program that lists each 

resident’s training location.’’

Furthermore, the commenter asserted 

that ‘‘[t]he intermediary’s level of 

acceptable documents has been 

increasingly stringent * * *’’ and that 

there have been occasions where 

disallowances have occurred because 

the submitted documentation did not 

meet individual intermediary 

requirements. The commenter also 

provided other examples of situations 

where auditors have disallowed FTE 

residents. 

Response: We acknowledge that the 

PRM should be revised and updated to 

incorporate current GME policies. 

However, we disagree with the 

commenters’ assertion that not enough 

guidance is provided to teaching 

hospitals concerning Medicare’s GME 

payment policies. In addition to 

clarifying policy through public Q&As 

and Federal Registers, we meet with 

teaching hospitals and intermediaries 

on hospital-specific issues and with 

associations representing teaching 

hospitals in order to clarify GME policy. 

We urge hospitals and fiscal 

intermediaries to contact us regarding 

questions they have about appropriate 

documentation. With regards to the use 

of the IRIS in determining a hospital’s 

FTE resident count, we note that the 

IRIS is only intended to serve as an 

audit tool to help identify duplicates 

and does not contain all of the specific 

documentation requirements listed 

under § 413.75(d) and § 412.105(f)(1) 

and, therefore, additional 

documentation is required. As 

previously mentioned, the fact that the 

IRIS does not meet the regulatory 

provision to report all training locations 

for an individual resident is not the only 

reason that the IRIS cannot serve as the 

evidence/documentation to support the 

accuracy of the FTE resident counts 

reported in the cost report. Modification 

of the IRIS would not eliminate the need 

for auditable evidence to support the 

cost report and the information 

included in the IRIS. We specified in 

the preamble background and the 

previous response in this section that 

CMS considers the rotation schedules or 

similar documentation as the primary 

evidence to support the FTE resident 

counts. In response to the commenter’s 

recommendation that sponsoring 

institutions submit documentation 

listing residents’ training locations, the 

rotation schedules are prepared by the 

Director of the GME program of the 

sponsoring institution. These types of 

rotation schedules should be used by 

the hospital to determine the cost report 

FTE resident counts and be furnished by 

the hospital to the fiscal intermediary 

when requested for audit purposes. 

Comment: One commenter noted that 

the documentation submitted in 

accordance with § 413.75(d) needs to be 

certified by an official of the hospital or 

by an official responsible for 

administering the residency program. 

The commenter was unclear as to what 

exactly needs to be certified, and in 

what format, and asked if submission 

and certification of the IRIS report meets 

the certification requirement. 

Response: The IRIS report does not 

contain all the information listed in 

§ 413.75(d) or § 412.105(f)(1). Therefore, 

in itself, it does not meet all the 

requirements of these sections 

regardless of whether it is certified or 

not. Therefore, in addition to submitting 

the IRIS report, the hospital must 

submit the other documentation 

elements specified in § 413.75(d), and 

those must be certified by a hospital or 

GME program official. 

Comment: One commenter expressed 

concern over the policies regarding the 

proper counting of FTE residents. 

Specifically, the commenter expressed 

dismay that a hospital can count 

resident training time for GME payment 

purposes when the resident rotates to a 

nonhospital site but not when a resident 

is training at another hospital even if the 

teaching hospital is incurring all the 

training costs of that resident at that 

other hospital. The commenter noted 

that this policy is particularly 

detrimental to emergency medicine. The 

commenter stated that the Accreditation 

Council for Graduate Medical Education 

(ACGME) sets forth a required case 

volume for residency training in 

emergency medicine and that this 

volume requirement limits the number 

of rural emergency medical residency 

training programs. The commenter 

noted that in an effort to provide 

residents in emergency medicine with 

experience in rural practice, attempts 

have been made to expand training to 

rural hospitals. The commenter noted 

that since few small rural hospitals 

‘‘* * * want to undertake the burden of 

becoming teaching hospitals in their 


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own right * * *,’’ the major teaching 

hospitals have continued to pay the 

costs of those residents training at the 

rural hospitals. The commenter stated 

that the current policy opposes efforts of 

governmental agencies to increase 

training in rural areas and further stated 

that more residency program directors 

would make rural training available if 

they were permitted to continue to 

count residents that were rotating to 

rural hospitals. The commenter urged 

CMS to change its policy to allow 

payment to the primary teaching 

institution for resident time spent in 

rural hospitals in situations where it is 

not economically feasible for the rural 

hospital to become a teaching hospital. 

Response: We agree that efforts 

should be made to ensure that residency 

training is occurring at rural facilities so 

that residents are prepared to work in 

these environments upon completion of 

their residency training programs. 

However, we do not believe that it is 

consistent with the requirements at 

sections 1886(d)(5)(B)(IV) and 

1886(h)(4)(E) of the Social Security Act 

to expand the policy to allow hospitals 

to count residents training at rural 

hospitals even if the hospital seeking to 

count the resident is paying the cost of 

training for those residents rotating to 

the rural hospital. In addition, section 

1886(h)(4)(B) of the Social Security Act 

requires that the regulations take into 

account individuals who serve as 

residents simultaneously in more than 

one hospital. Therefore, we believe that 

the statute contemplates allowing a 

hospital to count only those residents 

actually training in that hospital. We do 

not believe it is appropriate for the 

‘‘primary’’ teaching hospital to include 

time spent by residents at other 

hospitals in its FTE count, even when 

the ‘‘primary’’ teaching hospital is 

incurring the costs of training the 

residents. 

Comment: One commenter stated that 

fiscal intermediaries may be using the 

IRPs set forth in the August 30, 1996 

Federal Register. The commenter noted 

that in the August 30, 1996 Federal 

Register, CMS set an IRP of 2 years for 

podiatry residency programs. The 

commenter noted, however, that since at 

least 2003, the Council on Podiatric 

Medical Education (CPME) has stated 

that there exists both a 2-year podiatric 

medicine and surgery-24 program and a 

3-year podiatric medicine and surgery36 program. The commenter requested 

that all intermediaries use the most 

recent information regarding the length 

of the relevant training programs as set 

forth by the relevant accrediting 

organizations, in this case the CPME. 

Response: We did not propose any 

changes in policy regarding IRPs in the 

FY 2007 IPPS proposed rule. We 

consider this comment out of the scope 

of the proposed rule. Therefore, we are 

not responding to this comment at this 

time. 

5. Resident Time Spent in Nonpatient 

Care Activities as Part of Approved 

Residency Programs (§§ 413.9 and 

413.78(a)) 

In section IV.H.4. of this preamble, we 

discussed the importance of properly 

documenting where and when residents 

are training in a particular hospital or 

nonhospital site, in order for that 

hospital to count those FTE residents for 

purposes of direct GME and IME 

payment. In addition, it is important for 

hospitals to be able to document the 

activities in which residents are engaged 

because there are certain activities that 

are not allowable for direct GME or IME 

payment purposes, even though those 

activities may be performed as part of an 

approved residency program. 

Specifically, it has come to our attention 

that there may be some confusion in the 

provider community as to whether the 

time that residents spend in nonpatient 

care activities that are part of the 

approved residency program may be 

counted for the purpose of direct GME 

and IME payments. We have most 

recently received questions as to 

whether the time residents spend in 

nonhospital sites in didactic activities 

such as journal clubs or classroom 

lectures may be included in determining 

the allowable FTE resident counts. To 

respond to these inquiries and to resolve 

any confusion, in the FY 2007 IPPS 

proposed rule (71 FR 24114 and 24115), 

we included a clarification of our policy 

concerning the counting of time spent in 

nonpatient care activities for the 

purpose of direct GME and IME 

payments in both hospital and 

nonhospital settings. 

With respect to training in 

nonhospital settings, the time that 

residents spend in nonpatient care 

activities as part of an approved 

program, including didactic activities, 

cannot be included in a hospital’s direct 

GME or IME FTE resident count. This 

longstanding policy is based on the 

statutory requirements for counting FTE 

residents training in nonhospital sites. 

For the purpose of direct GME 

payments, providers have been allowed 

since July 1, 1987, to count the time 

residents spend training in nonhospital 

sites under certain conditions. Section 

1886(h)(4)(E) of the Act specifies that 

the implementing regulations 

concerning computation of direct GME 

for training in nonhospital sites ‘‘shall 

provide that only time spent in activities 

relating to patient care shall be counted 

and that all the time so spent by a 

resident under an approved medical 

residency training program shall be 

counted towards the determination of 

full-time equivalency, without regard to 

the setting in which the activities are 

performed, if the hospital incurs all, or 

substantially all, of the costs for the 

training program in that setting’’

(emphasis added). 

For IME payment purposes, hospitals 

were first allowed to count the time 

residents spend training in nonhospital 

sites for discharges occurring on or after 

October 1, 1997. Section 

1886(d)(5)(B)(iv) of the Act was 

amended by Pub. L. 105–33 in 1997 to 

provide that ‘‘all the time spent by an 

intern or resident in patient care 

activities under an approved medical 

residency program at an entity in a 

nonhospital setting shall be counted 

towards the determination of full-time 

equivalency if the hospital incurs all, or 

substantially all, of the costs for the 

training program in that setting’’

(emphasis added). 

We understand that, as part of an 

approved medical residency program, 

residents are often required to 

participate in didactic and ‘‘scholarly’’

activities such as educational 

conferences, journal clubs, and 

seminars. Some of these activities may 

take place in nonhospital sites, such as 

freestanding clinics or physicians’

offices, or in conference rooms at 

nonhospital settings. In implementing 

section 1886(h)(4)(E) of the Act for 

direct GME payment purposes, we 

specifically stated that ‘‘only time spent 

in activities relating to patient care may 

be counted [in nonhospital sites]’’ (54 

FR 40292, September 29, 1989). In 1998, 

when we implemented the statute 

allowing FTE residents to be counted in 

nonhospital sites for IME, we reiterated 

that a hospital may only count resident 

training time ‘‘in nonhospital sites for 

indirect and direct GME, respectively, if 

the resident is involved in patient care’’

(63 FR 40986, July 31, 1998). While we 

have not explicitly defined in 

regulations ‘‘patient care activities,’’ we 

have applied the plain meaning of that 

term. In addition, we note that the scope 

of the term ‘‘patient care’’ had been 

well-established in the Medicare 

program even prior to issuance of the 

first rules on counting FTE residents for 

purposes of direct GME and IME 

payments. For example, prior to the 

IPPS, acute care hospitals were paid by 

Medicare for inpatient services based on 

their reasonable operating costs, or costs 

relating to the provision of reasonable 

and necessary ‘‘patient care.’’ The 


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longstanding regulation at 42 CFR 413.9, 

entitled ‘‘Costs related to patient care,’’

states that ‘‘all payments to providers of 

services must be based on the 

reasonable cost of services covered 

under Medicare and related to the care 

of beneficiaries.’’ Thus, the scope of 

costs recognized as reasonable under 

Medicare had been limited to those 

relating to ‘‘patient care,’’ or to those 

relating to covered services for the care 

of beneficiaries. Although the agency 

appears to have made a conflicting 

statement in a letter directed to a 

particular individual implying that 

didactic time spent in nonhospital 

settings could be counted for direct 

GME and IME, that statement was 

inaccurate. We have applied and 

continue to apply the plain meaning of 

the statutory terms ‘‘patient care 

activities’’ and ‘‘activities relating to 

patient care’’ in the context of approved 

GME programs. That is, the plain 

meaning of patient care activities would 

certainly not encompass didactic 

activities. Rather, the plain meaning 

refers to the care and treatment of 

particular patients, or to services for 

which a physician or other practitioner 

may bill. Time spent by residents in 

such patient care activities may be 

counted for direct GME and IME 

payment purposes in the nonhospital 

site. Time spent by residents in other 

activities in the nonhospital site that do 

not involve the care and treatment of 

particular patients, such as didactic or 

‘‘scholarly’’ activities, is not allowable 

for direct GME and IME payment 

purposes. 

We note that there is a difference in 

the rules for counting FTE resident time 

for IME and direct GME payments when 

residents are training in a hospital. For 

direct GME payment purposes, under 

§ 413.78(a), ‘‘residents in an approved 

program working in all areas of the 

hospital complex may be counted.’’ As 

explained in the September 29, 1989 

Federal Register document (54 FR 

40286), the hospital complex consists of 

the hospital and the hospital-based 

providers and subproviders. Therefore, 

the distinction between patient care 

activities and nonpatient care activities 

is not relevant to direct GME FTE count 

determinations when the residents are 

training in the hospital complex. 

However, for IME payment purposes, 

consistent with the regulations at 

§ 413.9, only time spent in patient care 

activities in the hospital may be 

counted. It has been our longstanding 

policy that, regardless of the site of 

training, ‘‘* * * we do not include 

residents in the IME count to the extent 

that the residents are not involved in 

furnishing patient care * * *’’ (66 FR 

39897, August 1, 2001). 

Comment: Many commenters took 

issue with CMS’s ‘‘clarification’’ that 

FTE resident time spent in didactic 

activities while training in the hospital 

could not be counted for purposes of 

IME payment, and while training in a 

nonhospital site could not be counted 

for either direct GME or IME payments. 

The commenters urged CMS to ‘‘revert’’

to the position expressed in a letter in 

1999, and questioned whether, in light 

of that 1999 letter, CMS is actually 

‘‘clarifying’’ its policy rather than 

changing existing policy. One 

commenter suggested that to ‘‘avoid 

challenges’’ to CMS’s policy, a 

definition of ‘‘patient care activities’’

should be promulgated under the 

Administrative Procedures Act (APA). 

Another commenter argued that it is 

‘‘improper’’ for CMS to exclude 

nonpatient care time from the IME 

count for fiscal years prior to 2001 (as 

the April 25, 2006 proposed rule would) 

because CMS did not enact regulations 

requiring the exclusion of nonpatient 

care activities from the IME count until 

2001. The commenter observed that in 

the April 25, 2006 proposed rule, as in 

the 2001 rule (66 FR 39898), CMS stated 

that the rule excluding nonpatient care 

time from the IME count was 

‘‘longstanding’’ policy and applies to 

periods prior to 2001. The commenter 

asserted that it is inappropriate for the 

agency to apply the policy expressed in 

the April 25, 2006 proposed rule 

retroactively (as was done in 2001) 

because it ‘‘amends the agency’s policy 

prior to 2001 without notice and 

comment rulemaking as required by the 

APA.’’ Another commenter noted that, 

as justification for CMS’s ‘‘longstanding 

policy’’ concerning patient care 

activities, CMS quoted from the August 

1, 2001 final rule (66 FR 39897) which 

states that ‘‘we do not include residents 

in the IME count to the extent that the 

residents are not involved in furnishing 

patient care * * *.’’ The commenter 

stated that CMS ‘‘failed’’ to include the 

remainder of the text, which states ‘‘but 

are instead engaged exclusively in 

research.’’ The commenter argued that 

the excluded phrase indicates that CMS 

only meant to exclude research 

activities that are not patient-related 

from the IME count, and that ‘‘nowhere 

is the word ‘didactic’ ever mentioned.’’

Response: We disagree with the 

commenters’ assertion that the 

provision in the proposed rule 

concerning the time residents spend in 

nonpatient care activities is a change in 

policy, rather than a clarification of 

existing policy. With respect to 

residency training occurring in 

nonhospital settings, in the April 25, 

2006 proposed rule (71 FR 24115), we 

enumerated several examples to 

illustrate that the requirement for 

residents to spend time in patient care 

activities is fundamental to including 

the FTE resident time in the count for 

direct GME and IME purposes. 

Specifically, in implementing section 

1886(h)(4)(E) of the Act, which allows 

hospitals to count time spent by 

residents training in nonhospital sites 

for direct GME payment purposes under 

certain circumstances including that the 

resident time be spent in activities 

related to patient care, we reiterated that 

‘‘only time spent in activities relating to 

patient care may be counted’’ (54 FR 

40292, September 29, 1989). In 1998, 

when we implemented section 

1886(d)(5)(B)(iv), which first allowed 

hospitals to count time spent by 

residents in nonhospital sites for 

purposes of IME under certain 

conditions including that the resident 

time be spent in patient care activities, 

we reiterated that a hospital may only 

count resident training time ‘‘in 

nonhospital sites for indirect and direct 

GME, respectively, if the resident is 

involved in patient care’’ (63 FR 40986, 

July 31, 1998). In addition, we noted in 

the April 25, 2006 proposed rule that 

the scope of the term ‘‘patient care’’ had 

been well-established in the Medicare 

program even prior to issuance of the 

first rules on counting FTE residents for 

purposes of direct GME and IME 

payments. 

While we have not explicitly defined 

‘‘patient care activities’’ in regulations, 

we have consistently used the plain 

meaning of that term. This is the case 

despite the agency’s erroneous response 

to a question on this issue in a 

September 24, 1999 letter. The 

commenters refer to this 1999 letter to 

support their argument that the 

‘‘clarification’’ in the proposed rule 

demonstrates that CMS has changed its 

position since 1999. In the September 

24, 1999 letter, CMS (then HCFA) wrote: 

‘‘HCFA interprets the phrase ‘patient 

care activities’ broadly to include any 

patient care oriented activities that are 

part of the residency program. * * * 

[T]his can include resident participation 

in ‘‘(1) the direct delivery of patient 

care, such as clinical rounds, 

discussions, and conferences, and (2) 

scholarly activities, such as educational 

seminars, classroom lectures, research 

conferences, patient care related 

research as part of the residency 

program, and presentations of papers 

and research results to fellow residents, 

medical students, and faculty.’’

As we stated in the April 25, 2006 

proposed rule (71 FR 24115), in this 


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September 24, 1999 letter, we 

inaccurately stated our interpretation of 

the phrase ‘‘patient care activities,’’

implying that didactic time spent in 

nonhospital settings could be counted 

for direct GME and IME purposes. 

While there is no explanation of the 

phrase ‘‘patient care activities’’ in the 

conference report language 

accompanying the change in the laws 

allowing the counting of FTE residents 

in nonhospital sites in 1987 for direct 

GME and in 1997 for IME, we believe 

that Congress intended to limit in some 

meaningful way the types of activities 

for which FTE resident time could be 

counted in the nonhospital setting. If 

the term ‘‘patient care’’ in the statutory 

phrase ‘‘only time spent in activities 

relating to patient care’’ (section 

1886(h)(4)(E) of the Act) was to be 

interpreted as broadly as suggested in 

the agency’s September 24, 1999 letter, 

there would be virtually no limit to the 

types of activities that could be counted, 

rendering the entire phrase, and 

particularly, the word ‘‘only,’’

meaningless. If Congress had desired 

that all FTE time as part of an approved 

program be counted in nonhospital 

sites, then it need not have added the 

limiting language concerning patient 

care. It could have stated simply that 

time spent in an approved program at a 

nonhospital site should be counted. We 

do not believe that Congress would have 

included a superfluous phrase in the 

statute. As the commenters point out, 

CMS had not defined the term ‘‘patient 

care’’ prior to the enactment of either of 

the statutory provisions in 1987 and 

1997. Therefore, we believe that when 

Congress used the term ‘‘patient care’’, 

it meant to give the term its plain 

meaning. Such a plain meaning of the 

statutory language is in direct conflict 

with the exceedingly broad definition of 

‘‘patient care activities’’ articulated in 

the September 24, 1999 letter. We do 

not believe it would be appropriate to 

adopt a broad definition of patient care 

activities as was expressed in the 1999 

letter when that definition would 

conflict with the plain meaning of a 

limiting phrase in the statute—to the 

extent that it would give little or no 

meaning to the statutory phrase. 

Moreover, we believe it would be 

particularly inappropriate to adopt such 

a broad construction when the 

definition has not been promulgated 

through notice and comment 

rulemaking, but rather, expressed in a 

single letter directed to a single 

individual. 

We also question whether the 

provider community would actually 

have relied as heavily as commenters 

suggest on the September 24, 1999 letter 

when it was clearly directed to a single 

attorney in response to his specific 

inquiry, and not to a broader audience, 

nor was it (nor any similar guidance) 

disseminated by the Agency to its fiscal 

intermediaries. Furthermore, although 

we believe that the letter responding to 

this attorney contained an inartful and 

incorrect expression of the policy 

concerning nonpatient care activities, 

we do not believe that expression 

should be used to permit the 

indiscriminate inclusion of FTE resident 

time spent in nonpatient care activities 

in nonhospital sites. 

With respect to residency training in 

the hospital, our policy limiting the IME 

count to only time spent in patient care 

activities is rooted in the creation and 

the purpose of the IME adjustment. The 

IME adjustment is a payment to a 

teaching hospital for its higher costs of 

patient care. Before Congress passed the 

1983 law that included the IME 

adjustment in the IPPS, the Secretary 

submitted a report to Congress in 1982 

that (in part) explained that, ‘‘the 

indirect costs of graduate medical 

education are higher patient care costs 

incurred by hospitals with medical 

education programs’’ (Report to 

Congress required by the Tax Equity and 

Fiscal Responsibility Act of 1982, 

December 1982, pp. 48–49, italics 

emphasis added). Similarly, in passing 

the IPPS legislation in 1983, the House 

Committee on Ways and Means 

acknowledged the link between higher 

patient care costs and teaching 

hospitals, and noted that the IME 

adjustment was important due to 

concerns about whether the PPS could 

adequately account for factors such as 

the severity of illness of patients 

utilizing the more specialized treatment 

programs at teaching hospitals. Thus, 

the reasons for the IME adjustment 

enumerated by Congress and by the 

Secretary are directly linked to the 

involvement of residents in patient care. 

The August 1, 2001 final rule (66 FR 

39897) also lists discussions in other 

Federal Register notices in the 1980s 

that clearly state that the indirect costs 

of medical education are the additional 

operating costs that teaching hospitals 

incur in furnishing patient care. We 

reiterated this longstanding policy in 

the August 1, 2001 final rule and stated 

that, ‘‘* * * consistent with the 

purpose of IME payments and general 

Medicare reimbursement principles, in 

determining the FTE count with respect 

to the IME adjustment, it has been our 

longstanding policy that we do not 

include residents to the extent that the 

residents are not involved in patient 

care [but are instead engaged 

exclusively in research]’’ (66 FR 39897). 

One of the commenters stated that, in 

the discussion in the April 25, 2006 

proposed rule (71 FR 24115), ‘‘CMS 

failed to include the remainder of the 

text which states ‘but are instead 

engaged exclusively in research.’ These 

excluded words put in context what 

CMS was trying to convey in that rule—

that in terms of research activities, only 

those that are patient-related may be 

counted. Nowhere is the word ‘didactic’

ever mentioned.’’ We did not include 

the remainder of that text in the 

proposed rule because the focus of the 

discussion in the proposed rule was on 

didactic activities, not research. 

However, we reiterate that, just as 

residents engaged in activities that are 

exclusively research are not engaged in 

patient care activities, and are not 

included in the IME count in the 

hospital, residents in the hospital 

engaged in didactic, nonpatient care 

activities are also not counted for the 

purpose of IME. 

Comment: Several commenters 

pointed to what they believe is an 

‘‘inconsistency of logic’’ concerning 

CMS’ position regarding the time that 

may be included in the resident count 

at nonhospital settings, and the policy 

concerning the time for which a hospital 

must incur the costs relating to a 

teaching physician in those settings. On 

the one hand, CMS argues that in order 

for hospitals to receive direct GME and 

IME payments relating to residents 

training in nonhospital settings, the 

hospital must pay for the costs of the 

time spent by teaching physicians in 

educating residents, even when the 

activities are not associated with patient 

care. On the other hand, CMS precludes 

hospitals from counting FTE resident 

time not spent in patient care activities. 

According to the commenters, these 

‘‘conflicting positions’’ where the 

hospitals must pay for costs of training 

time that they cannot count for purposes 

of direct GME and IME payments will 

result in confusion in the provider 

community. 

Response: We are aware of what the 

commenter views as a paradox in the 

requirements concerning the time that 

residents train in nonhospital settings. 

Nevertheless, the statute clearly requires 

that hospitals must incur ‘‘all, or 

substantially all, of the costs for the 

training program’’ in the nonhospital 

setting in order to count any FTE 

residents training at a nonhospital site 

for IME and direct GME purposes 

(§ 1886(d)(5)(B)(iv) and § 1886(h)(4)(E) 

of the Act). The definition of ‘‘all or 

substantially all of the costs for the 

training program in the nonhospital 


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site’’ at § 413.75(b) is consistent with 

what CMS (and previously HCFA) has 

always considered to be ‘‘direct costs’’

of a GME program, inlcuding ‘‘the 

residents’ salaries and fringe benefits 

* * * and the portion of the cost of 

teaching physicians’’ salaries and fringe 

benefits attributable to direct GME.’’

The direct costs of GME associated with 

teaching physicians were historically 

paid for under Part A of the Medicare 

Trust Fund, while payment for billable, 

patient care services provided by 

residents supervised by teaching 

physicians are generally paid under 

Medicare Part B. Therefore, the costs 

associated with patient care activities in 

which the teaching physicians are 

involved are not included in the direct 

costs of the GME program. Yet, in 

allowing hospitals to count FTE 

residents training in nonhospital sites, 

the statutory provision regarding direct 

GME also states that ‘‘only time spent in 

activities relating to patient care shall be 

counted * * *’’ (§ 1886(h)(4)(E) of the 

Act). Similarly, the statutory provision 

regarding IME states, ‘‘all the time spent 

by an intern or resident in patient care 

activities * * * shall be counted * * *’’

(§ 1886(d)(5)(B)(iv)). Consequently, 

hospitals are not permitted to count a 

portion of the FTE resident time (that is, 

the nonpatient care time) even though 

they must incur the training program 

costs associated with that time. 

Comment: Several commenters stated 

that the IME and direct GME statute 

pertaining to nonhospital sites supports 

the counting of didactic activities, and 

that Congress wanted to encourage, not 

limit, residency training in nonhospital 

sites. The commenters believe that the 

reference to ‘‘patient care activities’’ in 

the IME and direct GME nonhospital 

statutes refers generally to patient care 

settings, such as physicians’ offices and 

other ambulatory care sites. One 

commenter cited the statutory language 

as the reason why hospitals exclude 

extended periods of time spent 

exclusively in ‘‘bench’’ research outside 

of the hospital, or time spent by 

preventive medicine residents in state 

and local public health departments 

from the IME and direct GME FTE 

counts, since these activities do not 

involve ‘‘patient care.’’ Another 

commenter implied that didactic time in 

nonhospital sites is allowed for IME 

purposes since the conference 

agreement accompanying the legislative 

language in the BBA states, ‘‘The 

conference agreement includes new 

permission for hospitals to rotate 

residents through nonhospital settings, 

which include primarily ambulatory 

care settings, without reduction indirect 

medical education funds’’ (emphasis 

added). Commenters also stated that 

Congress was ‘‘well aware’’ that 

residency training involves didactic 

components, and Congressional actions 

in both COBRA 1986 (enacting the 

direct GME nonhospital site provision) 

and BBA 1997 (enacting the IME 

nonhospital site provision) make it clear 

that Medicare would allow hospitals to 

count time spent in nonhospital sites for 

purposes of direct GME and IME. 

Response: We believe the commenters 

have erroneously concluded that 

because Congress desired to encourage 

increased residency training in 

nonhospital sites, the nonhospital IME 

and direct GME statutes must, therefore, 

also support the counting of FTE 

residents engaged in didactic activities 

in nonhospital sites. In fact, despite the 

lack of an explicit explanation of what 

was intended by the term ‘‘patient care 

activities,’’ when the Conference 

committee report language is viewed in 

conjunction with the statute, we believe 

the obvious and correct conclusion is 

that Congress wanted to encourage more 

training in nonhospital settings, but 

only for the purpose of increasing 

patient care training in outpatient, 

ambulatory settings. This Congressional 

intent is evident in the legislative 

history of both the direct GME and the 

IME provisions on nonhospital settings. 

First, legislative history associated with 

passage of the direct GME provision (as 

part of Pub. L. 99–509) indicates that 

‘‘[s]ince it is difficult to find sufficient 

other sources of funding [other than 

hospitals and Medicare] for the costs of 

such training, [that is, training in 

freestanding primary care settings such 

as family practice clinics or ambulatory 

surgery centers] assignments to these 

settings are discouraged [under the preenactment payment scheme]. It is the 

Committee’s view that training in these 

settings is desirable, because of the 

growing trend to treat more patients out 

of the inpatient hospital setting and 

because of the encouragement it gives to 

primary care.’’ (Emphasis added.) (H.R. 

Rep. No. 99–727, 99th Cong., 1st Sess., 

70 (1986).) Thus, from the start of the 

provision allowing hospitals to count 

FTE resident training in nonprovider 

sites, we believe Congress intended to 

create a monetary incentive (or remove 

the disincentive) for hospitals to rotate 

residents from the hospital to the 

nonhospital settings for the purpose of 

treating patients in those ambulatory 

settings, not for the purpose of spending 

time in didactic activities in those 

settings. We believe this is the reason 

why Congress specifically added the 

‘‘patient care activities’’ requirement to 

the direct GME (and later, the IME) 

statute. Similarly, in the Conference 

committee report accompanying the 

provision of Pub. L. 105–33 on counting 

resident training time in nonhospital 

settings for IME, Congress stated that 

‘‘[t]he conference agreement includes 

new permission for hospitals to rotate 

residents through nonhospital settings, 

without reduction in indirect medical 

education funds’’ (emphasis added, H.R. 

Conf. Rep. No. 105–217, 105th Cong., 

1st Sess., 817 (1997).) We believe that by 

the phrase ‘‘without reduction in 

indirect medical education funds,’’

Congress intended that when hospitals 

send residents to nonhospital sites for 

training, the IME payments relating to 

those FTE residents would not cease; 

that is, the hospitals would continue to 

receive IME, in addition to the direct 

GME payments they were already 

receiving when residents rotate from the 

hospitals to nonhospital settings. 

Furthermore, as we stated in the August 

1, 2003 final rule in the context of 

redistribution of cost and community 

support principles (68 FR 45436), 

legislative intent becomes even more 

evident when the nature of the IME 

adjustment is considered. Because the 

IME adjustment is a payment for patient 

care costs that is made for each 

Medicare discharge from the areas 

subject to the IPPS in a teaching 

hospital, ‘‘the authorization by Congress 

for IME payments relating to 

nonhospital services while residents are 

training at nonhospital sites would be 

absurd if not viewed as an incentive to 

transfer existing residency training from 

the hospital to the nonhospital setting’’

(68 FR 45436). Given the nature of IME 

as a patient care payment, surely 

Congress would not have made IME 

payments available for training in 

nonhospital settings to encourage 

movement of didactic training from the 

hospital to nonhospital sites. To the 

contrary, we believe Congress clearly 

intended to encourage hospitals to shift 

only residency training that involves 

patient care activities from the hospital 

to outpatient ambulatory settings. 

Comment: One commenter alleged 

that, ‘‘in a very misleading fashion in 

the proposed rule, CMS does not quote 

the entire section of the relevant portion 

of the Medicare statute, which reads in 

full: 

‘‘Counting Time Spent in Outpatient 

Settings. Such rules shall provide that 

only time spent in activities relating to 

patient care shall be counted and that 

all the time so spent by a resident under 

an approved medical residency training 

program shall be counted toward the 

determination of full-time equivalency, 

without regard to the setting in which 


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the activities are performed, if the 

hospital incurs all, or substantially all, 

of the costs for the training in that 

setting.’’ (Emphasis added). Section 

1886(h)(4)(E) of the Social Security 

Act.’’

The commenter argued that Congress 

and CMS are well aware of the language 

that can be used to describe care 

directly provided to individual patients; 

that is ‘‘direct patient care.’’ The 

commenter included a list of mostly 

regulatory (and 2 statutory) cites where 

the term ‘‘direct patient care’’ is used 

and noted that the statutory language 

regarding GME does not use the term 

‘‘direct patient care,’’ but rather, uses 

the much broader language of ‘‘activities 

relating to patient care.’’ Further, the 

law states that ‘‘all the time so spent by 

a resident under an approved medical 

residency training program shall be 

counted * * * without regard to the 

setting in which the activities are 

performed’’ (emphasis added.) The 

commenter added that Medicare 

regulations also define ‘‘direct medical 

and surgical services’’ of physicians in 

a teaching setting as ‘‘services to 

individual beneficiaries that are either 

personally furnished by a physician or 

furnished by a resident under the 

supervision of a physician in a teaching 

hospital * * *’’ (42 CFR 415.152), and 

that in all these situations, the idea of 

‘‘direct patient care’’ can be more 

narrowly defined than ‘‘activities 

relating to patient care.’’

Response: It appears that the 

commenter has overlooked the 

paragraph on page 24115 of the April 

25, 2006 proposed rule where we did, 

in fact, quote the entire section of the 

statutory language pertaining to direct 

GME payments for nonhospital training. 

We also believe the statutory language is 

intended to be read differently from the 

way the commenter has suggested, 

resulting in a significantly different 

policy. Specifically, the commenter 

quotes and emphasizes the statute as 

follows: ‘‘all the time so spent by a 

resident under an approved medical 

residency training program shall be 

counted * * * without regard to the 

setting in which the activities are 

performed * * * ’’ The commenter uses 

this language to suggest that CMS must 

allow the time spent in didactic 

activities in nonhospital sites. However, 

we believe the correct reading of the 

statute in its entirety is: 

‘‘Such rules shall provide that only 

time spent in activities relating to 

patient care shall be counted and that 

all the time so spent by a resident * * * 

shall be counted toward the 

determination of full-time equivalency, 

without regard to the setting in which 

the activities are performed * * * ’’

(§ 1886(h)(4)(E) of the Act). 

In other words, only a subset of the 

time that residents spend in nonhospital 

settings can be counted. Specifically, 

only all of the time so spent in activities 

relating to patient care can be counted, 

not necessarily all of the time spent 

training in the nonhospital site. 

Similarly, the IME statute states, ‘‘all the 

time spent by an intern or resident in 

patient care activities * * * shall be 

counted * * * ’’ (§ 1886(d)(5)(B)(iv) of 

the Act). Furthermore, as we stated in 

response to previous comments, if 

‘‘patient care’’ in the phrase ‘‘only time 

spent in activities relating to patient 

care’’ (section 1886(h)(4)(E) of the Act) 

is interpreted as broadly as suggested by 

the commenter, there would be virtually 

no limit to the types of activities that 

could be counted, rendering the entire 

phrase, and particularly the word 

‘‘only,’’ meaningless. In addition, we 

note that the definition of ‘‘direct 

medical and surgical services’’ at 

§ 415.152 of regulations relating to 

physicians in a teaching setting is 

consistent with our definition of the 

plain meaning of ‘‘patient care 

activities.’’ Just as the definition of 

‘‘direct medical and surgical services’’

refers to services to individual 

beneficiaries that are either personally 

furnished by a physician or furnished 

by a resident under the supervision of 

a physician, our definition of ‘‘patient 

care activities’’ refers to the care and 

treatment of particular patients, or to 

services for which a physician or other 

practitioner may bill. Therefore, the 

terms ‘‘direct medical and surgical 

services’’ and ‘‘direct patient care’’ are, 

for all intents and purposes, 

synonymous with the phrase ‘‘patient 

care activities.’’

Comment: We received many 

comments expressing strong opposition 

to the clarification in the proposed rule, 

some of which were quite passionate 

and included ominous predictions of 

the dire consequences of such a policy 

on GME programs. Generally, 

commenters urged that we rescind the 

provision in the proposed rule, on the 

grounds that there is a very close 

connection between the didactic 

activities that residents engage in and 

the delivery of patient care. They argued 

that with the exception of extended 

periods of time spent doing ‘‘bench 

research’’ which is excluded from the 

IME count, every activity that the 

residents are engaged in is integral to 

patient care activities. The commenters 

argued that there is no distinction 

between patient care and other activities 

in which residents participate during 

their residency training. Rather, the 

distinction is more appropriate when 

comparing undergraduate medical 

training and post-graduate residency 

training. The commenters noted that the 

emphasis in medical school is didactic 

education, while the focus in residency 

training is patient care delivery, with 

continued didactic education in the 

context of furnishing patient care. The 

commenters argued that the didactic 

activities are an important part of the 

ACGME’s required curriculum since it 

is now widely recognized that 

physicians should be competent in 

‘‘medical knowledge about established 

and evolving biomedical, clinical, and 

cognate * * * sciences and the 

application of this knowledge to patient 

care’’ (ACGME Institutional 

Requirements, III(E)(1)(b)). Several other 

commenters pointed out that the 

ACGME competencies are intended to 

address ‘‘exactly what the IOM has 

criticized our training professions for,’’

and therefore, didactic sessions are 

necessary to improve the quality of 

residency education. These commenters 

stated that their program (family 

medicine) currently evaluates their 

residents ‘‘in all these competencies as 

a continuing quality improvement 

process during patient care’’ (emphasis 

in the original). Commenters 

representing osteopathic residency 

programs stated that all osteopathic 

training programs are required to teach 

certain core competencies by 2006. 

Another commenter stated that, in an 

effort to improve the residents’ skills in 

delivering patient care, the teaching 

physician ‘‘looks for every opportunity, 

in whatever physical setting for the 

‘teachable moment’ to review a critical 

point or two to hone the learner’s 

skills.’’ Commenters also asserted that 

most didactic activities are relatively 

short, and residents often continue to 

have direct patient care responsibilities 

during the didactic time, and are often 

paged to respond to emergencies or to 

tend to their assigned patients during 

scheduled didactic periods. They noted 

generally that current patients are often 

used as a springboard for discussions at 

lectures, and it would be extremely 

difficult to track when the ‘‘patient 

care’’ ends and the didactic time begins. 

In addition, residents are required to 

attend simulation programs, which 

prepare them for ‘‘real-time’’ patient 

care experiences using advanced 

technologies. A commenter urged CMS 

to promote and encourage investment in 

such technologies and activities that are 

intended to improve the quality of 

patient care, rather than ‘‘create 

reimbursement disincentives for 

institutions that may be struggling to 


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afford it.’’ Many commenters indicated 

that if CMS finalized this rule, teaching 

faculty ‘‘will be caught up in the 

productivity race with no time for’’

valuable discussions with their 

residents, at a time when family 

physicians need to be ‘‘exceptionally 

well trained’’ in order to meet the needs 

of underserved, vulnerable patient 

population who need chronic disease 

management. The commenters warned 

that CMS’s proposal ‘‘lowers the 

standards of care for Medicare patients’’

and is ‘‘dangerous for our current and 

our future patients.’’ One commenter 

asked that we reconsider rule changes 

that will ‘‘rob Peter to pay Paul,’’ while 

another commenter urged that we 

‘‘please [do] not allow anything to occur 

that might reduce the attractiveness’’ of 

medical school graduates pursuing 

primary care specialties. One 

commenter added that with the recent 

loss of funding for primary care 

education in Title VII of the Public 

Health Act, this ruling could ‘‘literally 

spell the end of primary care practice in 

the United States.’’ Another commenter 

asked if ‘‘perhaps [CMS] could refocus 

[its] efforts toward educating doctors 

instead of spending so much of [its] 

time identifying new ways of 

withholding funding.’’ We also received 

a comment that stated that 

reimbursement for direct GME and IME 

is ‘‘sufficiently restricted’’ by limits on 

increases to per resident amounts 

(PRAs) and FTE resident caps, and there 

is no need to impose additional 

‘‘burdensome recordkeeping 

requirements with the sole apparent 

intent of further reducing such 

payments.’’

Response: We are sympathetic to the 

commenters’ arguments that the 

didactic activities in which the 

residents are required to participate 

contribute to the development of more 

highly skilled, proficient, well-rounded 

clinicians, and we are not in any way 

minimizing the importance of such 

activities, nor are we advocating a 

position that would deny all GME 

payments for these activities. However, 

we note that Medicare GME payments 

were never intended to cover the total 

costs of medical education, as is 

evidenced most obviously by the fact 

that direct GME payments are based on 

Medicare’s share of the costs of training 

an FTE resident. Rather, we are merely 

distinguishing between activities that 

concern the treatment and diagnosis of 

particular patients (that is, patient care), 

and activities that are didactic in nature 

(that is, not patient care), as this 

distinction is necessary to ensure that 

Medicare funds for medical education 

are paid appropriately. Direct GME has 

historically been considered to be the 

payment for the direct costs of 

education. Accordingly, the direct 

educational costs incurred by a hospital 

in providing didactic activities are more 

appropriately paid for via the direct 

GME payment. We note that the 

methodology used to determine 

hospitals’ base year direct GME PRAs 

included the allowable costs and FTE 

time of didactic activities occurring 

within the hospital complex. The IME 

adjustment serves an entirely different 

purpose. Specifically, the IME 

adjustment is a payment under the IPPS 

to recognize the higher operating costs 

that teaching hospitals incur in 

furnishing patient care; it is intended to 

pay a teaching hospital for those 

additional indirect patient care costs, 

not the direct costs associated with 

didactic learning. 

Furthermore, while we do not dispute 

that didactic activities are essential to 

and integrated with the residents’

patient care experience, this does not 

mean that the didactic activities are 

patient care activities. In addition, the 

didactic activities are not an 

insignificant portion of a resident’s 

training. These activities are required by 

the accrediting organizations, and are 

necessary for board certification, and 

therefore, even though it may not be an 

unusual occurrence for a resident to be 

called out of a conference to tend to a 

patient care emergency, the resident 

surely must satisfy his/her minimum 

requirements of didactic training over 

the course of the entire academic year. 

A random search on the internet of 

individual hospitals’ program 

requirements revealed that many 

programs schedule didactic activities for 

their residents of an hour or more in 

length every single day. In fact, many 

comments we received were from 

commenters who included detailed 

descriptions of the nonpatient care 

activities in which their residents are 

required to participate. We are also 

aware of rotations that are 

administrative or didactic in nature that 

are more lengthy (for example, 2 weeks 

or 6 weeks), but are scheduled less 

frequently. Such rotations are surely not 

patient care. Therefore, we are not 

convinced by the commenters’

arguments that since didactic time is 

frequently integrated with patient care 

activities, it is patient care and, 

therefore, the time should be allowed 

for IME purposes in the hospital, and for 

direct GME and IME purposes in the 

nonhospital site. 

Comment: One commenter noted that 

direct GME and IME payments are based 

on allowable ‘‘full-time equivalent’’

(FTE) counts, and that the regulations 

do not specify the number of hours that 

comprise one FTE. Rather, the 

regulations for IME state that ‘‘full-time 

equivalent status is based on the total 

time necessary to fill a residency slot’’

(§ 412.105(f)(1)(iii)(A)), and the direct 

GME regulations have a similar 

requirement (42 CFR § 413.78(a)). 

Response: The commenter is correct 

that a hospital’s allowable FTE count is 

‘‘based on the total time necessary to fill 

a residency slot’’ (§ 412.105(f)(1)(iii)(A). 

As the regulations state, the concept of 

the total time necessary to fill a 

residency slot is used to determine the 

part-time or full-time status of the 

resident. If it is determined that the 

resident is not working the number of 

hours necessary to fill a residency slot 

(between all the resident’s hospital and 

nonhospital training sites), the resident 

would be considered part-time, and the 

proportion of total time the resident is 

working in all training sites would be 

adjusted accordingly. For purposes of 

determining a hospital’s count of FTE 

residents, the important word in the 

regulatory phrase is ‘‘based.’’ That is, 

the starting point (denominator) for 

determining the allowable FTE count is 

the total time necessary to fill a 

residency slot. However, the hospital 

must then subtract (from the numerator) 

all nonallowable training time, such as 

time spent at other providers, time spent 

in IPPS-excluded distinct part units (for 

IME), didactic activities (for IME), and 

so on. Thus, while a hospital’s 

allowable FTE count is certainly 

‘‘based’’ on the total time necessary to 

fill a resident slot, the total time is often 

greater than the FTE time a particular 

hospital is permitted to count for IME 

and direct GME payment purposes. 

Comment: One commenter noted that 

the average resident’s workweek is 80 

hours, and if CMS were to count an FTE 

resident for GME purposes based on a 

40 hour workweek as is done for the 

Medicare IPPS wage index, the 

exclusion of didactic activities would 

not affect the overall FTE count. 

Response: The total number of hours 

recorded as worked by residents for the 

purpose of the wage index adjustment to 

the IPPS represents a compromise, and 

is irrelevant in the context of 

determining the FTE resident count for 

GME payment. Historically, the actual 

number of hours worked by residents 

(often more than 80 hours per week) 

was included in the average hourly 

wages of hospitals used to compute the 

wage index. However, teaching 

hospitals argued that the excessive 

number of resident hours relative to the 

hours worked by other employees 

skewed their average hourly wage 


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downward, and placed them at a 

disadvantage relative to non-teaching 

hospitals. Therefore, CMS (then HCFA) 

determined that it would be appropriate 

to count interns and residents for wage 

index purposes based on a 40-hour 

workweek. Thus, the 40-hour workweek 

actually benefited teaching hospitals for 

wage index purposes. In any case, 

beginning with the FY 2000 wage index 

(which was based on cost reporting 

periods starting on or after October 1, 

1995 and ending on or before September 

30, 1996), the wages and hours of 

interns and residents were phased out of 

the wage index, since Medicare 

payments for the salaries and fringe 

benefits of interns and residents are 

made by Medicare through the direct 

GME payment (based on the PRA), and 

not the IPPS. (Beginning with the FY 

2003 wage index (cost reporting periods 

beginning on or after October 1, 1999), 

we removed 100 percent of the interns’

and residents’ wage data from the wage 

index). For purposes of determining 

what portion of an FTE resident a 

hospital may count for a resident that is 

training at the hospital (after first 

determining whether the resident is a 

part-time or full-time resident based on 

the total necessary to fill the residency 

slot), it is important and necessary to 

first determine the actual total time 

worked by the resident. Accordingly, if 

80 hours per week is established as the 

total time necessary to fill the residency 

slot, and if a resident works an 80-hour 

week and works 40 hours per week at 

each of two hospitals, each hospital 

would count no more than one half of 

an FTE for the resident. The FTE 

determination for that resident cannot 

be based on 40 hours, since that would 

result in both hospitals counting the 

same resident as a full FTE. Thus, in 

calculating the FTE count, it would be 

inappropriate to compare the time spent 

in patient care activities to a 40 hour 

week and not to the total time worked 

by the resident. 

Comment: Some commenters asserted 

that just as the direct GME statute for 

residency training in the hospital does 

not include a reference to patient care, 

and therefore, all training in the hospital 

is countable for direct GME, the IME 

statute for hospital training also does 

not refer to patient care, and therefore, 

all the training in the hospital should be 

counted for IME too. One commenter 

asserted that the proposed rule is ‘‘ultra 

vires’’ and is therefore, 

‘‘unconstitutional’’ because the IME 

statute for training in the hospital does 

not exclude time spent in nonpatient 

care activities, and that the IME 

adjustment is only the ‘‘best proxy’’ for 

teaching hospitals’ increased training 

costs—it was not intended to measure 

the ‘‘actual costs’’ of training residents. 

The commenter argued that the 

Congress did not ‘‘intend that CMS 

parse apart or exclude certain time’’

from the FTE count, and doing so is 

beyond the scope of the agency’s 

authority. Another comment stated that 

‘‘we are unaware of any Medicare 

directive that distinguishes patient care 

activity in a hospital and nonhospital 

site.’’ One commenter stated that he is 

‘‘not aware that the fiscal intermediaries 

made disallowances for educational 

activities when calculating hospitals’

PRAs in the 1984 base year.’’ The 

commenter also refers to the 1990 Q&As 

issued by CMS (then HCFA) to the CMS 

Regional Offices and the fiscal 

intermediaries for use in computing the 

base year PRAs, and argues that ‘‘CMS 

makes numerous references to 

educational activities as allowable costs 

and does not once specify that these 

costs and the associated resident time 

were to be carved out if the activity took 

place in the nonhospital setting.’’ The 

commenter quoted part of a response (to 

one of the 1990 Q&As) which stated, ‘‘If 

the hospital, rather than the related 

school, directly incurs the costs 

associated with these educational 

activities, they should be recognized as 

allowable graduate medical education 

costs and included in the per resident 

amount.’’

Another commenter noted that the 

provisions at section 2120 of the 

Provider Reimbursement Manual, Part I, 

titled Reimbursement for Costs of 

Interns and Residents, which described 

the cost method of reimbursement for 

GME programs, do not distinguish 

between training types or training 

location, and therefore, Medicare 

allowed costs of residents when they 

trained in didactic activities in 

nonhospital locations. 

Commenters also argued that CMS’s 

‘‘overly rigid’’ interpretation of ‘‘patient 

care activities’’ ignores CMS’s 

longstanding definition of ‘‘costs related 

to patient care,’’ which is the basis for 

much of CMS’s analysis, because 

educational activities like conferences 

and seminars for hospital employees 

have always been allowable costs under 

Medicare, and therefore, should be 

allowed for purposes of the IME as well. 

[see PRM–I, chapter 21, sections 2108.1, 

2128, 2136.1, 2138.1, 2138.2, 2144.4, 

and 2144.6]. Another commenter 

contended that to exclude didactic time 

from the IME calculation would be 

inconsistent with Congress’s purpose in 

instituting the IME adjustment. 

Congress’s reason for enacting this 

provision was to address factors that 

contribute to the higher costs incurred 

by teaching hospitals, such as more 

acutely ill patients, more specialized 

treatments, and the additional costs 

associated with training residents such 

as the ordering of additional tests and 

extra staffing demands. The commenter 

argued that during the time the 

residents are involved in didactic 

activities, ‘‘these costs are in no way 

reduced,’’ since the ‘‘patients remain 

just as ill as they were before, the 

hospital continues with its residentrelated inefficiencies, the hospital 

continues to provide specialized 

services, and the services are just as 

intense. Thus, all of the costs that the 

IME adjustment is intended to 

compensate continue unabated no 

matter what the resident is doing.’’

Other commenters quoted the 

Committee report language 

accompanying the PPS legislation, 

which stated that purpose of the IME 

adjustment was to address ‘‘serious 

doubts about the ability of the DRG case 

classification system to account fully for 

factors such as severity of illness of 

patients requiring the specialized 

services and treatment programs 

provided by teaching institutions and 

the additional costs associated with the 

teaching of residents * * * the 

adjustment for indirect medical 

education costs is only a proxy to 

account for a number of factors which 

may legitimately increase costs in 

teaching hospitals (emphasis added, 

U.S. House of Representatives, 1983).’’

In light of this Committee report 

language, the commenter believed that 

the language in the proposed rule 

defining the ‘‘plain meaning’’ of patient 

care as related to the care and treatment 

of a specific patient or to services for 

which physicians can bill is ‘‘patently 

incorrect.’’

Response: After reading the numerous 

comments challenging CMS’ position 

that only the time spent by residents in 

patient care activities in the hospital 

may be counted for IME purposes, it has 

become apparent to us that there 

actually has been a good deal of 

confusion in the teaching hospital 

community regarding our longstanding 

policy with respect to IME and patient 

care activities. Nevertheless, we do 

believe that the commenters are 

misconstruing and confusing CMS’

position on, and the purpose for, the 

direct GME payments and IME 

payments, respectively. By including a 

provision in the April 25, 2006 

proposed rule clarifying our position on 

the time residents spend in nonpatient 

care activities, we were (and still are) 

distinguishing between activities that 

concern the treatment and diagnosis of 


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particular patients (that is, patient care), 

and activities that are didactic in nature 

(that is not patient care), as this 

distinction is necessary to ensure that 

Medicare funds for medical education 

are paid appropriately. As stated in 

response to a previous comment, 

historically, direct GME has been 

considered to be a payment for the 

direct costs of education. The 

conference report accompanying the 

original Medicare legislation (Pub. L. 

89–97) stated: 

‘‘Many hospitals engage in substantial 

educational activities, including the 

training of medical students, internship 

and residency programs, the training of 

nurses, and the training of various 

paramedical personnel. Educational 

activities enhance the quality of care in 

an institution and it is intended, until 

the community undertakes to bear such 

education costs in some other way, that 

a part of the net cost of such activities 

(including stipends of trainees as well 

as compensation of teachers and other 

costs) should be considered as an 

element in the cost of patient care, to be 

borne to an appropriate extent by the 

hospital insurance program’’ (S. Rep. 

No. 404, 89th Cong., 1st Sess. 36 (1965); 

H.R. No. 213, 89th Cong., 1st Sess. 32 

(1965)). 

Accordingly, educational activities of 

hospital employees, particularly those 

in ‘‘formally organized or planned 

programs of study’’ as they were 

described in the original regulations 

first published on November 22, 1966 

(31 FR 14814, and 20 CFR 405.421) 

(later redesignated as 42 CFR 405.421 on 

September 30, 1977 and as 42 CFR 

413.85 on September 30, 1986)), were 

recognized as Medicare-allowable costs 

and implicitly included in the 

definition of ‘‘costs related to patient 

care’’ at 42 CFR 413.9. These specific 

payments for medical education 

activities were the basis for what later 

evolved into the direct GME payments, 

as established by Section 9202 of the 

Consolidated Omnibus Budget 

Reconciliation Act of 1985 (Pub. L. 99–

272). That is, direct GME (and also, 

payments for approved nursing and 

allied health education programs under 

42 CFR 413.85) is a payment for 

education because it explicitly pays 

hospitals for the direct costs of these 

formally organized programs, such as 

the stipends of trainees and teachers. 

Additionally, as early as 1971, Chapter 

4 of the Provider Reimbursement 

Manual, Part I, stated that ‘‘any costs of 

usual patient care’’ are excluded from 

the definition of approved educational 

activities (Section 404.2 of the PRM-I). 

Clearly, the early medical education 

payments, in which current direct GME 

payments are rooted, were not intended 

to be a payment for caring for patients, 

but rather were (and are still today) 

payments to hospitals for education 

costs. Medicare made then, and still 

makes, payments for usual patient care 

as part of the hospital’s operating costs 

and as direct payment to hospital-based 

physicians under Medicare Part B. 

Therefore, to the extent that residents 

engage in nonpatient care didactic 

activities as part of their approved 

programs, the costs of those didactic 

activities are allowed and paid by 

Medicare through the direct GME 

payment, based on the PRA. The 

commenter is indeed correct that the 

costs of didactic activities were 

included as allowable costs by the fiscal 

intermediaries when determining the 

base year PRAs. However, the 

commenter should not conclude that 

didactic activities that occurred outside 

of the hospital were included in the 

determination of the PRAs. Under 

Medicare’s previous reasonable cost 

method of payment for approved 

medical education activities, any costs 

incurred by a hospital for resident 

training that took place outside of the 

hospital setting were not allowable costs 

to that hospital (66 FR 3371). In 

establishing PRAs, fiscal intermediaries 

used a count of FTE residents for the 

1984 base period that reflected ‘‘the 

average number of FTE residents 

working in the health care complex 

during the GME base period’’ (54 FR 

40299). Section 9314 of Pub. L. 99–509 

changed the law to allow resident time 

spent training in nonhospital settings to 

be counted for the first time for 

purposes of direct GME payments on 

and after July 1, 1987. Furthermore, 

regarding the specific language from the 

1990 Q&As quoted by the commenter, 

neither that question, nor the answer 

provided by CMS (then HCFA) gives 

any indication of where the educational 

activities took place. Therefore, the fact 

that CMS stated that the costs of 

educational activities incurred directly 

by a hospital are included in the PRA 

does not mean that the costs incurred by 

a hospital for all educational activities 

are allowable, regardless of the location 

in which they occurred. Similarly, just 

because the FTE time associated with 

certain costs is allowable (according to 

the statute) does not mean that the costs 

of a particular activity are necessarily 

allowable. Certainly, if the Congress had 

not changed the law in 1987 to allow 

residents training in nonhospital 

settings to be counted (for direct GME 

purposes), then even the time spent in 

direct patient care activities in 

nonhospital sites would not be allowed 

to be counted by a hospital. The 

relevant point, however, is that 

educational costs incurred by a hospital 

in providing didactic activities to 

residents in approved programs are paid 

by Medicare via the direct GME 

payment, which is a payment for costs 

of education. 

The purpose of the IME adjustment is 

different from that of direct GME in that 

it is designed to adjust the IPPS 

payment to teaching hospitals for the 

higher operating costs they incur in 

furnishing patient care. It is intended to 

pay a teaching hospital for those 

additional patient care costs that are an 

indirect result of the presence of the 

teaching program at the hospital, and 

not the direct costs associated with 

didactic learning. Although the 

commenters argue that didactic 

activities have long been recognized by 

CMS as ‘‘related to patient care,’’

despite the fact that none of these 

activities involves the ‘‘care and 

treatment of individual patients’’ or 

‘‘services for which a physician or other 

practitioner may bill,’’ we believe that 

because IME is a payment specifically 

for patient care costs, the regulations 

and subregulatory guidance concerning 

‘‘costs related to patient care’’ are not 

sufficient for determining what actually 

constitutes patient care and is therefore, 

an activity for which FTE resident time 

in the hospital may be counted for IME. 

As stated in response to a previous 

comment, with respect to residency 

training in the hospital, our policy 

limiting the IME count to only time 

spent in patient care activities is rooted 

in the creation and the purpose of the 

IME adjustment. Before Congress passed 

the 1983 law that included the IPPS and 

an IME adjustment, the Secretary 

submitted a report to Congress in 1982 

that (in part) explained that, ‘‘the 

indirect costs of graduate medical 

education are higher patient care costs 

incurred by hospitals with medical 

education programs’’ (Report to 

Congress required by the Tax Equity and 

Fiscal Responsibility Act of 1982, 

December 1982, pp. 48–49, italics 

emphasis added). Similarly, in passing 

the IPPS legislation in 1983, the House 

Committee on Ways and Means 

acknowledged the link between higher 

patient care costs of teaching hospitals, 

and noted that the IME adjustment was 

important due to—

‘‘* * * serious doubts about the 

ability of the DRG case classification 

system to account fully for factors such 

as severity of illness of patients 

requiring the specialized services and 

treatment programs provided by 

teaching institutions and the additional 

costs associated with the teaching of 


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30Similarly, to the extent that the higher costs are 

caused by other factors such as a greater relative 

share of medically complex or indigent patients, the 

IPPS includes payments in the form of the outlier 

and disproportionate share hospital (DSH) 

adjustments to specifically compensate for those 

costs. (Health Care Financing Review, Winter 1992, 

Vol. 14, No. 2, p. 69, and Health Care Financing 

Review, Spring 1990, Vol. 11, No. 3, pp. 31–

41).Therefore, the additional indirect medical 

education costs that remain after controlling for 

outlier and DSH payments are the essentially the 

higher patient care costs resulting from the presence 

and involvement of residents in patient care. 

residents * * * the adjustment for 

indirect medical education costs is only 

a proxy to account for a number of 

factors which may legitimately increase 

costs in teaching hospitals (U.S. House 

of Representatives, 1983).’’

Essentially, Congress listed two 

reasons for the IME adjustment, similar 

to those stated in the Secretary’s 1982 

report: (1) Teaching hospitals typically 

offer more technologically advanced 

treatments to their patients, and 

therefore, patients who are sicker and 

need more sophisticated treatment are 

more likely to go to teaching hospitals, 

and (2) the presence of inefficiencies 

associated with teaching residents 

resulting from the additional tests or 

procedures ordered by residents and the 

demands put on physicians who 

supervise, and staff that support, the 

residents. That is, because teaching 

hospitals attract sicker patients, they 

incur higher costs in caring for those 

sicker patients—whether due to 

additional tests ordered by residents or 

more intensive treatments provided in 

an educational setting. The Secretary 

and Congress recognized that the 

learning process in which the residents 

are engaged results in more intensive, 

and therefore more costly, treatment. 

Thus, the purpose of the IME 

adjustment is clearly limited to the 

unique characteristics and conditions of 

teaching hospitals that directly relate to 

the delivery of patient care.30 Since the 

purpose of the IME adjustment is rooted 

in patient care, there is a clear and 

compelling reason to limit the FTE 

resident time that can be counted for 

IME to time spent by residents in 

patient care; that is, in the care and the 

treatment of particular patients, or in 

furnishing services for which a 

physician or practitioner may bill. 

Commenters argued that during the 

time the residents are involved in 

didactic activities, higher costs incurred 

by teaching hospitals ‘‘are in no way 

reduced,’’ and emphasized the language 

in the Committee report describing the 

purpose of the IME adjustment as 

addressing (in part), ‘‘* * * the 

additional costs associated with the 

teaching of residents.’’ To address these 

comments, we refer to the August 1, 

2001 final rule (66 FR 39898), in which 

we reiterated our policy that IME is a 

payment for patient care, and we also 

included an example from that rule to 

illustrate how the FTE resident count 

for IME should be determined in a 

manner that would properly reimburse 

a hospital with residents that are 

engaged in non-patient care research 

activities. Although the discussion in 

the August 1, 2001 Federal Register 

focused on research, this example is 

useful for this discussion on nonpatient 

care didactic activities. In the example 

(66 FR 39898), a hospital has 20 FTE 

residents who were furnishing patient 

care in the areas of the hospital subject 

to the PPS, and 4 FTE residents engaged 

exclusively in research. We stated that 

the IME payment to the hospital should 

reflect the additional operating costs 

resulting from those 20 FTE residents 

delivering patient care, and would not 

include the 4 FTEs engaged exclusively 

in research, as those 4 FTE residents did 

not contribute to the hospital’s higher 

operating costs. While it may be that the 

existence of the research activities did 

contribute in some marginal way to the 

higher operating costs of the hospital, 

for instance, by attracting more severely 

ill or uninsured patients to the hospital 

for non-research treatment, those 

residents engaged exclusively in 

research are not involved in and do not 

contribute to more intensive or 

inefficient patient care, and therefore, 

their presence does not result in higher 

allowable operating costs. We believe 

the same holds true for the time 

residents spend in didactic activities—

during this time, the residents are not 

participating in or contributing to more 

intensive or inefficient patient care. 

Moreover, we believe that it is the 

combination of the factors enumerated 

by the Secretary and Congress as the 

reasons for the IME adjustment that 

contribute to the higher operating costs 

of teaching hospitals. We believe the 

Congress’ reference to ‘‘additional costs 

associated with the teaching of 

residents’’ refers to the presence of 

inefficiencies associated with teaching 

residents resulting from the additional 

tests or procedures ordered by residents 

and the demands put on physicians who 

supervise, and staff that support, the 

residents; and not to costs associated 

with research or didactic activities. 

Since direct GME payments are made to 

teaching hospitals to cover the explicit 

educational costs of training residents, 

we do not believe Congress intended for 

the IME adjustment to duplicate those 

educational payments. In fact, it first 

became evident that an adjustment to 

payments for teaching hospitals was 

necessary, in addition to the cost-based 

GME payments, after 1972 when 

Congress instituted what became known 

as the ‘‘section 223’’ limits to hospitals’

routine operating costs. Since the 

agency’s analyses showed that the 

section 223 cost limits adversely 

impacted teaching hospitals, a 

calculation based on a regression 

formula was computed to adjust the 

routine operating cost limits of teaching 

hospitals. Consequently, the IME 

adjustment was instituted to address the 

higher patient care costs not sufficiently 

compensated under the cost limits, and 

later the DRG system. In the example 

above, the inclusion of the four FTE 

residents engaged in nonpatient care 

research in the resident count for IME 

would vastly overcompensate the 

hospital for any marginal contribution 

to operating costs resulting from the 

presence of those FTE residents. 

Similarly, a resident that is participating 

in a seminar or a conference is not 

contributing to the higher patient care 

costs of the hospital. Thus, although it 

would be appropriate to count such 

nonpatient care time in calculating 

direct GME payments, it would not be 

appropriate to count that time for 

purposes of the IME adjustment. 

Accordingly, we believe it is 

appropriate and fully consistent with 

Congressional intent to apply the plain 

meaning of the term ‘‘patient care 

activities’’ and to limit the FTE resident 

count to time spent in patient care 

activities for IME for training in the 

hospital, and for both IME and direct 

GME for training in nonhospital sites. 

That is, only time spent in the care and 

treatment of particular patients, or in 

providing services for which a 

physician or other practitioner may bill, 

may be counted. 

Comment: One commenter said that 

independent research activity rotations 

were included in the allowable FTE 

count used to determine hospitals’

direct GME base year PRAs. The 

commenter said that these research 

electives, which are part of the ACGME 

approved program, ‘‘may happen at the 

hospital’s medical library’’ or ‘‘may 

happen at home at the resident’s study 

desk,’’ but ‘‘all of it has been included 

in the FTEs used to calculate the PRA 

amount.’’ The commenter suggested 

that, by the clarification in the April 25, 

2006 proposed rule, CMS is adopting a 

‘‘change in accounting method,’’ and 

that, therefore, CMS should consider 

adopting a change in the PRAs for 

hospitals that ‘‘exclude these newly 

excluded’’ FTEs. 

Response: We believe the commenter 

is confusing our policy of including the 


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FTE time spent in research activities in 

the denominator of the PRA calculation, 

and, in the FTE count in years 

subsequent to the PRA base year, our 

policy of excluding the costs of research 

activities from the numerator of the 

PRA. As we explained in the September 

29, 1989 Federal Register and again in 

the August 1, 2001 Federal Register (66 

FR 39898 through 39899), each 

hospital’s PRA is determined by taking 

the hospital’s total allowable graduate 

medical education costs (which do not 

include costs allocated to the nursery 

cost center, research, and other 

nonreimbursable cost centers) in a base 

year and dividing the costs by the 

number of FTE residents working in all 

areas of the hospital complex in the base 

year (§ 413.77(a)(1)(i)). In the case of 

research and other nonreimbursable cost 

centers, costs were excluded from the 

PRA calculation because they were 

nonreimbursable in the base year, 

consistent with longstanding Medicare 

policy on Medicare cost reimbursement 

to teaching hospitals. Ideally, residents 

participating in research electives 

would also have been excluded from the 

base year FTE count used in the PRA 

calculation. However, for a number of 

hospitals, the FTE count for the base 

year did include residents engaged in 

such research because the 1984 base 

year information available from 

hospitals when the PRAs were 

determined in 1990 did not consistently 

distinguish between residents involved 

in furnishing patient care services and 

residents engaged in nonpatient care 

research. The inclusion of such 

additional FTEs in the denominator of 

the PRA calculation lowered the PRAs 

for these hospitals. 

In order to avoid disadvantaging these 

hospitals, in making direct GME 

payments for a given year, we included 

and continue to include residents 

engaged in nonpatient care research in 

the direct GME FTE count both in the 

base year PRA calculation and in the 

FTE count in subsequent payment year 

calculations. This policy was adopted to 

‘‘offset’’ the effects of the inclusion of 

such FTE residents in the denominator 

of the direct GME PRA calculation (no 

such ‘‘offset’’ is warranted in the context 

of IME). Thus, there has been no 

‘‘change in accounting method,’’ and it 

is not necessary to consider changing 

the PRAs of hospitals that exclude 

independent research rotations, as the 

commenter suggests. Furthermore, 

because the nonreimburseable costs 

were excluded in calculating the PRA, 

the end result is that the direct GME 

payment does not encompass the costs 

of residents engaged exclusively in 

research. Therefore, as with the IME 

payment, Medicare is not and has not 

been reimbursing teaching hospitals 

under direct GME for costs the hospital 

incurs associated with resident time 

spent in nonpatient care research. 

Comment: One commenter disputed 

CMS’ policy to exclude nonpatient care 

time from the IME count on the grounds 

that the IME statute states that ‘‘the 

Secretary shall provide for an additional 

payment amount for subsection (d) 

hospitals with indirect costs of medical 

education, in an amount computed in 

the same manner as the adjustment for 

such costs under regulations (in effect as 

of January 1, 1983) * * *’’ (section 

1886(d)(5)(B) of the Act). The 

commenter maintained that because the 

regulations in effect as of January 1, 

1983, did not exclude nonpatient care 

activities from the IME count, the plain 

meaning of the statute requires that this 

time continue to be included in the IME 

resident count. 

Response: The exclusion of time spent 

in nonpatient care activities from the 

IME count is longstanding CMS policy, 

and consistent with the rules in effect as 

of January 1, 1983. The statute 

implementing the IME adjustment at 

section 1886(d)(5)(B) of the Act requires 

that, ‘‘[t]he Secretary shall provide for 

an additional payment amount for 

subsection (d) hospitals with indirect 

costs of medical education in an amount 

computed in the same manner as the 

adjustment for such costs under 

regulations (in effect as of January 1, 

1983) * * *’’). 

For the initial analysis of the 

operating costs of teaching hospitals 

versus non-teaching hospitals that was 

used to develop the IME adjustment, 

while analysts could distinguish 

between allowable and non-allowable 

costs, they did not have a method to 

consistently and accurately isolate all 

the time spent by residents in 

nonpatient care activities. Therefore, no 

consideration was given to where the 

residents were training in the hospital 

or what the residents were doing (that 

is, patient care or other activities). Prior 

to the implementation of the IPPS, 

under the reasonable cost system of 

reimbursement, the concept of an ‘‘FTE 

resident’’ had little, if any, relevance. 

Thus, for this analysis, an ‘‘FTE’’ simply 

distinguished between a resident that 

was employed at the hospital on a fulltime basis and a resident that was 

employed at the hospital only part-time. 

Accordingly, while only allowable costs 

were considered in the analysis, the 

time spent by residents in nonreimbursable activities or areas of the 

hospital was not excluded from the 

analysis. 

The April 1, 1980 Federal Register 

implementing the initial IME 

adjustment specified simplistic 

requirements for hospitals to report FTE 

residents to the fiscal intermediaries for 

purposes of receiving the IME 

adjustment to their cost limits, 

consistent with the relatively crude 

resident counts CMS used in computing 

the IME adjustment (45 FR 21484). The 

rules in effect as of January 1, 1983 

concerning determining the resident 

count for IME required, in part, that 

only residents in approved programs 

could be counted (47 FR 43310 

(September 30, 1982)). Once the IPPS 

was effective, CMS took certain steps to 

modify the rules concerning FTE 

resident counts for the resident-to-bed 

ratio to more appropriately adapt the 

IME adjustment to the new prospective 

payment methodology under which 

only inpatient operating costs were 

reimbursed. (Other types of costs, such 

as direct GME and outpatient hospital 

costs were specifically excluded from 

payment under the IPPS, and continued 

to be paid under existing mechanisms.) 

A distinction was drawn, for payment 

purposes, between the acute inpatient 

hospital (subject to the IPPS), and 

distinct part units and hospitals not 

paid under the IPPS. Since reasonable 

cost payments to these ‘‘IPPS excluded’’

providers and units already included 

the indirect costs of medical education, 

in order to avoid a ‘‘double’’ payment 

that would result from counting 

residents in those IPPS-excluded 

settings, CMS clarified in regulations 

that the IPPS IME adjustment does not 

apply to any hospitals or distinct part 

units not paid under the PPS, and 

consequently, both the number of beds 

and the time spent by residents in those 

areas could not be included in the 

resident-to-bed ratio (48 FR 39844). The 

agency modified the rules for counting 

FTE residents and hospital beds for 

purposes of the IME adjustment so that 

the adjustment would be more closely 

tailored to reflect the higher allowable 

patient care costs of teaching hospitals 

under the prospective payment system 

for inpatient acute care hospitals. 

In the September 3, 1985 final rule, 

CMS responded to comments regarding 

its proposal to exclude FTE resident 

time spent in outpatient departments 

from the numerator of the resident-tobed ratio. CMS had proposed this 

exclusion ‘‘because outpatient 

departments also are not subject to the 

prospective payment system and 

because the additional operating costs of 

outpatient departments associated with 

interns and residents are already 

recognized through reasonable cost 


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reimbursement for hospital services 

furnished to outpatients’’ (50 FR 35681 

through 35682). The commenters stated 

that CMS was required to count 

residents training in outpatient 

departments since section 1886(d)(5)(B) 

of the Act requires that the IME 

adjustment be ‘‘computed in the same 

manner’’ as set forth in the regulations 

on January 1, 1983. The commenters 

further argued that in the September 1, 

1983 interim final rule, CMS said that 

residents in outpatient departments 

would be counted so as to avoid 

‘‘altering only one element of the 

variable and failing to maintain 

comparability between the methodology 

used for developing the adjustment 

factors and subsequently standardizing 

hospital costs based on that factor’’ (48 

FR 39778). 

In response to those comments, CMS 

stated that the agency believed that in 

excluding residents training in the 

outpatient departments from the FTE 

count, it was computing the adjustment 

‘‘in the same manner’’ as previously, 

since the adjustment continued to be 

based on a resident-to-bed ratio. CMS 

noted that, although the statute purports 

to refer to regulations in effect on 

January 1, 1983, there were no specific 

regulations in effect on that date, and, 

although the September 30, 1982 

Federal Register (47 FR 43310) 

contained a description of the method to 

be used, the agency believed that 

‘‘Congress, in enacting the prospective 

payment system, intended that the 

methodology in effect be adopted rather 

than the entire description published in 

that notice’’ (emphasis added). CMS 

further noted that the agency had 

already made changes to the 

methodology for counting interns and 

residents in the January 3, 1984 and 

August 31, 1984 final rules (the latter in 

response to a provision in Pub. L. 98–

369) to ‘‘adapt the previous system to 

the prospective payment system more 

effectively.’’ (In fact, the Agency had 

also made changes in the September 1, 

1983 Federal Register (48 FR 39844) to 

exclude FTE training time in distinct 

part units that are excluded from the 

PPS). We noted that, in response to the 

refinements the agency made in 1983 

and 1984 to the rules for counting 

residents for purposes of the IME 

adjustment, Congress could have made 

adjustments to the IME multiplier, but 

chose not to do so even though it passed 

legislation (Pub. L. 98–369) dealing 

specifically with indirect medical 

education payments. In response to 

comments, the agency observed that 

‘‘the current [IME] adjustment itself is 

no longer entirely consistent with the 

original factor’’ (50 FR 35682). We 

concluded that, ‘‘if the deletion of time 

furnishing services to outpatients, 

which decreases the count of interns 

and residents, invalidates the indirect 

medical education adjustment, it should 

follow that the expansion of programs 

that took place since the current factor 

was developed also should have 

invalidated the adjustment. However, 

especially since Congress did not 

mandate that the factor be recalculated, 

we believe that if there are, as here, 

overriding concerns, the revision to the 

method of counting interns and 

residents is justified’’ (50 FR 35682). 

We acknowledge that soon after 

publication of this rule, Congress passed 

the Consolidated Omnibus Budget 

Reconciliation Act (COBRA) (Pub. L. 

99–272) on April 7, 1986, which 

included a provision (section 9104(a)) 

that addressed the agency’s regulation, 

and required that time spent by 

residents training in outpatient 

departments ‘‘will continue to be 

counted for purposes of determining the 

indirect teaching adjustment’’ (See 51 

FR 16773, May 6, 1986). We note 

further, however, that although 

Congress addressed CMS’s rule on 

excluding time spent in outpatient 

departments, Congress could have, but 

did not, also address the agency’s 

regulations concerning the exclusion of 

training time in distinct part psychiatric 

and rehabilitation units. Congress has 

considered and taken legislative action 

with respect to the IME adjustment 

many times since 1986, but has not 

found it necessary to modify the 

agency’s policies with respect to the 

counting of FTE residents for IME 

purposes. We do not believe that we are 

obligated to adhere rigidly to the 

rudimentary methodology of counting 

FTE residents for IME purposes that was 

in effect prior to and in the early days 

of the IPPS. Rather, since the IME 

adjustment is a payment for additional 

patient care costs, we believe there is a 

clear and compelling reason to limit the 

FTE resident time counted for IME 

purposes to the time spent by residents 

in the care and the treatment of 

particular patients, or to services for 

which a physician or other practitioner 

may bill. 

Comment: One commenter argued 

that CMS’ position in the April 25, 2006 

proposed rule that nonpatient care 

activities must be excluded from the 

IME FTE count ‘‘flies in the face of’’ the 

United States District Court’s decision 

in Riverside Methodist Hospital v. 

Thompson, Case No. C2–02–94 (S.D. 

Ohio 2003). In Riverside, the hospital 

appealed the fiscal intermediary’s 

disallowance of time spent in the 

hospital in journal clubs and seminars 

from the IME FTE count. In that 

decision, the Court ruled ‘‘1) that the 

2001 rule excluding nonpatient care 

time from the FTE count must not apply 

retroactively and 2) that resident time 

spent on nonpatient care activities 

should be included in the IME FTE 

count.’’ The commenter contended that 

CMS’ position in the proposed rule is 

‘‘an unconstitutional attempt to use the 

regulatory process to overturn the 

decision of an Article III court.’’

Another commenter claimed that the 

Court in Riverside affirmed Congress’

intent that the IME adjustment should 

compensate teaching hospitals for more 

than just the direct costs of residents’

involvement in patient care because 

those higher operating costs are difficult 

to separately identify and measure 

precisely. The commenter quoted part of 

the ruling in the Riverside case: ‘‘It is 

precisely because the indirect costs 

cannot be adequately itemized and 

quantified that Congress devised a 

formula based on the degree of teaching 

intensity in a particular hospital, as a 

substitution for any other method of 

reimbursing such costs. If Congress had 

believed that the indirect medical 

education costs of a teaching hospital 

could be separately identified and 

quantified, and that higher direct 

patient care costs could be so 

determined from the hospital’s records, 

then Congress could easily have 

qualified its formula for reimbursement 

to restrict the number of FTE residents 

to a number based only on hours that 

residents spent providing ‘patient care.’

It obviously did not do so’’. 

Response: The first commenter is 

correct that the Court in the Riverside 

case ruled to reverse the fiscal 

intermediary’s disallowance of time 

spent by the hospital’s residents in 

nonpatient care activities from the IME 

FTE count. We respect and will give full 

effect to that Court’s decision. However, 

we do not read that decision to restrict 

the Secretary’s discretion to promulgate 

regulations on the issues litigated in that 

case. Although we acknowledge the 

Court’s recognition that the statute did 

not specify that the IME formula be 

based only on hours spent in providing 

patient care, we believe, as explained 

above, that such a limitation is 

appropriate and in accordance with the 

purpose of the IME payment, as well as 

Congressional intent, under the IPPS. It 

is also noteworthy that Congress has not 

acted to modify the agency’s policies 

with respect to counting FTE residents 

even though Congress has recently 

enacted several provisions relating to 

IME and direct GME in the MMA. We 


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would also note that the cost report at 

issue in the Riverside case was from 

Fiscal Year 1996, which is clear 

evidence that the agency’s policy to 

disallow the time spent in nonpatient 

care activities from the IME FTE count 

in the hospital is, indeed, longstanding. 

Comment: Many commenters voiced 

their concern that if CMS were to 

‘‘inappropriately’’ require that all 

didactic activities must be excluded for 

IME purposes in the hospital, and for 

direct GME and IME purposes in the 

nonhospital sites, it would result in a 

‘‘quagmire of administrative 

difficulties,’’ and enormously increase 

teaching hospitals’ documentation 

burdens. It would mean a ‘‘sea change’’

for many hospitals, as rotation 

schedules are often weekly or monthly, 

and vary widely not only from hospital 

to hospital, but also from program to 

program. Especially for very large 

teaching hospitals, reporting residents’

activities in hour-long increments is 

‘‘literally not achievable.’’ One 

commenter alleged that CMS’s 

‘‘nefarious’’ separation of patient care 

time from didactic activities which 

‘‘devolve[s] to discussions of particular 

patients seems a capricious exercise in 

futility.’’ With respect to training in 

nonhospital settings, one commenter 

warned that CMS’ proposal would have 

a ‘‘chilling effect’’ on training outside 

the hospital. The commenter believed 

that hospitals will be ‘‘forced to 

demand’’ that nonhospital sites closely 

monitor the portion of time that is spent 

in nonpatient care activities, which may 

be difficult to distinguish from the 

patient care activities. The commenter 

believed that physicians will refuse to 

supervise residents in nonhospital sites 

if the documentation requirements 

become too burdensome, which would 

‘‘frustrate’’ Congress’ intent in enacting 

the IME nonhospital site payment 

provision. Another commenter 

expressed concern that CMS’ ‘‘shortsighted’’ approach ‘‘penalizes’’ hospitalbased residency programs that provide 

their residents with nonhospital training 

experiences, ‘‘exacerbating other recent 

CMS policy changes that disadvantage 

training programs conducted outside the 

hospital.’’

Response: We have carefully 

considered the comments, and we 

recognize that providing hour-by-hour 

schedules for, in some cases, more than 

1,000 residents, could be a daunting 

task. We would point out, however, that 

nowhere in the preamble discussion of 

the April 25, 2006 proposed rule did we 

explicitly require hourly rotation 

schedules. We did say that ‘‘it is 

important for hospitals to be able to 

document the activities in which 

residents are engaged because there are 

certain activities that are not allowable 

for direct GME or IME payment 

purposes, even though those activities 

may be performed as part of an 

approved residency program’’ (71 FR 

24114). Although we need to ensure that 

Medicare payments are paid accurately, 

it is not our desire to impose 

unreasonably complicated and timeconsuming recordkeeping requirements. 

It has always been the general practice 

of fiscal intermediaries to use rotation 

schedules as the primary source of 

documentation to determine whether 

residents’ time is allowable for IME and 

direct GME payment purposes. 

However, we are sympathetic to the fact 

that up to this point, hospitals have 

been inconsistent in their reporting of 

nonpatient care activities, either 

because of confusion surrounding our 

FTE-counting policy, or because of 

differing approaches to developing and 

maintaining rotation schedules. 

Therefore, we believe it is appropriate 

from an administrative perspective to 

distinguish between the treatment of 

cost reports for cost reporting periods 

beginning prior to October 1, 2006, and 

cost reporting periods starting on or 

after October 1, 2006, with respect to 

documentation requirements. 

Prospectively, (for cost reporting 

periods beginning on or after October 1, 

2006), to ensure consistent reporting by 

hospitals and auditing by fiscal 

intermediaries, we believe it is 

appropriate to require all teaching 

hospitals to document residents’ time at 

some minimum level of detail. 

Specifically, for cost reporting periods 

beginning on or after October 1, 2006, 

for training occurring either in the 

hospital or in nonhospital settings, we 

are instituting a ‘‘one workday’’

threshold for documentation purposes. 

That is, we are not requiring that 

hospitals overhaul their current rotation 

schedules, nor are we mandating that 

rotation schedules be in one-day 

increments. Rather, if a resident’s 

workday consists entirely of scheduled 

didactic activities and no scheduled 

patient care activities (for example, no 

care and treatment of individual 

patients, or no services which are 

billable) then, for documentation 

purposes, that workday must not be 

recorded as ‘‘patient care’’ (or, as 

occurring in a patient care unit such as 

ICU or Pediatrics, etc.). Instead that 

workday must be identified as 

nonpatient care and the time must be 

subtracted from the allowable FTE 

count (for IME if the training occurred 

within the hospital complex, and for 

both IME and direct GME if the training 

occurred in a nonhospital site). In other 

words, as long as an entire workday is 

not scheduled for didactic activities, 

then for documentation purposes, that 

day may be recorded as spent in patient 

care activities. For example, if a hospital 

maintains rotation schedules in monthly 

blocks for each resident in a particular 

program, and if a resident that is 

otherwise assigned to the Coronary Care 

Unit (CCU) for the month of January was 

scheduled to attend an all day 

conference on January 10 and not to 

participate in any planned patient care 

activities on that day, then the hospital 

must note on the rotation schedule that 

it submits to the fiscal intermediary that 

this resident was not in ‘‘patient care’’

on January 10. The hospital would 

subtract that time from the resident’s 

allowable IME and/or direct GME FTE 

count accordingly. We believe this ‘‘one 

workday’’ approach to documentation of 

residents’ time is an appropriate 

administrative measure that will assist 

our fiscal intermediaries in enforcing 

the policy concerning time spent in 

nonpatient care activities for cost 

reporting periods starting on or after 

October 1, 2006, while not 

overburdening hospitals with 

excessively detailed recordkeeping 

requirements. However, our policy 

continues to be that only time spent in 

patient care activities may be counted 

for IME purposes in the hospital 

complex, and for direct GME and IME 

purposes in nonhospital sites. 

Accordingly, we are amending 

§ 413.75(b) to add a definition of the 

term ‘‘patient care activities’’ which 

means, ‘‘the care and treatment of 

particular patients, including services 

for which a physician or other 

practitioner may bill.’’ (We note that in 

the proposed rule, we defined patient 

care activities as ‘‘the care and treatment 

of particular patients or services for 

which a physician or other practitioner 

may bill’’ (emphasis added). In this final 

rule, we are changing the word ‘‘or’’ to 

‘‘including,’’ because we did not mean 

to imply that the phrase ‘‘the care and 

treatment of particular patients’’ and 

‘‘services for which a physician or other 

practitioner may bill’’ are mutually 

exclusive. Rather, services that are 

billable are a subset of the more general 

category of activities involving the ‘‘care 

and treatment of particular patients,’’

and are indicative of patient care 

delivery). In addition, we are amending 

the IME regulations at § 412.105(f)(1)(iii) 

to add a paragraph (C) to state that ‘‘In 

order to be counted, a resident must be 

spending time in patient care activities, 

as defined in § 413.75(b).’’


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Comment: One commenter requested 

that if CMS decides to implement the 

policy expressed in the proposed rule, 

CMS should clarify that ‘‘only planned 

activities expressly undertaken to meet 

programmatic requirements should be 

included as part of the approved 

residency program.’’ The commenter 

was concerned that without such a 

clarification, CMS may interpret 

‘‘spontaneous’’ encounters at 

nonhospital settings (such as unplanned 

lunch meetings with a teaching 

physician and a resident where they 

‘‘happen’’ to discuss a medical topic) as 

nonpatient care time. Another 

commenter listed several residency 

training scenarios that he believed 

would need further clarification with 

respect to whether the time could be 

counted for IME and/or direct GME 

purposes, if CMS’s policy is finalized. 

The scenarios included the time that a 

resident is called out of a conference to 

care for a patient, lunch time lectures, 

and requires courses of study or 

activities that the resident may complete 

at home or at a faculty member’s home. 

Response: As we stated in response to 

the previous comment, as long as an 

entire workday is not scheduled for 

didactic activities, then for 

documentation purposes, that day may 

be recorded as spent in patient care 

activities. Of course, activities must be 

part of the approved residency training 

program in order to be counted for IME 

and direct GME payment purposes and 

a resident must be training within the 

hospital complex or in a nonhospital 

site. If a hospital documents that time 

was spent studying at a resident’s or a 

teaching physician’s home, this time is 

not permitted to be included in the IME 

count because it is not time spent in 

patient care, nor is it permitted to be 

included in the direct GME count 

because it did not take place in the 

hospital complex. 

Comment: One commenter stated that 

if CMS decides to implement the policy 

in the proposed rule in some form 

(although the commenter believed CMS 

shouldn’t), then the final policy would 

represent a change that must be 

modified formally through the process 

of notice and comment rulemaking, and 

therefore, should only apply 

prospectively for rotations beginning on 

or after July 1, 2007. 

Response: Although we recognize that 

there has been some misapprehension of 

our policies among the teaching hospital 

community, in particular with respect to 

the counting of FTE residents training in 

the hospital for purposes of IME, the 

only change we are making to current 

policy is the ‘‘one workday’’ approach 

to identifying nonpatient care time 

spent by residents. We do not believe it 

is necessary to wait until July 1, 2007, 

to implement our recordkeeping policy. 

We believe that an effective date stated 

above, for cost reporting periods 

beginning on or after October 1, 2006, 

provides hospitals with sufficient time 

to either modify their rotation schedules 

to reflect the ‘‘one workday’’ approach 

or to find other comparable 

documentation that can be used by the 

fiscal intermediaries in auditing cost 

reports. 

Comment: A commenter said that it is 

unclear how CMS intends to exclude 

nonpatient care time for cost reporting 

purposes; that is, just from the time 

allowable as part of a hospital’s resident 

count (that is, the numerator), or from 

the total time worked (in all locations) 

by the resident (that is, the 

denominator). The commenter observed 

that the statute quoted by CMS in the 

proposed rule states that ‘‘only time 

spent in activities relating to patient 

care shall be counted’’ (emphasis added, 

section 1886(h)(4)(E) of the Act). The 

commenter believed that to be 

‘‘counted’’, the time appears both in the 

allowable time claimed by the hospital 

and the total time worked by the 

resident in a given year, and conversely, 

if the activities do not relate to patient 

care, then the time should not be 

counted either as allowable time or as 

part of the total time worked. The 

commenter requested that CMS specify 

that these activities are not to be 

included at all in IRIS, either as 

allowable or unallowable, so as not to 

dilute the total resident count that may 

be claimed by all of the hospitals 

training the resident. 

Response: The effect of the 

commenter’s request would be to ignore 

portions of training time spent by 

residents in approved residency training 

programs with the result that, in total, 

less than a full-time equivalent resident 

would be counted. We do not believe 

such a policy would be appropriate or 

comport with Congressional intent. 

Section 1886(h)(4)(A) of the Act states 

that, ‘‘The Secretary shall establish rules 

consistent with this paragraph for the 

computation of the number full-time 

equivalent residents in an approved 

medical residency training program’’

and the remainder of the subsection is 

replete with references to ‘‘full-time 

equivalent’’ residents. Accordingly, the 

regulations at § 412.105(f)(1)(iii)(A) for 

IME and § 413.78(b) for direct GME 

indicate that, in computing the FTE 

count of a hospital, for each resident, 

the denominator consists of the total 

time necessary to fill a residency slot, 

which constitutes full-time equivalent 

status. Full-time equivalent status, in 

turn, is based upon the total amount of 

training time necessary to fulfill the 

requirements of the approved medical 

residency training program in a given 

academic year. Therefore, the 

denominator must consist of the total 

time worked by a resident throughout 

the academic year in activities that are 

part of the approved program, whether 

or not the time is permitted to be 

counted for IME or direct GME payment 

purposes. As stated in response to a 

previous comment, the starting point 

(denominator) for determining the 

allowable FTE count is the total time 

necessary to fill a residency slot 

consistent with the requirements of the 

approved residency program. However, 

the hospital must then subtract all nonallowable training time, such as time 

spent at other providers, time spent in 

IPPS-excluded distinct part units, 

nonpatient care activities (for example, 

research, didactic time), and so on, and 

only include the allowable time in the 

numerator. Thus, while a hospital’s 

allowable FTE count is certainly 

‘‘based’’ on the total time necessary to 

fill a resident slot that total time is often 

greater than the FTE time a particular 

hospital is permitted to count for 

payment purposes. Furthermore, 

certainly no FTE resident time that is 

outside the scope of the approved 

program would be included in either the 

numerator or the denominator of the 

FTE computation. 

Comment: A commenter noted that 

CMS uses the definition of ‘‘hospital 

complex’’ as explained in the September 

29, 1989 Federal Register to determine 

which residents may be included in a 

hospital’s direct GME count. 

Specifically, the September 29, 1989 

Federal Register (54 FR 40286) states 

that the hospital complex consists of the 

hospital and hospital-based providers 

and subproviders. The commenter 

observed that CMS’s regulations 

concerning the requirements for 

provider-based status are at § 413.65, 

and stated that it is their understanding 

that if a facility qualifies as providerbased under these regulations, the 

facility will be considered part of the 

hospital complex. The commenter 

requested that the connection between 

‘‘hospital complex’’ and ‘‘providerbased’’ be clarified in the final rule, 

since the September 29, 1989 Federal 

Register seems to imply that only 

facilities such as SNFs and HHAs 

(facilities that bill Medicare and have 

direct patient care activities) can qualify 

as provider-based. The commenter 

noted that, for example, a separate 

building where only research is 

conducted may qualify for providerVerDate Aug<31>2005 16:09 Aug 17, 2006 Jkt 208001 PO 00000 Frm 00224 Fmt 4701 Sfmt 4700 E:\FR\FM\18AUR2.SGM 18AUR2

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based status and should be included as 

part of the hospital complex. 

Response: The commenter is correct 

that the regulations that would be used 

to determine if a facility is part of the 

hospital complex (that is, providerbased) for direct GME purposes, are at 

§ 413.65. As the commenter pointed out, 

it may be necessary to determine for 

direct GME purposes if a facility in 

which no patient care is provided is 

‘‘provider-based,’’ even though a 

provider-based determination would not 

otherwise be made for such a facility. 

The example mentioned by the 

commenter of a separate building in 

which only research is conducted 

would be an instance where it would be 

appropriate for the fiscal intermediary 

to use the criteria at § 413.65 to 

determine if a facility is part of the 

hospital complex for direct GME 

purposes. Thus, training that occurs in 

facilities that meet the provider-based 

criteria at § 413.65 is training ‘‘in the 

hospital’’, and training that occurs in 

facilities that do not meet the providerbased criteria is training ‘‘in nonhospital 

settings,’’ (and, of course, in the case of 

the training in nonhospital settings, the 

hospital must meet certain requirements 

in order to count any FTE resident 

training time spent in that setting). 

Comment: Some commenters urged 

CMS not to distinguish between direct 

GME and IME payments based on 

hospital versus nonhospital locations. 

One commenter argued that 

‘‘geography’’ is irrelevant, particularly 

in the era of telephone and Internet 

communications. Another commenter 

believed that distinctions between 

provider-based versus freestanding 

practices or medical school facilities are 

‘‘founded on legal, structural, or 

financial issuances.’’ The commenter 

stated that hospital and nonhospital 

locations might be ‘‘across the hall or on 

the next floor from each other’’ with no 

difference between the patient care and 

learning experiences in each place. The 

commenter believed that CMS has 

recently distinguished between these 

sites for reimbursement purposes based 

solely on who is bearing ‘‘all or 

substantially all’’ of the costs of the 

residency program, which has created 

‘‘confusion, complexity, and 

controversy’’ in the provider 

community. Further ‘‘clarifications’’ of 

payment based on location or on type of 

activity are ‘‘unnecessary and onerous.’’

Response: We understand that it is 

quite common for hospitals, especially 

large academic medical centers, to be 

located on the same campus as a 

medical school, where the buildings are 

very closely situated or even connected, 

and the facilities are often shared. 

However, as the commenter indicated, 

hospitals, nonhospital sites, and 

medical schools are structured 

separately for legal and financial 

purposes, and are recognized 

independently for state licensing and 

Medicare cost reporting purposes. To 

put it simply, a hospital is not a medical 

school, and a medical school is not a 

hospital. As we stated in response to the 

previous comment, the criteria to be 

used in determining if a facility is 

provider-based are in the regulations at 

§ 413.65. Facilities that meet the 

provider-based criteria are part of the 

hospital, and facilities that do not meet 

the provider-based criteria are 

nonhospital sites, even if they are 

located on the same campus as the 

hospital. Additionally, while there is no 

requirement that hospitals incur the 

costs of residents training in a hospital 

in order for those residents to be 

counted for IME and direct GME 

purposes, hospitals are required by 

statute (not merely by CMS regulations, 

as the commenter implies) to incur ‘‘all, 

or substantially all of the costs’’ of a 

residency training program in a 

nonhospital site (such as a medical 

school) in order to count any of the 

resident FTE training time spent in 

those nonhospital sites for IME and 

direct GME purposes. Similarly, the 

statutes for IME and direct GME clearly 

indicate that only training in patient 

care activities may be counted in the 

nonhospital sites. Since the statute 

makes these distinctions, we do not 

believe we have created ‘‘unnecessary’’

and ‘‘confusing’’ distinctions between 

where the residents are training, or the 

type of activities in which the residents 

are engaged. 

Comment: Many comments from 

members of an academy of family 

medicine in a particular State indicated 

that they were informed that ‘‘CMS is 

considering the disallowance of faculty 

development activity in the calculation 

of IME and DME reimbursement.’’ Some 

of the activities they listed as being at 

risk included development, review, and 

delivery of curriculum, scholarly 

activities such as written publications 

and faculty development conferences, 

resident evaluation, faculty training, 

and alumni evaluation and research. 

The commenters were concerned that 

future physicians cannot be properly 

trained ‘‘without support for the 

educational aspects of their 

experience.’’ Another group of 

commenters, also teaching faculty for 

family medicine programs, stated that 

they were attracted to a profession in 

family medicine because ‘‘the 

community recognized the value of 

experience and academic inquiry to the 

well-being of our communities and the 

training of future physicians.’’ These 

teaching physicians stated that less than 

one-third of their academic time is 

compensated, and if funding for their 

work on program development, clinical 

research, writing critical reviews, and 

evaluating resident performance is 

reduced, then they may find it necessary 

to return to full time clinical practice, 

since the ‘‘thought of being told by a 

program that [we] will need to see more 

patients to pay for the time [we are] 

developing and delivering curriculum 

will be unacceptable.’’ The commenters 

concluded by wishing CMS ‘‘the best of 

luck’’ if CMS implements this rule, and 

stated that they would not continue as 

faculty members. Another commenter 

cautioned that ‘‘with every additional 

burden placed’’ on residency training by 

CMS or the ACGME, more valuable 

teaching physicians will be lost. 

Response: It appears the commenters 

have confused the time that residents in 

approved programs spend in nonpatient 

care activities, with the time that 

teaching faculty spend in nonpatient 

care activities. While the direct GME 

payments, through the PRAs, do 

compensate teaching hospitals for the 

portion of the teaching physicians’’

salaries and fringe benefits attributable 

to GME activities, only the FTE time of 

residents participating in approved 

programs is included in the hospital’s 

FTE resident count for both IME and 

direct GME. Accordingly, the activities 

listed by the commenters in which 

teaching faculty engage either on behalf 

of, or independent of, the residents they 

supervise are not affected by the rule 

that only time spent by residents in 

patient care activities may be counted 

for IME purposes in the hospital, and for 

IME and direct GME purposes in the 

nonhospital sites. 

Comment: One commenter, a hospital 

system, said that their understanding, 

which has been ‘‘reaffirmed time and 

again by our annual fiscal intermediary 

audits,’’ is that, with respect to direct 

GME, time spent in a nonpatient care 

activity, ‘‘no matter where it took place 

(on site or off), was allowed to be 

counted if that activity was needed for 

Board certification.’’ The commenter 

stated that it seems CMS ‘‘largely 

agrees’’ with this position ‘‘If the 

nonpatient care activities occur on site, 

but doesn’t if the activity is offsite’’

(emphasis included in the original). The 

commenter believes this is ‘‘illogical’’

considering that the hospital continues 

to bear the direct costs of the resident 

in either case. The commenter 

concluded that, although they were 

commenting on the implications for 


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direct GME, ‘‘at least for IME, [CMS’s] 

position is consistent—nonpatient care 

activities are not allowed whether one is 

on site OR offsite’’ (emphasis included 

in the original). 

Response: As we indicated in 

response to a previous comment, 

although our position with respect to 

IME and FTE time spent in nonpatient 

care activities is a longstanding policy 

as we explained in greater detail above, 

it has become apparent to us that there 

actually has been significant confusion 

regarding this policy in the teaching 

hospital community. Our policy has 

been to apply the plain meaning of the 

term ‘‘patient care activities,’’ which 

means that, even if the nonpatient care 

activities that occur in nonhospital sites 

count toward Board certification (that is, 

they are part of the approved program), 

such time must not be included in the 

direct GME or IME count. With respect 

to training in the hospital, resident time 

spent training in didactic activities that 

are part of an approved program can be 

counted for direct GME purposes, but 

not for IME. It makes no difference 

whether the hospital is paying the 

residents’’ salaries when the training 

occurs in the hospital complex; whether 

a hospital incurs the costs for the 

residents it trains in the hospital is 

irrelevant for purposes of both IME and 

direct GME. The requirement to incur 

the costs of the residency training 

program only applies in the instances 

where hospitals wish to count FTE 

residents that are training in 

nonhospital settings. In that case, the 

hospital must incur all or substantially 

all of the costs of the training program 

in the nonhospital site (and meet certain 

other requirements) in order to count 

any FTE residents training in that site. 

In summary, we are finalizing the 

clarification of our policy that only time 

spent in patient care activities may be 

counted for IME purposes in the 

hospital complex and for direct GME 

and IME purposes in nonhospital sites. 

We are amending § 413.75(b) to add a 

definition of the term ‘‘patient care 

activities’’ which means, ‘‘the care and 

treatment of particular patients, 

including services for which a physician 

or other practitioner may bill.’’ In 

addition, we are amending the IME 

regulations at § 412.105(f)(1)(iii) to add 

a paragraph (C) to state that ‘‘In order to 

be counted, a resident must be spending 

time in patient care activities, as defined 

in § 413.75(b).’’ We are also making 

conforming changes to the regulations 

text at § 412.105(f)(1)(iii)(C), and 

§ 413.78(c)(1), (d)(1), and (e)(1) for 

residency training in nonhospital 

settings. Lastly for cost reporting 

periods beginning on or after October 1, 

2006, we are implementing a ‘‘one 

workday’’ approach to documentation of 

residents’ time, where, if a resident’s 

workday consists entirely of scheduled 

nonpatient care activities, that workday 

must be identified as nonpatient care 

time and must be subtracted from the 

allowable FTE count (for IME, if the 

training occurred in the hospital 

complex, and for both IME and direct 

GME, if the training occurred in a 

nonhospital site). 

6. Medicare GME Affiliated Groups: 

Technical Changes to Regulations 

In the FY 2005 IPPS final rule (69 FR 

49112 and 49254 through 49265), we 

redesignated the contents of § 413.86 

(which contained the regulations 

governing Medicare payment for direct 

GME) as §§ 413.75 through 413.83 and 

made corresponding cross-reference 

changes in the text of these regulations. 

We have discovered that under the 

definition of ‘‘Medicare GME affiliated 

group’’ under § 413.75(b), we incorrectly 

cited the cross-reference to the rotation 

requirements for GME affiliated groups 

in paragraphs (1), (2), and (3), as 

‘‘§ 413.79(g)(2)’’. In the FY 2007 IPPS 

proposed rule (71 FR 24115), we 

proposed to correct the cross-reference 

for the rotation requirements in 

paragraphs (2) and (3) of the definition 

to read ‘‘§ 413.79(f)(2)’’. 

We did not receive any public 

comments on this proposed technical 

change and, therefore, are adopting it as 

final. 

In the FY 2006 IPPS final rule (70 FR 

47457 and 47489), we made additional 

changes to certain sections of the GME 

redesignated regulations to correct 

cross-references to other parts of 42 CFR 

Chapter IV relating to the definitions of 

the ‘‘urban’’ and ‘‘rural’’ location of a 

hospital. In one of the corrections, in 

paragraph (1) under the definition of 

‘‘Medicare GME affiliated group’’ under 

§ 413.75(b), we inadvertently dropped 

the language in that paragraph relating 

to the rotational requirements for these 

groups, including the incorrect crossreference to § 413.79(g)(2). In the FY 

2007 IPPS proposed rule (71 FR 24115), 

we proposed to correct the language of 

paragraph (1) under the definition of 

‘‘Medicare GME affiliated group’’ under 

§ 413.75(b) by adding the dropped 

language and correcting the crossreference to read ‘‘§ 413.79(f)(2).’’

We did not receive any public 

comments on this proposed technical 

change and, therefore, are adopting it as 

final. 

In the FY 2006 IPPS final rule (70 FR 

47454 and 47489), we revised 

§ 413.79(e)(1)(iv) to provide that a new 

urban teaching hospital that qualifies for 

an adjustment to its FTE cap for a newly 

approved program may enter into a 

Medicare GME affiliation agreement, but 

only if the resulting adjustments to its 

direct GME and IME caps are ‘‘positive 

adjustments.’’ We specified in the 

preamble of that final rule that this 

provision is effective for affiliation 

agreements entered into on or after 

October 1, 2005. However, we 

inadvertently did not include this 

effective date in the regulation text. In 

the FY 2007 IPPS proposed rule (71 FR 

24115 and 24116), we proposed to 

revise § 413.79(e)(1)(iv) to include the 

effective date as part of the text of that 

section. 

In addition, we proposed to correct a 

cross-reference in the introductory text 

of paragraph (f) of § 413.79 relating to 

Medicare GME affiliated groups. The 

cross-reference to ‘‘paragraph (e)(3)’’ of 

§ 413.79 should read ‘‘paragraph (d)’’ of 

that section. This proposed change is 

necessary to accurately cite the 

reference to our rules regarding the 3- 

year rolling average. 

We did not receive any public 

comments on the proposed technical 

change and cross-reference change and, 

therefore, are adopting them as final. 

I. Payment for the Costs of Nursing and 

Allied Health Education Activities: 

Clarification (§ 413.85) 

In addition to direct GME and IME 

payments to hospitals for the direct and 

indirect costs incurred for their graduate 

medical education programs in 

medicine, osteopathy, dentistry, and 

podiatry, Medicare makes payments to 

hospitals for two other categories of 

education-related costs for which 

different payment policies apply: 

• Approved nursing and allied health 

education programs operated by the 

hospital. The costs of these programs are 

excluded from the definition of 

inpatient hospital operating costs and 

are not included in the calculation of 

the per discharge payment rates for 

hospitals paid under the IPPS, or in the 

calculation of payments to hospitals and 

hospital units excluded from the IPPS 

that are subject to the rate-of-increase 

ceiling. These costs are separately 

identified and ‘‘passed through’’ (that is, 

paid separately, on a reasonable cost 

basis). 

• All other costs that can be 

categorized as educational programs and 

activities (for example, continuing 

education, on the job training, or 

seminars). These costs are considered to 

be part of the hospitals’ normal 

operating costs and payment for these 

costs is included in the per discharge 

payment amount for hospitals subject to 

the IPPS, the IRF PPS, or the LTCH PPS 


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and the prospective per diem payment 

amount for facilities under the IPF PPS. 

Similarly, these costs are considered to 

be part of the hospitals’ normal 

operating costs and are included as 

reasonable costs that are subject to the 

TEFRA rate-of-increase limits applicable 

to hospitals that continue to receive 

payments subject to those limits, 

including cancer and children’s 

hospitals. 

Regulations governing payment for 

the costs of approved and allied health 

education activities are located at 42 

CFR 413.85. 

In the FY 2004 IPPS final rule (68 FR 

45429), we revised the regulations at 

§ 413.85(h)(3) to further clarify the 

difference between provider-operated 

and continuing education programs. We 

revised the regulations to state that, 

effective October 1, 2003, programs in 

which employees participate that do not 

lead to the ability to practice and begin 

employment in a nursing or allied 

health specialty are also treated as 

normal operating costs. We now realize 

that when we revised § 413.85(h)(3) to 

include this clarification, we 

inadvertently did not specify that the 

provision was applicable to trainees as 

well as employees. In the preamble of 

the FY 2004 IPPS final rule, we stated 

that because § 413.85(h)(3) refers to 

education that will not lead to the 

ability to practice and begin 

employment, we intended the 

provisions to apply not only to 

employees but to trainees as well. 

Therefore, in the FY 2007 IPPS 

proposed rule (71 FF 24116), we 

proposed to make a technical change to 

§ 413.85(h)(3) to make it applicable to 

both employees and trainees. We 

proposed this technical change to clarify 

that the educational activities in which 

employees or trainees participate, but 

that do not lead to the ability to practice 

and begin employment in a nursing or 

allied health specialty, are treated as 

normal operating costs. We noted that 

we did not propose to expand or make 

any changes to the current payment 

policy for nursing and allied health 

education activities; rather, we merely 

proposed to clarify the language of the 

existing regulations. 

Comment: One commenter requested 

that, in response to CMS’’ clarification 

of the regulations pertaining to normal 

operating costs, CMS make ‘‘* * * a 

regulation revision to reflect that 

trainees are included in the normal 

operation costs to avoid confusion.’’

Response: We agree with the 

commenter and note that as we 

proposed, we are revising the 

regulations at § 413.85(h)(3) to read: 

Educational seminars, workshops, and 

continuing education programs in 

which the employees or trainees 

participate that enhance the quality of 

medical care or operating efficiency of 

the provider and, effective October 1, 

2003, do not lead to the ability to 

practice and begin employment in a 

nursing or allied health specialty. 

In this final rule, we are adopting as 

final, without modifications, the 

proposed technical change to 

§ 413.85(h)(3) to make it applicable to 

both employees and trainees. 

J. Hospital Emergency Services Under 

EMTALA (§ 489.24) 

1. Background 

Sections 1866(a)(1)(I), 1866(a)(1)(N), 

and 1867 of the Act impose specific 

obligations on certain Medicareparticipating hospitals and CAHs. 

(Throughout this section of this 

proposed rule, when we reference the 

obligation of a ‘‘hospital’’ under these 

sections of the Act and in our 

regulations, we mean to include CAHs 

as well.) These obligations concern 

individuals who come to a hospital 

emergency department and request 

examination or treatment for medical 

conditions, and apply to all of these 

individuals, regardless of whether they 

are beneficiaries of any program under 

the Act. 

The statutory provisions cited above 

are frequently referred to as the 

Emergency Medical Treatment and 

Labor Act (EMTALA), also known as the 

patient antidumping statute. EMTALA 

was passed in 1986 as part of the 

Consolidated Omnibus Budget 

Reconciliation Act of 1985 (COBRA), 

Pub. L. 99–272. Congress enacted these 

antidumping provisions in the Social 

Security Act to ensure that individuals 

with emergency medical conditions are 

not denied essential lifesaving services 

because of a perceived inability to pay. 

Under section 1866(a)(1)(I)(i) of the 

Act, a hospital that fails to fulfill its 

EMTALA obligations under these 

provisions may be liable for termination 

of its Medicare provider agreement, 

which would result in loss of all 

Medicare and Medicaid payments. 

Section 1867 of the Act sets forth 

requirements for medical screening 

examinations for individuals who come 

to the hospital and request examination 

or treatment for a medical condition. 

The section further provides that if a 

hospital finds that such an individual 

has an emergency condition, it is 

obligated to provide that individual 

with either necessary stabilizing 

treatment or an appropriate transfer to 

another medical facility where 

stabilization can occur. 

The EMTALA statute also outlines the 

obligation of hospitals to receive 

appropriate transfers from other 

hospitals. Section 1867(g) of the Act 

states that a participating hospital that 

has specialized capabilities or facilities 

(such as burn units, shock-trauma units, 

neonatal intensive care units or (with 

respect to rural areas) regional referral 

centers as identified by the Secretary in 

regulation) shall not refuse to accept an 

appropriate transfer of an individual 

who requires these specialized 

capabilities or facilities if the hospital 

has the capacity to treat the individual. 

The regulations implementing section 

1867 of the Act are found at 42 CFR 

489.24. 

2. Role of the EMTALA Technical 

Advisory Group (TAG) 

Section 945 of Pub. L. 108–173 

(MMA) required the Secretary to 

establish a Technical Advisory Group 

(TAG) to provide the Secretary with 

advice concerning issues related to 

EMTALA regulations and 

implementation. Section 945 of Pub. L. 

108–173 further required that the 

EMTALA TAG be composed of 19 

members, including the Administrator 

of CMS, the Inspector General of HHS, 

hospital representatives and physicians 

representing various specialties, patient 

representatives, and representatives of 

organizations involved in EMTALA 

enforcement. 

The EMTALA TAG was first 

established in 2005 and held three 

meetings during that year. At each of its 

meetings, the EMTALA TAG heard 

testimony from representatives of 

physician groups, hospital associations, 

and others regarding EMTALA issues 

and concerns. As explained more fully 

below in sections IV.K.3. and 4. of this 

preamble, in the FY 2007 IPPS proposed 

rule (71 FR 24116 through 24118) we 

proposed to revise the EMTALA 

regulations at § 489.24 based on the 

recommendations adopted and 

forwarded to the Secretary by the 

EMTALA TAG. 

3. Definition of ‘‘Labor’’

As noted in the background portion of 

this section, the EMTALA statute and 

regulations require that if an individual 

comes to a hospital emergency 

department and a request is made on the 

individual’s behalf for examination or 

treatment for a medical condition, the 

hospital is obligated to provide that 

individual with an appropriate medical 

screening examination within the 

capability of the hospital. If the 

individual is found to have an 

emergency medical condition, the 

hospital is obligated by EMTALA to 


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provide either necessary stabilizing 

treatment or an appropriate transfer to 

another medical facility where 

stabilization can occur. 

Section 489.24(b) of the regulations 

defines the key terms used in the 

section. The term ‘‘emergency medical 

condition’’ is defined as—

‘‘A medical condition manifesting 

itself by acute symptoms of sufficient 

severity (including severe pain, 

psychiatric disturbances and/or 

symptoms of substance abuse) such that 

the absence of immediate medical 

attention could reasonably be expected 

to result in placing the health of the 

individual (or, with respect to a 

pregnant woman, the health of the 

woman or her unborn child) in serious 

jeopardy; serious impairment to bodily 

functions; or serious dysfunction of any 

bodily organ or part; or with respect to 

a pregnant woman who is having 

contractions, that there is inadequate 

time to effect a safe transfer to another 

hospital before delivery; or that transfer 

may pose a threat to the health and 

safety of the woman or the unborn 

child.’’

This definition closely follows the 

definition of ‘‘emergency medical 

condition’’ in section 1867(e)(1) of the 

Act with the exception that the 

regulation text further expands on 

‘‘acute symptoms of sufficient severity’’

by including ‘‘psychiatric disturbances 

and/or symptoms of substance abuse’’ in 

addition to severe pain. In recognition 

of the fact that this definition gives 

special consideration to women in 

labor, the term ‘‘labor’’ is itself defined, 

in paragraph (b) of § 489.24, to mean 

‘‘the process of childbirth beginning 

with the latent or early phases of labor 

and continuing through the delivery of 

the placenta.’’ The definition further 

states: ‘‘A woman experiencing 

contractions is in true labor unless a 

physician certifies that, after a 

reasonable period of observation, the 

woman is in false labor.’’ A woman 

found to be in false labor is considered 

not to have an emergency medical 

condition and that finding thus means 

that the hospital has no further 

EMTALA obligation to her. 

The CMS interpretative guidelines 

used by State surveyors in EMTALA 

investigations provide that once an 

individual has presented to a hospital 

seeking emergency care, the 

determination as to whether an 

emergency medical condition exists is 

made by the examining physician(s) or 

other qualified medical person(s) 

actually caring for the individual at the 

treating facility. The guidelines further 

provide that the medical screening 

examination must be conducted by one 

or more individuals who are determined 

to be qualified by the hospital bylaws or 

rules and regulations and who meet the 

hospital condition of participation in 42 

CFR 482.55 regarding emergency 

services personnel and direction. (Of 

course, these individuals would not be 

expected or permitted to perform any 

screening functions other than those 

which they are allowed to perform 

under State scope of practice laws.) 

However, consistent with the definition 

of ‘‘labor’’ at § 489.24(b), the guidelines 

also state that if a qualified medical 

person other than a physician 

determines that a woman is in false 

labor, a physician must certify the 

diagnosis. The guidelines permit this 

certification to be made based either on 

actual examination of the patient or on 

a telephone consultation with the 

qualified medical person who actually 

examined the patient. (Medicare State 

Operations Manual, Appendix V—

Interpretive Guidelines—Responsibility 

of Participating Hospitals in Emergency 

Cases, TAG A–406.) 

At its meeting held on June 15–17, 

2005, the EMTALA TAG heard 

testimony from representatives of both 

physician and nonphysician 

professional societies regarding the 

competence of practitioners other than 

physicians to certify false labor. In 

particular, a representative of the 

American College of Nurse-Midwives 

stated that the current requirement that 

allows only a physician to certify false 

labor is overly restrictive and does not 

adequately recognize the training and 

competence of certified nursemidwives. Testimony was also 

presented by the American College of 

Obstetricians and Gynecologists, which 

recommended amending the EMTALA 

regulations to allow certified nursemidwives and other qualified medical 

persons to determine whether a woman 

is in false labor. 

After extensive consideration of the 

issue, the members of the EMTALA 

TAG voted to recommend to the 

Secretary that the definition of ‘‘labor’’

at § 489.24(b) be amended to permit 

certified nurse-midwives and other 

qualified medical personnel to certify 

false labor. The TAG recommended 

deleting the second sentence, which 

states that a woman experiencing 

contractions is in true labor unless a 

physician certifies that, after a 

reasonable time of observation, the 

woman is in false labor. 

We agree with the TAG’s 

recommendation that other health care 

practitioners besides physicians should 

be allowed to certify false labor, and 

believe that the recommendation is 

consistent with CMS’ current policy 

regarding who may conduct medical 

screening examinations. However, we 

do not believe such a change can be best 

accomplished by simply deleting the 

second sentence of the current 

definition of ‘‘labor’’ in the existing 

regulations because doing so would also 

remove the explicit statement that a 

woman experiencing contractions is in 

labor unless she has been found to be 

in false labor. To achieve the principal 

objective of the EMTALA TAG 

recommendation without compromising 

the protections of EMTALA for women 

having contractions, in the FY 2007 

IPPS proposed rule, we proposed to 

modify the definition of ‘‘labor’’ in 

§ 489.24(b) by revising the second 

sentence of that definition to state that 

a woman experiencing contractions is in 

true labor unless a physician, certified 

nurse-midwife, or other qualified 

medical person acting within his or her 

scope of practice as defined in hospital 

medical staff bylaws and State law, 

certifies that, after a reasonable time of 

observation, the woman is in false labor. 

The effect of this change would be to 

have a single, uniform policy on the 

personnel who are authorized to make 

a determination as to whether an 

individual has an emergency medical 

condition. 

Comment: Several commenters 

expressed approval of the proposed 

change to the regulations to allow 

nonphysician practitioners to certify 

when a woman is in false labor, 

pursuant to State law and hospital 

bylaws. The commenters stated that this 

change to the regulations would provide 

hospitals greater flexibility in staffing 

and help ensure access to necessary 

services. 

Response: We appreciate the 

commenters’ support for this change to 

the regulations and have kept their 

remarks in mind while finalizing this 

proposal. 

Comment: One commenter disagreed 

with the proposed change to the 

regulations. The commenter stated that 

one cause of higher rates of premature 

labor and malformed and malpresented 

neonates in the United States than 

among other industrialized nations is 

the use of nurses for labor and delivery 

services. The commenter recommended 

that CMS not only continue to require 

that a physician determine when a 

woman is in false labor but also that 

such physician be specialized in 

obstetrics. 

Response: While we understand this 

commenter’s concerns, the commenter 

has not provided evidence to support 

the allegation that there is a higher rate 

of premature labor and malformed and 

malpresented neonates in the United 


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States than other industrialized nations. 

Nor has the commenter demonstrated 

that the problems as cited are directly 

linked to nonphysician practitioners’

involvement in labor and delivery 

services. Therefore, we are not 

modifying the proposed change based 

on this comment. 

Comment: One commenter expressed 

approval of the concept of allowing 

practitioners other than physicians to 

certify false labor, but objected to the 

use of the phrase ‘‘qualified medical 

person’’ in § 489.24(b) to describe the 

kind of individual who may perform 

this function. The commenter stated 

that use of the term ‘‘medical’’ could 

suggest, incorrectly, that only a 

physician could certify false labor. The 

commenter recommended that the term 

used be ‘‘other qualified health care 

professional’’. 

Response: The term ‘‘qualified 

medical person’’ is used in section 

1867(c)(1)(A)(ii) of the Act and in 

current regulations at § 489.24 (e)(1)(C). 

Both statutory and regulatory usages of 

this term make reference to a ‘‘qualified 

medical person’’ as an individual other 

than a physician who is authorized to 

sign a certificate outlining the risks and 

benefits of transfer in the absence of a 

physician. Thus, we do not believe the 

language in our proposed revision will 

be misleading. However, we will keep 

the commenter’s concern in mind as we 

draft conforming revisions to the 

EMTALA program instructions and 

other issuances, to make it clear that a 

qualified medical person need not be 

(and in fact will not be) a physician. 

After consideration of the public 

comments received, we are adopting as 

final, without modifications, the 

proposed change in the definition of 

‘‘labor’’ in § 489.24(b). 

4. Application of EMTALA 

Requirements to Hospitals Without 

Dedicated Emergency Departments 

Section 489.24(b) of the regulations 

outlines when a hospital will be 

considered to be a hospital with a 

‘‘dedicated emergency department’’ and 

makes it clear that only a hospital with 

a dedicated emergency department has 

an EMTALA responsibility with respect 

to an individual for whom no 

appropriate transfer is sought but who 

comes to the hospital seeking 

examination or treatment for a medical 

condition. However, it has come to 

CMS’ attention that our policy regarding 

the application of EMTALA to hospitals 

that have specialized capabilities but are 

without dedicated emergency 

departments may be less well 

understood as it relates to individuals 

for whom an appropriate transfer is 

sought. 

It has been CMS’ longstanding policy 

that any Medicare-participating hospital 

with a specialized capability must, in 

accordance with section 1867(g) of the 

Act, accept, within the capacity of the 

hospital, an appropriate transfer from a 

requesting hospital. This policy has 

been applied to hospitals without regard 

to whether they have dedicated 

emergency departments. In fact, in the 

past, CMS has taken enforcement 

actions against hospitals with 

specialized capabilities that failed to 

accept appropriate transfers under 

EMTALA when the hospitals had the 

capacity to treat the transferred 

individuals. 

At its meeting held on October 26–28, 

2005, the EMTALA TAG heard 

testimony from representatives of 

physician groups, hospital associations, 

and others regarding EMTALA 

compliance by specialty hospitals that 

typically do not have dedicated 

emergency departments. After extensive 

consideration and discussion of the 

issues raised and views presented, the 

members of the EMTALA TAG voted to 

recommend to the Secretary that 

hospitals with specialized capabilities 

(as defined in § 489.24(f) of the 

regulation) that do not have a dedicated 

emergency department be bound by the 

same responsibility to accept an 

appropriate transfer under EMTALA as 

hospitals with a dedicated emergency 

department. 

We agree with the EMTALA TAG’s 

assessment. We believe that the 

recommendation is consistent with 

CMS’ current policy and highlights the 

need to clarify CMS’ policy regarding 

hospitals with specialized capabilities. 

Therefore, in the FY 2007 IPPS 

proposed rule (71 FR 24118), we 

proposed to modify the regulations at 

§ 489.24(f) to specifically indicate that 

any participating hospital with 

specialized capabilities or facilities, 

even if it does not have a dedicated 

emergency department, may not refuse 

to accept an appropriate transfer if the 

hospital has the capacity to treat the 

individual. We noted that the proposed 

revision does not reflect any change in 

current CMS policy. We further noted 

that the revision would not require 

hospitals without dedicated emergency 

departments to open dedicated 

emergency departments nor would it 

impose any EMTALA obligations on 

those hospitals with respect to 

individuals who come to the hospital as 

their initial point of entry into the 

medical system seeking a medical 

screening examination or treatment for 

a medical condition. Although the 

proposed revision sought only to clarify, 

rather than change, current policy, we 

nevertheless, solicited comments on 

what effect, if any, commenters believe 

the proposed clarification might have on 

EMTALA compliance and patient health 

and safety. 

Comment: Several commenters 

expressed approval of the proposed 

change to the regulations to clarify that 

hospitals with specialized capabilities 

have an obligation under EMTALA to 

accept appropriate transfers within their 

capabilities whether or not the hospital 

has a dedicated emergency department, 

including all physician-owned limited 

service facilities. 

Response: We appreciate the 

commenters’ support for this change to 

the regulations and have kept their 

remarks in mind while finalizing this 

proposal. 

Comment: Several commenters 

requested that CMS provide additional 

guidance on the definition of 

‘‘specialized capabilities or facilities.’’

Response: We refer these commenters 

to the regulations at § 489.24(f) for a 

partial list of specialized capabilities or 

facilities. These include, but are not 

limited to, burn units, shock-trauma 

units, neonatal intensive care units, and 

certain referral centers. We recognize 

that this list is not exhaustive and 

would include physician-owned limited 

service facilities with special 

capabilities. We also would note that 

the EMTALA TAG is currently 

considering whether the definition of 

‘‘specialized capabilities’’ should be 

further revised. However, no expansion 

of the list of specialized facilities or 

capabilities was specifically proposed in 

the proposed rule published on April 

25, 2006. In view of this fact and in 

consideration of the fact that the 

EMTALA TAG may make 

recommendations relating to this issue, 

we have decided not to make any 

further revision to the list of examples 

noted above. However, we will consider 

carefully any recommendations made by 

the EMTALA TAG on the issue and may 

propose changes in the future. 

Comment: Several commenters asked 

CMS to emphasize that all physicianowned limited service facilities are 

required to maintain adequate on-call 

panels to comply with the Medicare 

hospital conditions of participation. In 

addition, the commenters requested that 

CMS require these hospitals to have 

preexisting transfer agreements with any 

community hospital to which it may 

send patients for emergency services. 

Two commenters suggested that the 

Secretary establish the terms of such 

agreements. The commenters 

recommended three issues to be 


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addressed in the agreements: Procedures 

for an appropriate transfer for patients 

not covered under EMTALA; continuity 

of care; and support for maintaining 

full-time emergency capacity at the 

community hospital, including on-call 

coverage. The commenters also 

requested that CMS require physicians 

who practice at such hospitals to 

participate in on-call panels at the 

community hospitals with which their 

hospital has a transfer agreement. 

Response: While physician-owned 

limited service hospitals certainly are 

required to maintain compliance with 

the hospital conditions of participation, 

those regulations set forth in 42 CFR 

Part 482 do not include an explicit oncall requirement. Thus, we are not 

including a revision in this final rule to 

include the specific change requested by 

the commenter. However, we note that 

the conditions of participation relating 

to a hospital’s governing body at 

§ 482.12(c)(3) requires that all Medicareparticipating hospitals have a doctor of 

medicine or osteopathy either on duty 

or on call at all times. In addition, the 

governing body condition of 

participation and the condition of 

participation for medical staff found at 

§ 482.22 include various other 

requirements that make the hospital 

governing body and medical staff 

accountable for providing adequate 

physician services for hospital patients. 

These requirements also apply to 

physician-owned limited service 

facilities, including those that do not 

operate emergency departments, on the 

same basis as to community and other 

hospitals. 

In general, we believe the comments 

concerning transfer agreements are 

outside the scope of the proposed 

change to the regulations. In addition, 

the terms of transfer agreements 

between hospitals are decided upon by 

the individual hospitals party to the 

agreement. However, we will refer these 

comments to the EMTALA TAG for 

further consideration, and may propose 

some further change in Medicare 

regulations on these topics in the future 

if they are warranted. 

5. Clarification of Reference to ‘‘Referral 

Centers’’

The language of the existing 

regulations at § 489.24(f) duplicates the 

language of section 1867(g) of the Act in 

that it identifies, as an example of a 

hospital with specialized capabilities, 

‘‘(with respect to rural areas) regional 

referral centers identified by the 

Secretary in regulation)’’. Because the 

term ‘‘regional referral centers’’ is not 

used elsewhere in the Medicare 

regulations, it is unclear whether the 

reference is to referral centers as defined 

in 42 CFR 412.96, which must be 

located in rural areas and meet other 

criteria spelled out in that section, or to 

any facilities that are located in rural 

areas and accept patients on referral. To 

maintain consistency in the Medicare 

regulations and avoid confusion as to 

which facilities are considered to have 

specialized capabilities for purposes of 

EMTALA, in the FY 2007 IPPS 

proposed rule (71 FR 24118), we 

proposed to amend § 489.24 by 

clarifying that ‘‘regional referral 

centers’’ are those centers meeting the 

requirements of § 412.96. 

We did not receive any public 

comments on this clarification and, 

therefore, are adopting, as final without 

modification, the amendment to 

§ 489.24 to clarify that ‘‘regional referral 

centers’’ are those centers meeting the 

requirements of § 412.96. 

K. Other Technical Changes 

1. Cross-Reference Correction in 

Regulations on Limitations on 

Beneficiary Charges (§ 412.42) 

In the FY 2007 IPPS proposed rule (71 

Fr 24118), we proposed to amend 

§ 412.42 to correct an obsolete crossreference. Paragraph (d) of § 412.42 

contains a cross-reference to 

‘‘§ 405.310(k).’’ This section was 

redesignated as § 411.15(k) in 1989 (54 

FR 41737, October 11, 1989). We 

proposed to amend paragraph (d) of 

§ 412.42 to delete the obsolete crossreference and insert the correct crossreference. 

We did not receive any public 

comments on this proposed crossreference change and are, therefore, 

adopting it as final. 

2. Cross-Reference Corrections in 

Regulations on Payment Denials Based 

on Admissions and Quality Reviews 

(§ 412.48) 

In the FY 2007 IPPS proposed rule (71 

FR 24118), we proposed to amend 

§ 412.48 to correct an obsolete crossreference. Paragraph (b) of § 412.48 

contains a cross-reference to 

‘‘§§ 405.330 through 405.332’’. Section 

405.330 was redesignated as § 411.400, 

and § 405.332 was redesignated as 

§ 411.402 in 1989 (54 FR 41746, October 

11, 1989). (There was no § 405.331.) We 

proposed to amend paragraph (b) of 

§ 412.48 to delete the obsolete crossreferences and to insert the correct 

cross-references. 

We did not receive any public 

comments on this proposed crossreference change and are, therefore, 

adopting it as final. 

3. Cross-Reference Correction in 

Regulations on Outlier Payments 

(§ 412.84) 

On June 9, 2003, we published a final 

rule in the Federal Register (68 FR 

34494) that amended the portion of the 

hospital IPPS regulations that sets out 

the methodology for determining 

payments for extraordinarily high-cost 

cases (outliers). We changed the 

methodology because we concluded 

that, in certain cases, hospitals were 

dramatically and inappropriately 

increasing charges, thereby inflating 

CCRs, resulting in overestimation of 

these hospitals’ costs per case, a critical 

factor in determining outlier payments. 

As a part of these methodology 

changes, we required that outlier 

payments be reconciled using a 

hospital’s settled cost report for the cost 

reporting year in which the outlier 

discharge occurred. This approach 

meant that there would be some delay 

in computing the final outlier payment. 

To address this issue, we added 

§ 412.84(m), which provided that 

reconciled outlier payments would be 

adjusted to account for the time value of 

any underpayments or overpayments. 

We inadvertently included in 

paragraph (m) of § 412.84 a crossreference to paragraph (h)(3) of § 412.84. 

The cross-reference should be to 

paragraph (i)(4), which sets out the 

requirement for reconciling outlier 

payments when the cost report for the 

year in which the discharge occurred is 

settled. In the FY 2007 IPPS proposed 

rule (71 FR 24118 and 24119), we 

proposed to amend paragraph (m) of 

§ 412.84 to correct the cross-reference to 

read ‘‘paragraph (i)(4)’’ of § 412.84. 

We did not receive any public 

comments on this proposed crossreference change and are, therefore, 

adopting it as final. 

4. Removing References to Two Paper 

Claims Forms 

Section 1862(a)(22) of the Act 

generally requires electronic submission 

of initial Medicare claims requesting 

payment for items and services. Section 

1862(h) of the Act provides for limited 

exceptions when paper claims still may 

be used. Our existing regulations at 42 

CFR 424.32 set out the requirements for 

submitting electronic and paper claims 

for payment, as well as when the 

exceptions apply and paper forms still 

may be used. Our existing regulations at 

paragraph (b) of § 424.32 list six forms 

that are to be used for submitting paper 

claims. 

We have evaluated the use of two of 

these forms, Form CMS–1490U (Request 

for Medicare Payment by Organization) 


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and Form CMS–1491 (Request for 

Medicare Payment—Ambulance). We 

found that these forms have limited use, 

we would incur expensive costs in 

redesigning these forms to comply with 

other reporting requirements, and that 

an alternate form is available to claim 

payments. For these reasons, we intend 

to no longer use these forms. Therefore, 

in the FY 2007 IPPS proposed rule (71 

FR 24119), we proposed to remove the 

references to these forms from 

paragraph (b) of § 424.32. 

Form CMS–1490U is a paper claim 

form used by employers, unions, 

employer-employee organizations that 

pay physicians and suppliers for their 

services to employees, group practice 

prepayment plans, and health 

maintenance organizations. Form CMS–

1490U is used to claim payment from 

carriers for bills already paid by these 

entities. We concluded that this form 

should no longer be used for several 

reasons. It is duplicative of Form CMS–

1500 (Health Insurance Claim Form), 

which also may be used to claim 

payment for these services. We have 

encouraged suppliers to submit their 

paper claims using the Form CMS–1500. 

Unlike Form CMS–1500, Form CMS–

1490U cannot accommodate an 

additional reporting requirement, the 

National Provider Identifier (NPI), 

without an expensive redesign. Finally, 

according to our records, relatively few 

suppliers currently use the form. The 

CMS component that supplies blank 

copies of this form for users reported 

that, between 2002 and 2005, only 2,550 

copies of Form CMS–1490U were 

ordered by carriers. A 2005 survey of 

Part B carriers indicated that requests 

for the form are very low and that 

receipts of the form vary from very few 

to none. 

Form CMS–1491 is a paper claim 

form used by ambulance suppliers to 

apply for payment for ambulance 

services. We concluded that this form 

should no longer be used for several 

reasons. It also is duplicative of Form 

CMS–1500, which also may be used to 

claim payment for ambulance services. 

In addition, we have encouraged 

suppliers to submit their paper 

ambulance claims using the Form CMS–

1500. Unlike Form CMS–1500, Form 

CMS–1491 cannot accommodate the 

NPI without an expensive redesign and 

usage of this form is low. A recent 

survey of carriers, initiated by Joint 

Signature Memorandum RO–2324, 

Request for Information Concerning the 

CMS–1491, issued October 30, 2003, 

from the Centers for Medicare 

Management, was conducted to 

ascertain the usage of Form CMS–1491. 

The results of the survey showed that 

fewer than 2 percent (1.71 percent) of all 

suppliers of ambulance services 

currently use the Form CMS–1491. CMS 

received approximately 240,000 

ambulance claims using Form CMS–

1491 during the period from October 1, 

2002, to September 30, 2003. These data 

were used for the most recent OMB 

renewal under the Paperwork Reduction 

Act. Since the last OMB renewal 

approval in 2001, CMS has printed a 

total of 1,620,000 forms at a cost of 

$42,890. 

We did not receive any public 

comments on our proposal. Therefore, 

we are adopting, as final without 

modification, the proposed removal of 

the references to the identified forms 

from paragraph (b) of § 424.32. 

L. Rural Community Hospital 

Demonstration Program 

In accordance with the requirements 

of section 410A(a) of Pub. L. 108–173, 

the Secretary has established a 5-year 

demonstration program (beginning with 

selected hospitals’ first cost reporting 

period beginning on or after October 1, 

2004) to test the feasibility and 

advisability of establishing ‘‘rural 

community hospitals’’ for Medicare 

payment purposes for covered inpatient 

hospital services furnished to Medicare 

beneficiaries. A rural community 

hospital, as defined in section 

410A(f)(1), 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. 

As we indicated in the FY 2005 IPPS 

final rule (69 FR 49078), in accordance 

with sections 410A(a)(2) and (a)(4) of 

Pub. L.108–173 and using 2002 data 

from the U.S. Census Bureau, we 

identified 10 States with the lowest 

population density from which to select 

hospitals: 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). Nine rural community hospitals 

located within these States are currently 

participating in the demonstration 

program for FY 2007. (Of the 13 

hospitals that participated in the first 2 

years of the demonstration program, 4 

hospitals located in Nebraska have 

withdrawn from the program; they have 

become CAHs.) 

Under the demonstration program, 

participating hospitals are paid the 

reasonable costs of providing covered 

inpatient hospital services (other than 

services furnished by a psychiatric or 

rehabilitation unit of a hospital that is 

a distinct part), applicable for 

discharges occurring in the first cost 

reporting period beginning on or after 

the October 1, 2004, implementation 

date of the demonstration program. 

Payments to the participating hospitals 

will be the lesser amount of the 

reasonable cost or a target amount in 

subsequent cost reporting periods. The 

target amount in the second cost 

reporting period is defined as the 

reasonable costs of providing covered 

inpatient hospital services in the first 

cost reporting period, increased by the 

inpatient prospective payment update 

factor (as defined in section 

1886(b)(3)(B) of the Act) for that 

particular cost reporting period. The 

target amount in subsequent cost 

reporting periods is defined as the 

preceding cost reporting period’s target 

amount, increased by the inpatient 

prospective payment update factor (as 

defined in section 1886(b)(3)(B) of the 

Act) for that particular cost reporting 

period. 

Covered inpatient hospital services 

are inpatient hospital services (defined 

in section 1861(b) of the Act), and 

include extended care services 

furnished under an agreement under 

section 1883 of the Act. 

Section 410A of Pub. L. 108–173 

requires that ‘‘in 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.’’

Generally, when CMS implements 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 providers 

do not exceed the amount that would be 

paid to those same providers in the 

absence of the demonstration program. 

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 


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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 the nine 

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 providers. 

In order to achieve budget neutrality 

for this demonstration program for FY 

2007, we are adjusting the national 

inpatient PPS rates by an amount 

sufficient to account for the added costs 

of this demonstration program. We are 

applying budget neutrality across the 

payment system as a whole rather than 

merely across the participants in this 

demonstration program. As we 

discussed in the FY 2005 and FY 2006 

IPPS final rules (69 FR 49183 and 70 FR 

47462), we believe that the language of 

the statutory budget neutrality 

requirements permits the agency to 

implement the budget neutrality 

provision in this manner. For FY 2007, 

using cost report data for FY 2003, 

adjusted to account for the increased 

estimated costs for the remaining nine 

participating hospitals, we estimate that 

the adjusted amount would be 

$9,197,870. This estimated adjusted 

amount reflects the estimated difference 

between the participating hospitals’

costs and the IPPS payment based on 

data from the hospitals’ cost reports. We 

discuss the payment rate adjustment 

that will be required to ensure the 

budget neutrality of the demonstration 

program for FY 2007 in section II.A.4. 

of the Addendum to this final rule. 

We did not receive any public 

comments on the provisions of the 

demonstration program discussed in the 

proposed rule. 

M. Health Care Information 

Transparency Initiative 

The United States faces a dilemma in 

health care. Although the rate of 

increase in health care spending slowed 

last year, costs are still growing at an 

unsustainable rate. The United States 

spends $1.9 trillion on health care, or 16 

percent of the gross domestic product 

(GDP). By 2015, projections are that 

health care will consume 20 percent of 

the GDP. The Medicare program alone 

consumes 3.4 percent of the GDP; by 

2040, it will consume 8.1 percent of the 

GDP, and by 2070, 14 percent of the 

GDP. 

Part of the reason health care costs are 

rising so quickly is that most consumers 

of health care—the patients—are 

frequently not aware of the actual cost 

of their care. Health insurance shields 

them from the full cost of services, and 

they have only limited information 

about the quality and costs of their care. 

Consequently, consumers do not have 

the incentive or means to carefully shop 

for providers offering the best value. 

Thus, providers of care are not subject 

to the competitive pressures that exist in 

other markets for offering quality 

services at the best possible price. 

Reducing the rate of increase in health 

care prices and avoiding health services 

of little value could help to stem the 

growth in health care spending, and 

potentially translate into fewer 

individuals who are unable to afford 

health insurance. Part of the President’s 

health care agenda is to expand Health 

Savings Accounts (HSAs), which would 

provide consumers with greater 

financial incentives to compare 

providers in terms of price and quality, 

and choose those that offer the best 

value. 

In order to exercise such choices, 

consumers must have accessible and 

useful information on price and quality 

of health care items and services. 

Typically, health care providers do not 

publicly quote or publish their prices. 

Moreover, list prices, or charges, 

generally differ from the actual prices 

negotiated and paid by different health 

plans. Thus, even if consumers were 

financially motivated to shop for the 

best price, it would be very difficult at 

the current time for them to access 

usable information. 

Similarly, individuals have very little 

information available to them about the 

quality of care that they receive. 

Although there are preliminary steps 

underway to rectify that fact, including 

the hospital quality reporting initiative 

in which a significant number of acute 

care hospitals are participating (see 

sections IV.A and IV.B of this 

preamble), those data are nascent and 

consumers lack sufficient information 

on which to base a judgment about 

where to receive care based on quality 

of care. 

For these reasons, in the FY 2007 

IPPS proposed rule (71 FR 24120), we 

announced that the Department intends 

to launch a major health care 

information transparency initiative in 

2006. This effort will build on steps 

already taken by CMS to make quality 

and price information available. For 

example, we currently collect quality 

information and publish it through the 

CMS Hospital Compare Web site, which 

we reference in other parts of this final 

rule. We also make available 

unprecedented information on the 

prices of drugs to beneficiaries in the 

Medicare prescription drug plan for 

each pharmacy in the United States. 

In the FY 2007 IPPS proposed rule, 

we also stated that we intend to take 

further steps to collect and publish 

useful information on quality and cost. 

The Department intends to identify 

several regions in the United States 

where health care costs are high, and 

where there is significant interest in 

reducing health care costs and 

improving health care quality. The 

Department will use its leadership role 

in health care policy to help lead change 

in those areas. 

The Secretary also has significant 

regulatory authority as well. In the FY 

2007 IPPS proposed rule, we solicited 

comments on several proposals that the 

Secretary might adopt to increase the 

transparency of quality and pricing 

information, and how this can be used 

to attenuate the growth in health care 

costs. In addition, we solicited 

comments from the public on additional 

ways that we could use our regulatory 

authority to enhance transparency of 

quality and pricing information. 

In the FY 2007 IPPS proposed rule, 

we addressed several possibilities that 

we believe exist. First, we could publish 

a list of hospital charges either for every 

region of the country or for selected 

regions of the country. In addition, we 

could publish the rates that Medicare 

actually pays to a particular hospital for 

every DRG or for selected DRGs that 

could be adjusted to take into account 

the hospital’s labor market area, 

teaching hospital status, and DSH 

status. Some might argue that 

publishing these payment rates does not 

provide meaningful information to 

consumers because Medicare payment 

rates are not set by the market, but 

rather by a statutory payment formula. 

In addition, providing information on 

hospital payments only does not 

disclose the true cost of an episode of 

care because it would not take into 

account the cost of physician services, 

laboratory tests, and other procedures 

that go along with hospital charges. On 

the other hand, Medicare payment rates 

may provide a helpful benchmark, 

especially for uninsured individuals, to 

determine whether the charges they see 

on a hospital bill bear any relationship 

to what third-party fee-for-service 

payors pay to the hospital. 

A second option would be for the 

Secretary to use his authority to 

establish conditions of participation for 


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hospitals to propose a rule that relates 

to charges for uninsured patients. For 

example, the conditions of participation 

could include a requirement that 

hospitals post their prices and/or post 

their policies regarding discounts or 

other assistance for uninsured patients. 

Yet another alternative to posting 

Medicare DRG payment rates would be 

to make publicly available the total 

Medicare payments for an episode of 

care. For example, one of the most 

common inpatient hospital procedures 

under the Medicare program (based on 

total dollars spent) is hip replacement 

surgery. Under this proposal, we could 

make publicly available the expected 

total payment for an episode of care for 

hip replacement surgery, including the 

inpatient hospital stay, physician 

payments (including the surgeon and 

the anesthesiologist), and payments for 

post-acute care services such as services 

provided in an IRF, SNF, or LTCH. In 

the proposed rule, we indicated that we 

are currently assessing methods for 

making such information available and 

were seeking comments on how to do so 

as quickly and effectively as possible. 

We solicited comment on any ways in 

which the Department can encourage 

transparency in health care quality and 

pricing whether through its leadership 

on voluntary initiatives or through 

regulatory requirements. We also sought 

comment on the Department’s statutory 

authority to impose such requirements. 

We indicated that discussion of 

particular options in the proposed rule 

should not be taken as an indication 

that the Department will adopt any of 

these proposals. Rather, the proposals 

were included to foster comment on 

possible options to promote the aims of 

transparency of quality and pricing 

information and the Department’s 

authority and ability potentially to 

implement these options. We indicated 

that the Department is anxious to 

receive comments on any of these 

proposals, or on other options that may 

be available that the Department could 

adopt either through voluntary 

initiatives or through its regulatory 

authority. 

Thirty-eight commenters made more 

than a hundred specific comments on 

the transparency discussion in the FY 

2007 IPPS proposed rule. We received 

comments from providers, practitioners, 

and their representatives or 

associations, including hospital 

associations, physician associations, 

and organizations representing other 

health care professionals, as well as the 

medical device industry. We also 

received comments from organizations 

that promote quality measures in health 

care, from employers, and from health 

care-related companies. We found these 

comments to be extremely helpful and 

constructive as we seek to promote 

transparency in the health care system. 

Listed below are the eight issue areas 

related to transparency that we 

identified in the comments and which 

generated the greatest number of 

comments: 

• Features of transparency; 

• Types of pricing information; 

• Leadership/stakeholder 

participation; 

• Medicare Conditions of 

Participation; 

• Limited effectiveness of 

transparency efforts to address 

uninsured and safety net providers; 

• Physician-identifiable Medicare 

claims data; 

• Concerns regarding the June 1, 2006 

posting of payment information on the 

30 common elective procedures by DRG; 

and 

• The link between value-based 

purchasing and making the health care 

system more transparent. 

Comment: The majority of 

commenters provided comments on 

what types of transparency features 

would be important to consumers with 

the end goal of providing consumers 

with meaningful, easily accessible 

information for health care decisionmaking. Many commenters suggested 

conducting research on what 

information consumers would want. For 

example, ease of use and ease of access 

to posted price information (which may 

include a web-based tool), common 

definitions and language to describe 

pricing information, and offering 

explanations of the potential sources of 

variation in price are features that 

numerous commenters identified. They 

also noted that the integration of price 

and quality information is critical and 

that price should only be one 

consideration in consumers’ decisionmaking process. Several commenters 

highlighted the importance of a feasible 

approach to implementation, 

specifically highlighting the complexity 

of hospital pricing. One commenter 

noted that physician ownership in 

specialty hospitals should be 

transparent to the public. One 

commenter suggested that transparency 

should promote the continuum of care. 

Finally, several commenters noted that 

promoting the use of health information 

technology as well as further developing 

quality measurements are important 

factors in advancing transparency. 

Response: We agree that it is 

important to understand what 

information beneficiaries want, how 

they use the information, whom 

beneficiaries consult in making 

decisions, and the needs of different 

types of users of information. 

Particularly with regard to Medicare 

beneficiaries—many of whom face 

challenges in accessing and 

understanding information—CMS has 

strived to provide information on 

quality in a way that is accessible and 

meaningful to beneficiaries and to those 

who assist beneficiaries in making 

health care decisions. CMS and AHRQ 

have sponsored research in this area and 

will continue to examine these issues. 

We will continue to improve the webbased tools currently in use (such as 

Hospital Compare and Nursing Home 

Compare), and will continue to explore 

other means of improving our ability to 

disseminate information and means of 

encouraging the use of available 

information. 

We recognize the complexities 

involved in attempting to present 

pricing information in an accurate and 

useful manner that is accessible for the 

intended users. We agree that in making 

health care decisions, consumers must 

have access to both cost and quality 

information and that information must 

be available across the continuum of 

care. Consumers also must have access 

to other types of information that may 

be considered relevant when they are 

making decisions about their health 

care. While CMS has recently begun 

releasing information on Medicare 

payments to hospitals by procedure, and 

we plan to make pricing information 

available for other types of providers 

and practitioners, we recognize that an 

education effort is required to enable the 

best use of pricing information. 

Similarly, from the provider and 

practitioner point of view, there are 

many complexities involved in the 

reporting of information on price and 

quality. We agree that standardizing 

terminology and greater use of health 

information technology would support 

transparency by reducing reporting 

burdens. The ideal is to design a system 

that is feasible and accomplishes its 

intended goals in the most efficient 

manner possible. 

Comment: We received a significant 

number of comments on what types of 

pricing information should be made 

publicly available based on reliable 

claims data. Many commenters 

recommended making both hospital 

charges and out-of-pocket costs 

available, and several commenters 

recommended this as a Federal 

requirement. However, some 

commenters cautioned against using 

hospital charges since they do not 

reflect consumers’ expected costs. 

Commenters noted that it is important 

to help consumers understand that there 


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are price variations that reflect factors 

such as additional payments to fund 

teaching and research missions, caring 

for the under- and uninsured, and other 

costs. Several commenters noted the 

importance of measuring costs and 

quality across settings and over 

appropriate timeframes using evidencebased protocols. One commenter 

recommended displaying CCRs. 

Another commenter recommended 

reporting national average charges for 

certain common procedures. One 

commenter noted that the cost of 

nursing care is not shown as a separate 

cost to patients. One commenter noted 

that costs of supplies and services 

should be transparent as well. With 

regard to possible studies of costs in 

areas of the country where there are 

relatively high health care costs, one 

commenter recommended that a studied 

region be homogenous, but 

heterogeneous outside of the study area. 

Response: As mentioned previously, 

we recognize the complexities involved 

in attempting to present pricing 

information in an accurate and useful 

manner that is accessible for the 

intended users. As also noted above, we 

agree that in making health care 

decisions, consumers must have access 

to both cost and quality information, as 

well as other information that may be 

considered relevant when consumers 

are making decisions about their health 

care. As noted above, while CMS has 

recently begun to release information on 

Medicare payments to hospitals by 

procedure as well as the number of 

procedures performed by the hospital, 

and we plan to make pricing 

information available for other types of 

providers and practitioners, we 

recognize that an education effort is 

required to enable the best use of 

pricing information. Consumers must 

take into account the many factors noted 

by commenters which are components 

of the prices that consumers (or 

insurers) will pay for care. For example, 

consumers may want to know the costs 

of all the services they received in an 

episode-of-care when determining the 

total costs for a course of treatment. 

Similarly, with an episode-of-care 

approach, consumers also may want 

information about the quality of care at 

each point in the continuum of care 

when multiple providers and 

practitioners are involved. 

With regard to beneficiary out-ofpocket costs, the current pricing tools 

available to Medicare beneficiaries—the 

Medicare Personal Plan Finder and the 

tools beneficiaries use in evaluating Part 

D drug plans—are intended to give 

beneficiaries important, accurate 

information about their expected out-ofpocket costs when faced with various 

choices. At the same time, we believe it 

is desirable for consumers to know how 

much their insurer—or the Medicare 

program (and therefore taxpayers)—is 

paying for a person’s care. The cost of 

care to the primary payer should be a 

factor when a person is attempting to 

make judicious decisions about his or 

her health care. 

Comment: A considerable number of 

commenters addressed the importance 

of leadership and stakeholder 

participation in efforts to bring greater 

transparency to the health care system. 

Many commenters noted the success of 

existing public-private partnerships and 

recommended that CMS continue to 

build on these partnerships. Many 

commenters recommended that the 

further expansion of hospital quality 

information should be accomplished 

through the Hospital Quality Alliance. 

Also, commenters noted that the AHRQ 

is best suited to conduct research on 

what consumers want in helping them 

with health care purchasing decisions. 

Several commenters suggested 

collaborative efforts though workshops. 

Several commenters recommended a 

hospital-led effort to create consumerfriendly pricing language. One 

commenter suggested that insurance 

companies are best positioned to be 

advisors to patients and to provide 

information on the expected costs for an 

entire episode of care. One commenter 

supported a hospital-led effort in 

making transparent information 

available to consumers, rather than a 

government-led initiative. 

Response: The views of many of the 

commenters are consistent with CMS’

current practices in the development 

and dissemination of quality measures 

for Medicare beneficiaries, and are 

consistent with our future direction 

with respect to transparency in 

providing price and quality information. 

Many of the tools and measures that 

CMS currently uses in providing 

information on quality have been 

developed through public-private 

collaborations. CMS has used a 

collaborative approach for many years, 

and CMS actively participates in efforts 

such as the Hospital Quality Alliance, 

the Ambulatory Care Quality Alliance, 

the National Committee on Quality 

Assurance, the National Quality Forum, 

and numerous other organizations 

whose mission is to improve the quality 

of health care by making valid, reliable 

information available to providers and 

consumers. In particular, CMS is 

supporting pilot programs in Boston, 

Indianapolis, Minneapolis-St. Paul, 

Wisconsin, Phoenix, and California, in 

conjunction with the Hospital Quality 

Alliance and Ambulatory Care Quality 

Alliance, to identify and implement 

effective ways of providing better 

information on quality and improving 

quality. As the commenters noted, the 

AHRQ is a leader in this arena, and 

CMS will continue to work with AHRQ 

to ensure that there is continuing 

progress in providing information on 

quality. A broad, collaborative approach 

to the development and dissemination 

of information also promotes 

improvement in the usefulness of the 

information and improvement in the 

mechanisms of dissemination. 

As noted above, we agree that it is 

important to understand the information 

needs of Medicare beneficiaries, and we 

will continue to examine that issue as 

it pertains to beneficiaries. As more 

information on quality continues to be 

made available, and as pricing 

information becomes more commonly 

available, we need to understand 

whether the new information and the 

manner in which it is disseminated is 

effectively serving the needs of 

beneficiaries and the needs of other 

individuals and entities that assist 

beneficiaries in their decisionmaking 

processes. 

Comment: Several commenters 

opposed the option which suggested 

that we modify the Medicare conditions 

of participation to require hospitals to 

post price information on assistance 

programs for the uninsured. 

Commenters noted that hospitals 

provide community financial assistance 

to the uninsured in their service areas 

based on local patient demographics 

and the local poverty level. They believe 

that as patient demographics and 

poverty levels vary from community to 

community, so must charity care 

policies. One commenter noted that 

without Congressional action, CMS does 

not have the authority to require 

hospitals to produce price information 

unrelated to Federal program 

beneficiaries. This commenter also 

advocated that CMS allow the current 

hospital pricing marketplace, that 

includes the provision of charity care to 

the uninsured, to continue to operate 

without Federal interference. 

Response: Although we are not 

adopting our proposal to amend the 

Medicare conditions of participation to 

require hospitals to post price 

information, including information on 

assistance programs for the uninsured at 

this time, we have not abandoned the 

idea and may consider it in the future. 

As noted in the FY 2007 IPPS proposed 

rule, we are considering several options 

to achieve greater transparency in the 

health care system. We agree that any 

transparency policy must take into 


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consideration the current programs 

operated by hospitals across the country 

to provide financial assistance to the 

uninsured and the variances in the 

patient demographics that are addressed 

by these programs. However, we believe 

that providing true cost transparency in 

the health care system will require 

making available price information 

across populations through publicprivate collaboratives, such as the AQA 

pilots. We appreciate the current efforts 

of the hospital and insurance industries 

to work with CMS towards greater 

transparency in the health care system. 

Comment: Two commenters suggested 

that pricing transparency will not 

address the problem of the uninsured 

and will have a marginal impact on 

costs. Specifically, the commenters 

argued that the complexity of, and 

variances in, hospital charge structures 

make price comparisons among 

hospitals nearly impossible; and 

therefore posting hospital-specific 

charges will not accomplish CMS’

transparency goals. Rather the 

commenters stated that CMS should 

work with Congress to expand Medicaid 

and other safety net programs. 

Alternatively, the commenters 

supported the expansion of CMS’

current efforts to report national average 

charges for certain common procedures, 

as this information would allow patients 

to encourage their local hospitals to 

align their charges with national 

averages. The commenters also noted 

that for the privately insured, the 

relevant financial information is the 

amount that is the patient’s 

responsibility. 

Response: We believe by increasing 

the transparency of health care costs 

and providing cost and quality 

information to consumers to make 

better-informed health care choices, 

overall costs to the health care system 

should decrease and the quality of care 

will improve. Greater health care 

efficiency is critical for the long-term 

sustainability of the health care system, 

including the ability to deliver care to 

the uninsured population. As we 

continue to develop policies to support 

transparency in the health care system, 

CMS is committed to ensuring that the 

needs of the uninsured population and 

the safety net providers that serve them 

are addressed. 

Comment: Three commenters 

recommended the release of physicianidentifiable Medicare claims data (fully 

protecting patient privacy), to allow for 

better quality and efficiency 

performance reporting. 

Response: Those making this 

comment suggest that releasing 

physician-identifiable Medicare claims 

data to the public would increase the 

scope and breadth of performance 

measures. CMS is firmly committed to 

increasing the scope and breadth of 

performance measures in all settings of 

care in which Medicare patients receive 

care. Specifically, in this regulation, 

CMS is requiring hospitals to report on 

a broader set of quality measures to 

receive the full payment update. We 

agree that physician-identifiable claims 

are an important source of information 

and are evaluating the potential to use 

physician-identifiable Medicare claims 

in this initiative. 

Comment: One commenter noted that 

the June 1, 2006 CMS posting of 

payment information on the 30 common 

elective procedures by diagnosis-related 

group (DRG) does not include 

information on the quality of care 

delivered within each specific DRG. 

Response: We agree that both quality 

and cost information must be used to 

assess the value of health care. We 

disagree with the commenter’s view that 

CMS is not releasing information for 

beneficiaries on both quality and cost on 

the same conditions. Many of the 

patients who would receive care for the 

high-utilization condition for which 

payment information has been posted 

would be the same patients whose care 

would be assessed for Hospital Compare 

quality measures. Further, the HQA 

surgical measures would apply to some 

of the surgical procedures for which 

payment information was posted. Many 

quality measures, such as the Hospital 

Consumer Assessment of Healthcare 

Providers and Systems Survey

(HCAHPS), are not specific to certain 

procedures and may be just as important 

to beneficiaries and other consumers as 

condition-specific clinical measures. 

Other information included in the 

posting, such as how many patients a 

hospital treats for a certain condition, 

also adds to the information that people 

can use to make better decisions on 

their care. 

Comment: Several commenters 

supported the link between value-based 

purchasing and making the health care 

system more transparent. 

Response: We agree that financial 

incentives can be a powerful tool to 

encourage quality improvement. Almost 

all hospitals chose to report and 

improve on certain quality measures 

when Congress determined that 

reporting them should be a condition of 

receiving the full payment update for 

inpatient care. Further, the initial 

results from the Premier Hospital 

Quality Incentive Demonstration show 

that participating hospitals, on average, 

improved on the quality measures upon 

which they were assessed for purposes 

of receiving a payment bonus. In 

addition to these efforts, CMS has 

embarked on a variety of initiatives that 

use public reporting to provide useful 

information to beneficiaries and to 

improve the quality and value of care. 

Payers, beneficiaries, and providers 

share a common interest in having 

consumers make informed health care 

decisions. Providers who deliver high 

quality services at a lower cost than 

others should be given the opportunity 

to be publicly acknowledged for their 

efforts. 

V. Changes to the PPS for CapitalRelated Costs 

A. Background 

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 PPS established 

by the Secretary.’’ Under the statute, the 

Secretary has broad authority in 

establishing and implementing the PPS 

for hospital inpatient capital-related 

costs. We initially implemented the PPS 

for capital-related costs in the August 

30, 1991 IPPS final rule (56 FR 43358), 

in which we established a 10-year 

transition period to change the payment 

methodology for Medicare hospital 

inpatient capital-related costs from a 

reasonable cost-based methodology to a 

prospective methodology (based fully 

on the Federal rate). 

Federal fiscal year (FFY) 2001 was the 

last year of the 10-year transition period 

established to phase in the PPS for 

hospital inpatient capital-related costs. 

For cost reporting periods beginning in 

FY 2002, capital PPS payments are 

based solely on the Federal rate for most 

acute care hospitals (other than certain 

new hospitals and hospitals receiving 

certain exception payments). The basic 

methodology for determining capital 

prospective payments using the Federal 

rate is set forth in § 412.312. For the 

purpose of calculating payments for 

each discharge, the standard Federal 

rate is adjusted as follows: 

(Standard Federal Rate) × (DRG 

Weight) × (Geographic Adjustment 

Factor (GAF)) × (Large Urban Add-on, if 

applicable) × (COLA for hospitals 

located in Alaska and Hawaii) × (1 + 

Capital DSH Adjustment Factor + 

Capital IME Adjustment Factor, if 

applicable). 

Hospitals also may receive outlier 

payments for those cases that qualify 

under the threshold established for each 

fiscal year as specified in § 412.312(c) of 

the regulations. 

The regulations at § 412.348(f) 

provide that a hospital may request an 

additional payment if the hospital 


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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 August 1, 2002 

IPPS final rule (67 FR 50102), we 

revised the regulations at § 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 § 412.348(f) can be 

found in the FY 2005 IPPS final rule (69 

FR 49185 and 49186). 

During the transition period, under 

§§ 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 hospital 

(§ 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, even 

after the transition period, eligible 

hospitals receive additional payments 

under the special exceptions provisions 

at § 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. 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 PPS 

transition period. Hospitals eligible for 

special exceptions payments were 

required to submit documentation to the 

intermediary indicating the completion 

date of their project. (For more detailed 

information regarding the special 

exceptions policy under § 412.348(g), 

refer to the August 1, 2001 IPPS final 

rule (66 FR 39911 through 39914) and 

the August 1, 2002 IPPS final rule (67 

FR 50102).) 

Under the PPS for capital-related 

costs, § 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 

more detailed information, see the 

August 30, 1991 final rule (56 FR 

43418).) During the 10-year transition 

period, a new hospital was exempt from 

the capital PPS 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 

we believe that special protection to 

new hospitals is also appropriate even 

after the transition period, as discussed 

in the August 1, 2002 IPPS final rule (67 

FR 50101), we revised the regulations at 

§ 412.304(c)(2) to provide that, for cost 

reporting periods beginning on or after 

October 1, 2002, a new hospital (defined 

under § 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 fully prospective 

payment based on 100 percent of the 

Federal rate. (Refer to the August 1, 

2001 IPPS final rule (66 FR 39910) for 

a detailed discussion of the statutory 

basis for the system, the development 

and evolution of the system, the 

methodology used to determine capitalrelated payments to hospitals both 

during and after the transition period, 

and the policy for providing exception 

payments.) 

Section 412.374 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 PPS, we 

compute a separate payment rate 

specific to Puerto Rico hospitals using 

the same methodology used to compute 

the national Federal rate for capitalrelated costs. In general, hospitals 

located in Puerto Rico are paid a blend 

of the applicable capital PPS Puerto 

Rico rate and the applicable capital PPS 

Federal rate. 

Prior to FY 1998, hospitals in Puerto 

Rico were paid a blended capital PPS 

rate that consisted of 75 percent of the 

capital PPS Puerto Rico specific rate and 

25 percent of the capital PPS Federal 

rate. However, effective October 1, 1997 

(FY 1998), in conjunction with the 

change to the operating PPS blend 

percentage for Puerto Rico hospitals 

required by section 4406 of Pub. L. 105–

33, we revised the methodology for 

computing capital PPS payments to 

hospitals in Puerto Rico to be based on 

a blend of 50 percent of the capital PPS 

Puerto Rico rate and 50 percent of the 

capital PPS Federal rate. Similarly, in 

conjunction with the change in 

operating PPS payments to hospitals in 

Puerto Rico for FY 2005 required by 

section 504 of Pub. L. 108–173, we again 

revised the methodology for computing 

capital PPS payments to hospitals in 

Puerto Rico to be based on a blend of 

25 percent of the capital PPS Puerto 

Rico rate and 75 percent of the capital 

PPS Federal rate effective for discharges 

occurring on or after October 1, 2004. 

B. Treatment of Certain Urban Hospitals 

Reclassified as Rural Hospitals Under 

§ 412.103 

In the FY 2007 IPPS proposed rule (71 

FR 24122), we proposed technical 

changes to §§ 412.316(b) and 

412.320(a)(1) to clarify that hospitals 

reclassified as rural under § 412.103 are 

not eligible for the large urban add-on 

payment or for the capital DSH 

adjustment. These changes were 

proposed to reflect our historic policy 

that hospitals reclassified as rural under 

§ 412.103 also are considered rural 

under the capital PPS. Since the genesis 

of the capital PPS in FY 1992, the same 

geographic classifications used under 

the operating PPS also have been used 

under the capital PPS. 

These changes and clarifications are 

necessary because we inadvertently 

made an error when we updated our 

capital PPS regulations to incorporate 

OMB’s new CBSA definitions for IPPS 

hospital labor market areas beginning in 

FY 2005. In the FY 2005 IPPS final rule 

(69 FR 49187 through 49188), in order 

to incorporate the new CBSA 

designations and the provisions of the 

newly established § 412.64, which 

incorporated the CBSA-based 

geographic classifications, we revised 

§ 412.316(b) and § 412.320 to specify 

that, effective for discharges occurring 

on or after October 1, 2004, the capital 

PPS payment adjustments are based on 

the geographic classifications under 

§ 412.64. However, § 412.64 does not 

reference the provisions of § 412.103 

regarding the urban-to-rural 

reclassifications, as was previously 

found in § 412.63(b)(1). 

We believe that this error must be 

corrected in order to maintain our 

historic policy for treating urban-torural hospital reclassifications under the 

operating PPS the same for purposes of 

the capital PPS. Therefore, we proposed 

to specify under §§ 412.316(b)(2) and 

(b)(3) and 412.320(a)(1)(ii) and (a)(1)(iii) 

that, for discharges on or after October 

1, 2006, hospitals that are reclassified 

from urban to rural under § 412.103 

would be considered rural. 

We did not receive any public 

comments on our proposal. Therefore, 

we are adopting as final, without 

modification, the proposed changes to 

§§ 412.316(b)(2) and (b)(3) and 

412.320(a)(1)(ii) and (a)(1)(iii) which 

specify that, for discharges on or after 

October 1, 2006, hospitals that are 


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reclassified from urban to rural under 

§ 412.103 would be considered rural. 

C. Other Technical Corrections Relating 

to the Capital PPS Geographic 

Adjustment Factors 

In the FY 2007 IPPS proposed rule (71 

FR 24122) we proposed to make 

technical corrections to the regulations 

under paragraphs (a) and (c) of 

§ 412.316. Specifically, we proposed to 

make a technical change under 

§ 412.316(a) to correct the crossreference to ‘‘§ 412.63(k)’’ to clarify that 

the same wage index that applies to 

hospitals under the operating PPS is 

used to determine the geographic 

adjustment factor (GAF) under the 

capital PPS. We proposed to cross-refer 

instead to subpart D of Part 412 to 

capture the applicable requirements in 

their entirety. 

We did not receive any public 

comments on our proposal. Therefore, 

we are adopting as final without 

modification the proposed technical 

change under § 412.316(a) to correct the 

cross-reference to ‘‘§ 412.63(k)’’ to 

clarify that the same wage index that 

applies to hospitals under the operating 

PPS is used to determine the geographic 

adjustment factor (GAF) under the 

capital PPS. We cross-refer instead to 

subpart D of Part 412 to capture the 

applicable requirements in their 

entirety. This technical correction does 

not change any current payment 

policies because the regulation, as 

written, makes clear that the GAF 

adjustment for local cost variation under 

the capital PPS is based on a hospital’s 

operating PPS wage index value. Thus, 

the same payment policies that are in 

effect prior to FY 2007 (that is, the GAF 

is based on a hospital’s operating PPS 

wage index value) will continue in 

effect for FY 2007 and beyond; the only 

change in the regulation is a correction 

of the erroneous cross-reference. 

In addition, we proposed to make a 

technical correction under § 412.316(c) 

to correct the cross-reference to 

‘‘§ 412.115’’ to clarify that, for hospitals 

located in Alaska and Hawaii, the same 

COLA factor that applies to these 

hospitals under the operating PPS is 

used to determine the COLA factor 

under the capital PPS. The existing 

regulation erroneously references the 

COLA factor used to determine payment 

under § 412.115, which is not related to 

the operating PPS COLA factor or any 

other payment factors. Again, we 

proposed to cross-refer instead to 

subpart D of Part 412 to capture the 

applicable requirements in their 

entirety. 

We did not receive any public 

comments on this proposal. Therefore, 

we are adopting as final, without 

modification, the proposed technical 

correction. This technical correction 

does not change any current payment 

policy; rather it makes clear that the 

capital PPS COLA factor is based on the 

hospital’s COLA factor under the 

operating PPS. This technical correction 

reflects our historic policy that the 

COLA factor under the capital PPS is 

based on the hospital’s operating PPS 

COLA factor, which is how the capital 

PPS COLA factor has been determined 

since the implementation of the capital 

PPS in FY 1992. Thus, the same 

payment policy that has been in effect 

prior to FY 2007 (that is, the use of the 

operating PPS COLA factor as shown in 

the table in section II.B.2 of the 

Addendum of this final rule in 

determining a hospital’s capital PPS 

COLA factor) will continue to be in 

effect for FY 2007 and beyond; the only 

change in the regulation is a correction 

of the erroneous cross-reference. 

VI. Changes for Hospitals and Hospital 

Units Excluded From the IPPS 

A. Payments to Excluded Hospitals and 

Hospital Units (§ 413.40) 

1. Payments to Existing and New 

Excluded Hospitals and Hospital Units 

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 

§ 413.40(a)) was set for each hospital or 

hospital unit based on the hospital’s 

own cost experience in its base year. 

The target amount was multiplied by 

the Medicare discharges and applied as 

an aggregate upper limit (the ceiling as 

defined in § 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). 

Payment for 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 § 403.752(a) of the regulations, 

RNHCIs are also subject to the rate-ofincrease limits established under 

§ 413.40 of the regulations.) For IRFs, 

IPFs, and LTCHs, reasonable cost 

payment provisions changed 

significantly for cost reporting periods 

beginning on or after October 1, 1997. 

Section 1886(b)(3)(H) of the Act 

established caps on the target amounts 

for cost reporting periods beginning on 

or after October 1, 1997, through 

September 30, 2002, for certain existing 

hospitals and hospital units excluded 

from the IPPS. Section 413.40(c)(4)(iii) 

of the implementing regulations states 

that ‘‘In the case of a psychiatric 

hospital or unit, rehabilitation hospital 

or unit, or long-term care hospital, the 

target amount is the lower of amounts 

specified in paragraph (c)(4)(iii)(A) or 

(c)(4)(iii)(B) of this section.’’

Accordingly, in general, for ‘‘existing’’

IPFs, IRFs, or LTCHs for the applicable 

5-year period, the target amount is the 

lower of: The hospital-specific target 

amount (§ 413.40(c)(4)(iii)(A)) or the 

75th percentile cap 

(§ 413.40(c)(4)(iii)(B)). 

For cost reporting periods beginning 

on or after October 1, 2002, all IRFs are 

paid 100 percent of the adjusted Federal 

rate under the IRF PPS. Therefore, an 

IRF, considered ‘‘existing’’ under 

section 1886(b)(3)(H) of the Act would 

have no portion of its payment subject 

to § 413.40(c)(4)(ii) of the regulations for 

cost reporting periods beginning on or 

after October 1, 2002. 

For cost reporting periods beginning 

on or after October 1, 2002, to the extent 

an IPF or LTCH has all or a portion of 

its payment determined under 

reasonable cost principles, the target 

amounts for the reasonable cost-based 

portion of the payment are determined 

in accordance with section 

1886(b)(3)(A)(ii) of the Act and the 

regulations at § 413.40(c)(4)(ii). Section 

413.40(c)(4)(ii) states, ‘‘Subject to the 

provisions of [§ 413.40] paragraph 

(c)(4)(iii) of this section, for subsequent 

cost reporting periods, the target amount 

equals the hospital’s target amount for 

the previous cost reporting period 

increased by the update factor for the 

subject cost reporting period unless the 

provisions of [§ 413.40] paragraph 

(c)(5)(ii) of this section apply.’’ Thus, 

because § 413.40(c)(4)(ii) indicates that 

the provisions of that paragraph are 

subject to the provisions of 

§ 413.40(c)(4)(iii), which are applicable 

only for cost reporting periods 

beginning on or after October 1, 1997, 

through September 30, 2002, the target 

amount for FY 2003 was determined by 

updating the target amount for FY 2002 

by the applicable update factor. For 

example, if a provider was paid the cap 

amount in FY 2002, the target amount 

for FY 2003 would be the amount paid 

in FY 2002, updated to FY 2003 (that is, 

the target amount from the previous 

year increased by the applicable update 


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factor). As discussed below, IRFs, IPFs, 

and LTCHs are now paid under separate 

PPSs, although some are subject to 

transition payment provisions. 

In addition, a new method of 

determining the payment amount for 

‘‘new’’ excluded providers for cost 

reporting periods beginning on or after 

October 1, 1997. Section 413.40(f)(2)(ii) 

of the implementing regulations states 

that, ‘‘* * * the amount of payment for 

a new psychiatric hospital or unit, a 

new rehabilitation hospital or unit, or a 

new long term care hospital that was not 

paid and excluded prior to October 1, 

1997, is the lower of the hospital’s net 

inpatient operating cost per case or 110 

percent of the nation median of the 

target amounts for the class of excluded 

hospitals and units (psychiatric, 

rehabilitation, long-term care) as 

adjusted for the difference in wage 

levels and updated to the first cost 

reporting period in which the hospital 

receives payment. The second cost 

reporting period is subject to the same 

target amount as the first cost reporting 

period.’’ For the third cost reporting 

period, the target amount determined 

for the preceding cost reporting period 

is updated to the third cost reporting 

period. (See § 413.40(c)(4)(v).) 

The 110 percent of the national 

median payment limits for new 

providers under TEFRA 

(§ 413.40(f)(2)(ii)) do not apply to those 

IPFs or LTCHs, whose first cost 

reporting period begins on or after the 

date the particular class of hospitals 

implemented their respective PPS 

because they are paid 100 percent of 

their Federal PPS rate. IRFs are paid 100 

percent of the Federal rate under the IRF 

PPS for cost reporting periods beginning 

on or after October 1, 2002. Therefore, 

the 110 percent of the median payment 

limitations are not applicable to IRFs for 

cost reporting periods beginning on or 

after that date. 

2. Separate PPS for IRFs 

Section 1886(j) of the Act, as added by 

section 4421(a) of Pub. L. 105–33, 

provided for a phase-in of a case-mix 

adjusted PPS for inpatient hospital 

services furnished by IRFs for cost 

reporting periods beginning on or after 

October 1, 2000, and before October 1, 

2002, with payments based entirely on 

the adjusted Federal prospective 

payment for cost reporting periods 

beginning on or after October 1, 2002. 

Section 1886(j) of the Act was amended 

by section 125 of Pub. L. 106–113 to 

require the Secretary to use a discharge 

as the payment unit under the PPS for 

inpatient hospital services furnished by 

IRFs and to establish classes of patient 

discharges by functional-related groups. 

Section 305 of Pub. L. 106–554 further 

amended section 1886(j) of the Act to 

allow IRFs, subject to the blend 

methodology, to elect to be paid the full 

Federal prospective payment rather than 

the transitional period payments 

specified in the Act. 

On August 7, 2001, we issued a final 

rule in the Federal Register (66 FR 

41316) establishing the PPS for IRFs, 

effective for cost reporting periods 

beginning on or after January 1, 2002. 

There was a transition period for cost 

reporting periods beginning on or after 

January 1, 2002, and ending before 

October 1, 2002. For cost reporting 

periods beginning on or after October 1, 

2002, payments are based entirely on 

the adjusted Federal prospective 

payment rate determined under the IRF 

PPS. 

3. Separate PPS for LTCHs 

In accordance with the requirements 

of section 123 of Pub. L. 106–113, as 

modified by section 307(b) of Pub. L. 

106–554, we established a per 

discharge, DRG-based PPS for LTCHs as 

described in section 1886(d)(1)(B)(iv) of 

the Act for cost reporting periods 

beginning on or after October 1, 2002, in 

a final rule issued on August 30, 2002 

(67 FR 55954). The LTCH PPS uses 

information from LTCH hospital patient 

records to classify patients into distinct 

LTC–DRGs based on clinical 

characteristics and expected resource 

needs. Separate payments are calculated 

for each LTC–DRG with additional 

adjustments applied. 

On May 7, 2004, we issued in the 

Federal Register a final rule (69 FR 

25673) that updated the payment rates 

for the LTCH PPS and made policy 

changes effective for a new LTCH PPS 

rate year of July l, 2004 through June 30, 

2005. For the LTCH PPS rate year of July 

1, 2005 through June 30, 2006, we 

issued in the Federal Register a final 

rule (70 FR 24168) that further updated 

the payment rates and made policy 

changes. For the LTCH PPS rate year of 

July 1, 2006 through June 30, 2007, we 

issued in the Federal Register a final 

rule (71 FR 27798) that further updated 

the payment rates, discussed the LTC–

DRG classifications and relative weights 

which remain linked to the inpatient 

DRG system, and made several policy 

changes. The 5-year period for LTCHs to 

transition from a PPS payment 

consisting of a blend of reasonable costbased reimbursement and the adjusted 

Federal prospective payment rate to a 

payment based on 100 percent of the 

Federal prospective rate ends with cost 

reporting periods beginning on or after 

October 1, 2005, and before October 1, 

2006. LTCHs with cost reporting periods 

beginning on or after October 1, 2006, 

are paid entirely on the adjusted Federal 

prospective payment rate. 

4. Separate PPS for IPFs 

In accordance with section 124 of the 

BBRA and section 405(g)(2) of Pub. L. 

108–173, we established a PPS for 

inpatient hospital services furnished in 

IPFs. On November 15, 2004, we issued 

in the Federal Register a final rule (69 

FR 66922) that established the IPF PPS, 

effective for IPF cost reporting periods 

beginning on or after January 1, 2005. 

Under the final rule, we compute a 

Federal per diem base rate to be paid to 

all IPFs for inpatient psychiatric 

services based on 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. The Federal per diem base 

rate is adjusted to reflect certain patient 

characteristics, including age, specified 

DRGs, selected high-cost comorbidities, 

days of the stay, and certain facility 

characteristics, including a wage index 

adjustment, rural location, indirect 

teaching costs, the presence of a fullservice emergency department, and 

COLAs for IPFs located in Alaska and 

Hawaii. We have established a 3-year 

transition period during which IPFs 

whose first cost reporting periods began 

before January 1, 2005, will be paid 

based on a blend of reasonable costbased payment and IPF PPS payments. 

For cost reporting periods beginning on 

or after January 1, 2008, all IPFs will be 

paid 100 percent of the Federal per 

diem payment amount. 

5. Grandfathering of Hospitals-WithinHospitals (HwHs) and Satellite Facilities 

Existing regulations at 42 CFR 

412.22(e) define a hospital-within-ahospital (HwH) as a hospital that 

occupies space in a building also used 

by another hospital, or in one or more 

separate buildings located on the same 

campus as buildings used by another 

hospital. In order to be paid as an 

excluded hospital, an HwH is required 

to demonstrate compliance with 

requirements at § 412.22(e)(1) through 

(e)(3), as applicable, which were 

established to create operational and 

organizational separateness between the 

HwH and the host hospital with which 

it is co-located. 

The existing regulations at 

§ 412.22(h), relating to satellite facilities 

of hospitals excluded from the IPPS, 

define a satellite facility as a part of a 

hospital that provides inpatient services 

in a building also used by another 

hospital, or in one or more entire 

buildings located on the same campus 

as buildings used by another hospital. 


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Section 412.25(e), relating to satellite 

facilities of excluded hospital units, 

defines a satellite facility as a part of a 

hospital unit that provides inpatient 

services in a building also used by 

another hospital, or in one or more 

entire buildings located on the same 

campus as buildings used by another 

hospital. 

There are significant similarities 

between the definition of a satellite 

facility and the definition of an HwH as 

it relates to their co-location with other 

Medicare hospital-level providers 

(hosts). There are also similarities in our 

policy concerns with the potential for 

patient-shifting (and its consequences 

for the Medicare program) between the 

co-located entities and their hosts. 

Regarding HwHs and satellite facilities, 

particularly LTCH HwHs and satellite 

facilities of LTCHs, which were the 

original entities that we regulated 

beginning with FY 1995, we have 

repeatedly expressed our concerns (for 

example, in the FY 2005 IPPS final rule 

(69 FR 49191)) that an HwH’s or a 

satellite facility’s ‘‘configuration could 

result in patient admission, treatment, 

and discharge patterns that are guided 

more by attempts to maximize Medicare 

payments than by patient welfare.’’ (69 

FR 48916 and 49191). We further 

believe that ‘‘the unregulated linking of 

an IPPS hospital and a hospital 

excluded from the IPPS could lead to 

two Medicare payments for what was 

essentially one episode of patient care.’’

(69 FR 48916 and 49191). Therefore, we 

established ‘‘separateness and control’’

criteria to govern these relationships 

with host hospitals, at § 412.22(e) for 

HwHs, and at §§ 412.22(h) and 412.25(e) 

for satellite facilities of excluded 

hospitals and satellite facilities of 

hospital units, respectively. Moreover, 

for HwHs and satellite facilities, we 

provided for the ‘‘grandfathering’’ of 

existing facilities, thereby exempting 

those that were in existence prior to the 

establishment of the ‘‘separateness and 

control’’ requirements from compliance 

with the criteria. At § 412.22(f), we 

provided for the grandfathering of 

HwHs that were in existence on or 

before September 30, 1995, as long as 

the hospital continues to operate under 

the same terms and conditions. We also 

provided for grandfathering HwHs that 

changed the terms and conditions under 

which they operated between 

September 30, 1995 and before October 

1, 2003, but subsequently continued to 

operate under the terms and conditions 

in effect on September 30, 2003. At 

§ 412.22(h)(3) and (h)(4) we 

grandfathered satellite facilities that 

were part of a hospital, that were in 

existence on September 30, 1999, and 

that met certain other conditions. 

Further, at § 412.25(e)(3) and (e)(4), we 

grandfathered satellite facilities that 

were part of a hospital unit, were in 

existence on September 30, 1999, and 

that met certain other conditions. The 

purpose of our grandfathering certain 

existing HwHs and satellites was to 

reflect reliance interests and settled 

expectations that existed on the part of 

these facilities at the time the 

separateness and control requirements 

were created. 

The regulations addressing 

‘‘separateness and control’’ policies for 

each of the above types of entities are 

presently not entirely uniform. This 

situation has arisen, in part, because the 

policies were implemented at different 

times and also because there are 

differences among the types of entities. 

(For example, in the FY 2003 IPPS final 

rule (67 FR 49982 and 50105), we 

included a detailed discussion of the 

‘‘performance of basic functions’’ test 

utilized for HwHs and how this test was 

not applicable to satellite facilities.) 

There are also differences between 

specific features of the grandfathering 

provisions for HwHs and satellite 

facilities, despite the fact that, as noted 

above, the intent of each of the 

grandfathering provisions was the same 

(for HwHs at § 412.22(f), for satellite 

facilities of hospitals at § 412.22(h)(3)(i) 

and (h)(4), and for satellite facilities of 

hospital units at § 412.25(e)(3) and 

(e)(4)). The regulations exempt certain 

HwHs and satellite facilities from 

compliance with the ‘‘separateness and 

control’’ criteria governing the 

relationships with their host hospitals 

as long as they continue to operate 

under the same ‘‘terms and conditions,’’

including the number of beds and 

square footage considered to be part of 

the hospital or satellite facility as of the 

date that they were grandfathered. 

This particular policy was adopted 

because we believed that those entities 

that were designated as grandfathered, 

versus those that were required to meet 

the ‘‘separateness and control’’

requirements, should not be permitted 

to alter their operations from the 

‘‘snapshot in time’’ taken when they 

were grandfathered and thus benefit 

even more from this status. In other 

words, we believed that grandfathered 

facilities received a benefit not enjoyed 

by nongrandfathered facilities—namely, 

they were free from compliance with the 

‘‘separateness and control’’ regulations 

and we did not want to allow these 

entities to realize additional economic 

advantages by expansion that would 

increase their Medicare payments by 

virtue of their grandfathered status. 

Furthermore, it has been our policy that 

if a grandfathered HwH or satellite 

facility of the HwH chooses not to 

operate under the same terms and 

conditions in effect as of its 

grandfathering, it could still be paid 

under the applicable excluded hospital 

payment system if it changed its 

relationship with its host to the extent 

that it has come into compliance with 

the applicable ‘‘separateness and 

control’’ requirements. In addition, our 

rationale for the separateness and 

control requirements (and limiting the 

grandfathering provision) was to 

prevent abusive gaming of the Medicare 

payment system by co-located hospitals. 

Because the underlying rationale for 

the grandfathering policies for both 

HwHs and satellite facilities of HwHs is 

the same, upon review of these various 

provisions, we believe that, where 

appropriate, the grandfathering 

provisions should be consistent. Under 

the authority of section 1871(a)(1) of the 

Act, which authorizes the Secretary to 

prescribe such regulations as may be 

necessary to carry out the 

administration of the Medicare program, 

in the FY 2007 IPPS proposed rule (71 

FR 24124) we proposed the following 

revisions to make the policies 

consistent. We proposed to revise the 

HwH provision at § 412.22(f) to include 

an exception to the requirement that a 

grandfathered HwH be operated under 

the terms and conditions in effect on 

October 1, 2003, that corresponds to the 

existing exceptions for satellite facilities 

of hospitals and for satellite facilities of 

hospital units at § 412.22(h)(4) and 

412.25(e)(4), respectively. (As provided 

in § 412.22(f), the original September 30, 

1995, ‘‘snapshot in time’’ date for 

grandfathered HwHs was extended to 

hospitals that changed the terms and 

conditions under which they operated 

between September 30, 1995, and before 

October 1, 2003, in the FY 2004 IPPS 

final rule (68 FR 45462).) Specifically, 

we proposed a corresponding change to 

the HwH grandfathering provision at 

§ 412.22(f)(3) that would allow for 

increases or decreases in square footage, 

or decreases in the number of beds of 

the HwH that are needed for specific 

circumstances beyond the control of the 

facility. We proposed to specify that 

increases or decreases in square footage 

or decreases in the number of beds that 

are required because of the relocation of 

a facility to permit construction or 

renovation necessary for compliance 

with Federal, State, or local law 

affecting the physical facility or because 

of catastrophic events such as fires, 

floods, earthquakes, or tornadoes. (64 

FR 14535) We also proposed to add a 


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provision for grandfathered hospital 

satellites and satellites of units at 

§ 412.22(h)(5) and § 412.25(e)(5) 

respectively, allowing a decrease in 

square footage or numbers of beds for 

consistency with the proposed 

regulations for grandfathered HwHs at 

§ 412.22(f)(3)(i) and we proposed to 

amend § 412.22(h)(4)(i) to mirror to the 

language in § 412.25(e)(4)(i). 

The comments we received on our 

proposals, and our responses, are set 

forth below. 

Comment: All of the commenters, 

including commenters representing 

grandfathered HwHs, including 

grandfathered LTCHs, children’s 

hospitals, a cancer hospital, and an IRF, 

hospital associations, legislators, and 

industry consultants, endorsed our 

reexamination of the existing 

restrictions on grandfathered HwHs 

changing the ‘‘terms and conditions’’

under which they operate. A number of 

commenters questioned whether or not 

HwHs would lose their grandfathered 

status if they were required by Federal, 

State, or local law, or catastrophic 

events to increase or decrease their 

square footage or to decrease their 

number of beds in ways that did not 

involve relocations of the facilities. Two 

commenters described hypothetical 

situations that could result in a need for 

an increase in square footage for the 

grandfathered HwH such as the 

following: Making necessary repairs to 

the existing physical plant that are now 

governed by building standards 

established by the American Institute of 

Architects (AIA) or the Americans with 

Disabilities Act (ADA) since the facility 

was established (and now required by 

law); compliance with privacy and 

security requirements of the Health 

Insurance Portability and 

Accountability Act of 1996 (HIPAA); or 

meeting fire or safety codes that were 

not in existence when the facility was 

built. The commenters requested that 

CMS clarify its grandfathering policies 

in light of such scenarios. 

Response: We thank the commenters 

for their support for our proposals. After 

reviewing the comments, we agree that 

there are indeed situations not related to 

the relocation of a facility that could 

make it necessary to add or reduce 

square footage, or decrease the number 

of beds in a grandfathered facility. 

Moreover, after consideration of this 

concern and of the comments we 

received on our proposals, and for the 

reasons summarized below, and in 

accordance with our authority in section 

1871(a)(1) of the Act we have decided 

to revise our regulations on 

grandfathering of HwHs, satellites of 

IPPS-excluded hospitals, and satellites 

of IPPS-excluded hospital units to allow 

these facilities more flexibility to adjust 

their square footage upward or 

downward or to decrease their number 

of beds. Specifically, in this final rule, 

for cost reporting periods beginning on 

or after October 1, 2006, we are revising 

the regulations in 

§§ 412.22(f)(3)(applicable to HwHs), 

412.22(h)(4)(applicable to satellites of 

IPPS-excluded hospitals), and 

412.25(e)(4)(applicable to satellites of 

IPPS-excluded units) to allow these 

facilities to increase or decrease the 

square footage of the facility or to 

decrease the number of beds in the 

facility without affecting the facility’s 

grandfathered status. Under the final 

rule, such changes could be undertaken 

for any reason and would not be limited 

to situations involving changes in 

Federal, State, or local laws or 

catastrophic events. Such changes also 

would not be limited to cases in which 

a facility must be relocated. Therefore, 

we have not finalized our proposed 

provisions that specified such 

exceptions for HwHs, and in the case of 

satellites hospitals, we have restored the 

existing terminology of § 412.22(h)(4) 

for cost reporting periods beginning 

before October 1, 2006. This is the case 

because under our finalized policy, 

which is effective for cost periods 

beginning on or after October 1, 2006, as 

discussed in detail below, we are not 

restricting grandfathered HwHs at 

§ 412.22(h)(3) and grandfathered 

satellites at 412.22(h)(5) from increasing 

or decreasing their square footage or 

decreasing their number of beds. As 

discussed elsewhere in these responses, 

even though grandfathered satellite 

units will also be permitted to increase 

or decrease their square footage or 

decrease their number of beds at 

§ 412.25(e), such facilities are subject to 

the existing regulations regarding 

changes in size of excluded units unless 

the change in size is necessitated by 

relocation of the unit to permit 

construction or renovation necessary for 

compliance with a law affecting the 

physical facility or because of 

catastrophic event. 

As noted above, in establishing 

grandfathering provisions generally, we 

intended to protect certain existing 

hospitals and satellite facilities from 

‘‘the potentially adverse impact of 

recent, more specific regulations that we 

now believe to be essential to the goals 

of the Medicare program’’ (68 FR 

45463). However, they were not 

intended to establish a separate class of 

providers. Moreover, it was our 

intention that our ‘‘snapshot in time’’

policy prevented grandfathered entities 

that were advantaged more than their 

nongrandfathered peer facilities as a 

result of their protected status from 

realizing additional benefits by 

changing their ‘‘terms and conditions’’

in ways that could increase their 

Medicare reimbursement. It also helps 

prevent the program abuse associated 

with co-located facilities that may result 

from patient shifting whereby Medicare 

makes two separate payments for what 

is essentially a single episode of care. 

Recently, several grandfathered LTCH 

HwHs and satellite facilities questioned 

whether a decrease in their square 

footage or their number of beds would 

result in negating their grandfathered 

status, because compliance with each of 

the above cited grandfathering 

provisions requires that they continue to 

operate under the same terms and 

conditions, including the number of 

beds and square footage considered to 

be part of the hospital, the satellite 

facility, or the hospital unit in effect on 

the day that the grandfathering policy 

was implemented. We also have been 

urged to modify our policies to allow 

these grandfathered entities to increase 

in square footage and number of beds 

without requiring compliance with the 

‘‘separateness and control’’policies 

discussed above. Clearly, under existing 

regulations, an increase or a decrease in 

square footage or number of beds would 

result in a loss of status as a 

grandfathered HwH or hospital satellite 

facility (unless § 412.22(h)(4) or 

§ 412.25(b)(3) applies) because the 

existing regulations prohibit any change 

in the terms and conditions of 

operation, as described above. 

As stated above, under our broad 

authority in section 1871(a)(1) of the 

Act, we have now decided to revise the 

regulations in §§ 412.22(f) (applicable to 

HwHs), 412.22(h)(4) and (h)(5) 

(applicable to satellites of IPPSexcluded hospitals) and 412.25(e)(4) 

and (e)(5) (applicable to satellites of 

IPPS-excluded units) to allow these 

facilities for cost reporting periods 

beginning on or after October 1, 2006, to 

increase or decrease the square footage 

of the facility or to decrease the number 

of beds in the facility at any time 

without affecting the facility’s 

grandfathered status. 

We made this decision following a 

review of public comments on our 

proposed rule, as summarized below. In 

reaching this decision, we recognize 

that allowing increases in the square 

footage of those grandfathered facilities 

could, in some cases, increase their 

reimbursement under Federal health 

insurance programs administered by 

CMS. For example, any increase in the 

square footage of a grandfathered facility 


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could result in increased operating 

costs. Therefore, an increase in square 

footage in a grandfathered HwH that is 

paid for services to Medicare 

beneficiaries under the TEFRA system 

could lead to an increase in Medicare 

payments. We recognize that this result 

is not fully consistent with our objective 

of not allowing a grandfathered facility 

to make changes that would lead to 

increased costs to the Medicare 

program. However, we believe it is 

necessary to weigh the importance of 

this objective against the need, 

described by many of those whose 

comments are summarized below, for 

hospitals and other grandfathered 

facilities to have the flexibility to 

upgrade their facilities and services to 

incorporate new technology or 

additional services to meet patient 

needs or to comply with applicable new 

laws. After considering these two 

competing objectives in relation to one 

another, we concluded that allowing 

increases in square footage is justified 

even though in a very limited number 

of cases (as explained below), it may 

result in some additional cost to the 

Medicare program. 

We note that with the exception of 

children’s and cancer hospitals, the only 

IPPS-excluded facilities are IRFs, IPFs, 

and LTCHs. The payment 

methodologies applicable to IRFs, IPFs, 

and LTCHs use prospectively 

determined rates, so that payments to an 

individual facility are not affected by 

increases in the square footage of that 

facility. Children’s and cancer hospitals 

are paid through the use of a TEFRA 

system under which increases in the 

square footage of a facility would 

increase the facility’s Medicare 

payments. However, there is only one 

grandfathered cancer HwH and only 

three grandfathered children’s HwHs. 

For this reason, we believe that the total 

Medicare cost increases, if any, will be 

very small. 

Comment: Several commenters 

requested that we establish a policy that 

would enable them to maintain their 

grandfathered status while also being 

permitted to increase square footage to 

accommodate advancements in patient 

care, and improvements in medical 

technology that have evolved since they 

were grandfathered, and that would also 

permit expansion for administrative or 

nonpatient related care activities. The 

comments focused on each facility’s 

need for additional space (square 

footage) which would allow them the 

ability to expand to accommodate 

dialysis, rehabilitation, telemetry, and 

hyperbaric services, isolation areas, and 

additional diagnostic equipment which 

are essential in order to maintain high 

quality patient services. A number of 

commenters also noted that their needs 

for additional space for administrative 

activities, professional instruction, and 

computer hardware had grown since 

they were grandfathered. These 

commenters argued that such 

expansions of square footage are 

essential in order to efficiently deliver 

the highest quality care to Medicare 

beneficiaries and, furthermore, would 

not result in any increased costs to the 

Medicare program. 

Several of the commenters asserted 

that the legislative intent of section 

4417(a) of the BBA of 1997, which 

established grandfathering for those 

LTCH HwHs that were certified to 

participate in the Medicare program on 

or before September 30, 1995, and that 

were co-located with another hospital, 

was to protect these hospitals and not 

limit their functioning. These 

commenters maintained that Congress 

did not intend for a grandfathered HwH 

to lose the ability to participate in the 

Medicare program as a hospital 

excluded from the IPPS if they added 

beds or increased square footage in 

order to better serve Medicare 

beneficiaries. Another commenter stated 

that the issue of how Medicaid 

payments might be impacted by 

grandfathering of certain LTCHs was not 

contemplated by the grandfathering 

provision in the BBA of 1997, and asks 

CMS to clarify the application of the 

HwH rules to an excluded hospital’s 

participation in the Medicaid program. 

Response: When we established the 

basic grandfathering requirements for 

HwHs, we had two objectives. As we 

have noted above, we believed the 

grandfathering provision enacted by 

Congress reflected a legitimate interest 

in protecting certain existing hospitals 

that were co-located with other 

hospitals from ‘‘the potentially adverse 

impact of recent, more specific 

regulations that we now believe to be 

essential to the goals of the Medicare 

program’’ (68 FR 45463). The 

grandfathering provisions are an 

exception to the separateness and 

control requirements that reflect 

reliance interests and settled 

expectations that existed at the time the 

rule was set into place. Grandfathering 

provisions for these facilities allowed 

existing HwHs to continue to be paid 

outside of the IPPS, despite the fact that, 

among other factors, they did not 

demonstrate operational or 

organizational separateness between 

these grandfathered entities and their 

host hospitals. However, the second 

objective was to ensure that these 

entities would not make changes that 

would lead to increased costs to the 

Medicare program or that could 

encourage inappropriate patient shifting 

by co-located hospitals. This particular 

policy was adopted because we believed 

that those entities that were designated 

as grandfathered should not be 

permitted to alter their operations from 

the ‘‘snapshot in time’’ taken when they 

were grandfathered and thus benefit 

even more from this status than those 

facilities that were required to meet the 

‘‘separateness and control’’

requirements. As noted above, an HwH 

could change its terms and conditions 

under which it operates after September 

39, 1995 but before October 1, 2003, 

after which time its terms and 

conditions may not further change. (See 

FY 2004 IPPS final rule (68 FR 45462).) 

In other words, we believed that 

grandfathered facilities received a 

benefit not enjoyed by nongrandfathered 

facilities—namely, they were free from 

compliance with the ‘‘separateness and 

control’’ regulations and we did not 

want to allow these entities to realize 

additional economic advantages by 

expansion that could increase Medicare 

payments by virtue of their 

grandfathered status. 

With respect to section 4417(a) of the 

BBA, we believe its purpose was to 

protect LTCH HwHs that existed prior to 

September 30, 1995, from losing their 

IPPS excluded status because they failed 

to meet the separateness and control 

requirements recently promulgated by 

the Secretary. We do not believe that it 

is reasonable to assume that by creating 

a limited exception for these hospitals, 

Congress was immunizing these 

facilities from any further regulation by 

the Secretary as to their growth and 

financial impact on the Medicare 

program. We do not believe Congress 

was establishing a separate class of 

providers. Furthermore, contrary to 

commenter’s assertions, grandfathered 

facilities continue to remain free to add 

beds or square footage at any time, as 

long as they meet the separation and 

control requirements outlined in these 

regulations. Consequently, it is 

inaccurate to suggest that a 

grandfathered HwH would lose its 

ability to participate in the Medicare 

program as an excluded hospital if it 

increases the number of beds or square 

footage since complying with the 

separateness and control requirements 

remains an option for these facilities. 

In response to the comments stating 

that the issue of Medicaid payments is 

not contemplated by the grandfathering 

provision in the BBA of 1997 and asking 

us to clarify the application of the HwH 

rules to an excluded hospital’s 

participation in the Medicaid program, 

we note that the grandfathering rules’


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impact on the Medicaid payments to a 

hospital, to the extent there is an 

impact, will depend on the particular 

payment methodology adopted by the 

State in its State Medicaid plan. In 

general, if a State pays grandfathered 

HwHs under a predetermined 

prospective rate which is unaffected by 

changes in square footage, then 

individual hospitals would not be 

directly affected by increases or 

decreases in their square footage. By 

contrast, if the State were to pay 

grandfathered HwHs under the TEFRA 

system used by Medicare or under 

another cost-based system, payment 

could be directly affected by changes in 

square footage. With respect to changes 

in the numbers of beds, to the extent a 

hospital seeks to increase its number of 

beds because it is already operating at 

or near its State licensed and Medicarecertified bed capacity, increasing the 

number of beds would lead to a 

proportionate increase in utilization and 

payment. We believe that it is 

appropriate to consider the impact of 

revisions in Medicare policy on the 

Medicaid payment system. 

We continue to believe that it is 

entirely reasonable and appropriate for 

to us regulate the growth of HwHs that 

have been otherwise favored by 

exemptions from the more rigorous 

‘‘separateness and control’’ provisions 

that we have implemented for nongrandfathered co-located providers. We 

also note that the issue here, namely our 

reexamination of our grandfathering 

policies, is an exception to a general 

rule to permit reliance on expectations 

that existed at the time the rule was put 

in place. However, we do understand 

that, in order to provide the highest 

level of patient care, any hospital will 

have to respond to advancements in 

patient care, some of which may involve 

the introduction of new technology 

requiring an increased need for space, 

such as new imaging equipment or the 

installation of a hyperbaric chamber. We 

also understand that a hospital may also 

have reasonable need to create 

additional administrative space for a 

number of reasons, among which are 

instructional space, updated computer 

hardware, and record storage. 

We believe that these commenters 

have presented cogent arguments for our 

reconsideration of the preclusion 

against a grandfathered HwH expanding 

square footage. We have evaluated the 

impact on the Medicare program of 

allowing an increase in square footage 

for grandfathered HwHs and have 

determined that we believe that such a 

policy change will not result in 

additional Medicare payments to those 

grandfathered HwHs that are paid under 

the excluded hospital PPSs (LTCH, IRF, 

and IPF). For those grandfathered HwHs 

that are still reimbursed under the 

TEFRA payment system (that is, certain 

cancer and children’s hospitals) square 

footage is used to allocate certain costs, 

so there may be a corresponding 

increase in Medicare payment for those 

costs. However, we believe (as we 

discuss in greater detail below) that 

because there is only one grandfathered 

cancer HwH and three grandfathered 

children’s HwHs, the increased costs 

will be ‘‘de minimus’’ and we see no 

reason, therefore, to distinguish them 

from other grandfathered HwHs in a 

way that might discourage them from 

making necessary and appropriate 

changes to their facilities that would 

result in increases in their square 

footage. Therefore, we believe the de 

minimus costs to the Medicare program 

associated with increases in square 

footage are outweighed by the benefits 

associated with advancements in 

technology and other patient care 

enhancements that may be achieved 

through changes to hospital facilities 

that concurrently increase the square 

footage of the facilities. Even though it 

is likely that any increase in the square 

footage of a hospital or satellite paid 

under the TEFRA system will increase 

the costs upon which Medicare payment 

is based, certain improvements, such as 

the adoption of new technology or 

modernization of a physical facility, 

may also result in reduced operating 

costs that partially or entirely offset any 

cost increases. 

Therefore, in this final rule, we are 

revising the policy that we proposed at 

§ 412.22(f)(3) to specify that a 

grandfathered HwH may increase or 

decrease its square footage or decrease 

its number of beds, or both, without 

affecting its exception from the 

‘‘separateness and control’’

requirements for HwHs at § 412.22(e). 

However, as explained below, we 

continue to believe that an increase in 

the number of beds, which could have 

a much more significant impact on the 

level of payments to the facility under 

the Medicare programs, is a change to 

the facility that should be a basis for 

terminating its grandfathered status. 

This policy will be effective for cost 

reporting periods beginning on or after 

October 1, 2006. Although we 

considered allowing increases in square 

footage to situations involving new 

technology or new laws affecting 

hospitals’ physical facilities, we 

concluded that such a policy would be 

overly prescriptive and that its 

enforcement would not be cost effective 

in light of the limited increases in 

Medicare spending we expect to result 

from this change. Thus, we have not 

included any provision restricting the 

reasons for which such changes may be 

made. 

In the interest of consistent treatment 

of HwHs, hospital satellite facilities (as 

defined in § 412.22(h)), and satellite 

facilities of units (as defined in section 

412.25(e)(1)), and because similar 

considerations underlie our policies 

with respect to each type of 

grandfathered facility, we are also 

applying this policy to satellites, 

effective for cost reporting periods 

beginning on or after October 1, 2006. 

To accomplish these changes, we are 

revising §§ 412.22(f), 412.22(h), and 

412.25(e) as set forth below. 

In the case of facilities that are 

satellites of IPPS-excluded units, we 

note that there are existing rules in 

§ 412.25(b)(1) and (2) which govern 

changes in the square footage and 

number of beds in an IPPS-excluded 

unit and where applicable, the 

regulations that we are finalizing for the 

increase or decrease in square footage of 

the decrease in number or beds of a 

grandfathered satellite unit will be 

subject to these rules. Section 

412.25(b)(1) permits increases in the 

square footage or number of beds of a 

unit to be made only at the start of a cost 

reporting period. However, as we have 

discussed previously, in these finalized 

revisions of our grandfathering policy, 

while we are allowing for an increase in 

square footage of grandfathered satellite 

units, we are not allowing these 

facilities to increase their number of 

beds. Therefore, we specify in 

§ 412.25(e)(5)(i), a grandfathered unit 

structured as a satellite facility may only 

increase in square footage at the 

beginning of a cost reporting period. 

Further, existing regulations for 

excluded hospitals at § 412.25(b)(2) 

permit reductions in the square footage 

or number of beds of a unit to be made 

only with 30 days’ advance written 

notice to the fiscal intermediary and 

CMS, requires maintenance of sufficient 

information to accurately determine 

costs, and specifies that reductions in 

the number of beds or square footage 

considered to be part of an excluded 

unit made during a cost reporting period 

must remain in effect for the remainder 

of that period. Since our finalized policy 

at § 412.25(e)(5)(i) allows for both 

reductions in square footage or bed 

number for grandfathered satellite units, 

under circumstance other than those 

specified at § 412.25(e)(4) we are 

requiring that any such decreases by 

these facilities be subject to existing 

regulations for units of excluded 

hospitals at 412.25(b)(2). We believe 


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that these requirements are reasonable 

and necessary because changes in the 

square footage or a decrease in the 

number of beds in a satellite of a unit 

may affect the bed size or square footage 

of the facility of which it is a part. We 

believe this requirement is needed to 

avoid confusion and provide for 

equitable and consistent treatment of all 

excluded units. 

However, under existing regulations 

at 412.25(e)(4), a grandfathered satellite 

of a unit would be able to increase or 

decrease its square footage or decrease 

its number of beds at any time, for 

purposes of relocation of the facility to 

permit construction or renovation 

necessary for compliance with changes 

in the law affecting the physical facility, 

or because of catastrophic events. 

Comment: Several commenters stated 

that if the proposed revisions allowing 

for a decrease in square footage, but not 

an increase, were finalized, their 

grandfathered HwHs would face the 

very onerous choice of either not 

making necessary operational or clinical 

improvements to their facilities or of 

having to disrupt longstanding favorable 

relationships with the administration of 

their host hospital. 

Response: As we have stated above, 

under the policy in this final rule, we 

are not attempting to prescribe the 

reasons for which changes in the square 

footage of grandfathered HwHs and 

satellites may be made. We believe this 

approach will give the hospitals and 

satellites the flexibility they need to 

increase or decrease square footage in 

response to technological innovation, 

changes in hospital practice patterns, 

shifts in the types of services required 

by the hospital’s or satellite’s patients, 

and other factors relevant to the 

operation of the facilities, without 

having to alter their historic relationship 

with their host hospital. 

Comment: One commenter stated that 

our proposed regulations indicated a 

new flexibility to our implementation of 

grandfathering rules for HwHs but 

found no logic in why we would allow 

certain changes in ‘‘terms and 

conditions’’ but not others. 

Response: Although we are making 

significant changes to the proposed 

revisions of our grandfathering policy 

for HwHs and satellite facilities in this 

final rule, as noted throughout these 

responses, we believe that the rationale 

underlying our determinations is quite 

apparent. We are permitting 

grandfathered HwHs and satellite 

facilities an increase in square footage 

because we believe that there have been 

significant clinical advances, some of 

which are detailed elsewhere in these 

responses, reasonably requiring a 

hospital to increase its physical space in 

order to accommodate new equipment 

or treatment modalities so that it could 

continue it to offer the highest level of 

medical care to its patients. We could 

also envision circumstances under 

which changing administrative or 

otherwise nonclinical needs could 

require additional space, and we have 

noted that we understand that an 

increase in square footage by those 

HwHs and satellite facilities paid under 

the TEFRA system may result in a de 

minimus increase in Medicare costs. 

However, we do not believe that any of 

these changes require the establishment 

of additional beds. Because the number 

of beds is directly related to hospital 

capacity, adding bed capacity will 

significantly increase costs to the 

Medicare program across all excluded 

providers. This case is unlike that of an 

increase in square footage because 

square footage increases would increase 

Medicare spending only for services of 

those hospitals paid under the TEFRA 

system. By contrast, increasing the bed 

capacity of a grandfathered HwH or unit 

would allow increased utilization not 

only in TEFRA facilities but in HwHs 

and satellites paid under the 

prospective payment systems applicable 

to IRFs, IPFs, and LTCHs. To the extent 

that any of these systems provides a 

higher level of payment for certain 

services than the IPPS, allowing bed 

size increases by grandfathered facilities 

might lead to the shifting of utilization 

from less expensive to more expensive 

settings, thereby inappropriately 

increasing Medicare spending. 

Furthermore, a significant increase in 

the number of beds could dramatically 

alter the size and character of the 

facility, thereby defeating one of the 

primary purposes of grandfathering 

which was, as noted above, to capture 

the ‘‘snapshot in time’’ for the 

grandfathered facility. By allowing 

existing co-located facilities (HwHs or 

satellite facilities) to continue to 

function as they had been, we were 

enabling these facilities to continue to 

function as they were, without having to 

make the organizational and operating 

changes necessary for compliance with 

our separateness and control policies. 

Therefore, in answer to the commenter, 

we believe that our rationale for the 

changes that we are finalizing to the 

grandfathering regulations is apparent. 

We are permitting changes that relate 

directly to the quality of patient care 

and services and we are not allowing 

changes that we believe could 

substantially and inappropriately 

increase costs to the Medicare program. 

In addition, we note that we have never 

adopted a policy that would preclude 

one of these facilities from changing 

other terms and conditions under which 

it operates, including its bed size. We 

would only require that such a facility 

begin to comply with the separateness 

and control requirements. 

Comment: Several hospitals requested 

that we allow them to increase their bed 

numbers. One commenter, a children’s 

hospital, noted that it wanted to 

establish mental health beds for 

children and adolescents. Another 

commenter suggested alternatives to our 

preclusion of increase in bed size for 

grandfathered HwHs: that CMS allow a 

‘‘modest’’ increase in beds equivalent to 

those permitted during the 18-month 

moratorium established by Congress in 

section 507 of Pub. L. 108–173 for 

physician-owned specialty hospitals or 

if the grandfathered HwH admitted a 

‘‘de minimus’’ percentage (for example, 

10 percent or less) of patients from its 

host. This commenter and one other 

commenter, a grandfathered LTCH colocated with an IRF from which the 

commenter stated that the LTCH 

receives a minimum of admissions, 

suggested that CMS establish another 

exemption from the bed size increase 

preclusion of the grandfathering 

regulations if the inpatient facility with 

which the grandfathered HwH is colocated is not an acute care hospital, but 

rather is an IRF or an IPF or if the HwH 

is located on a campus of the host acute 

care hospital but is not physically colocated with an acute care hospital. The 

commenters believed that this particular 

exemption is reasonable because, in the 

view of the commenter, our most 

significant concern regarding HwHs is 

inappropriate shifting of patients from a 

host acute care hospital to a LTCH 

HwH. 

Response: In considering these 

comments, we believe it is important to 

recall that grandfathered HwHs, as well 

as satellite facilities, are organized and 

operated in ways that make them unable 

to meet the minimal tests of 

separateness and control applicable to 

nongrandfathered facilities, so that they 

effectively function as units of their host 

facilities. Because of this, we continue 

to believe that, in grandfathering HwHs 

and satellites facilities, we have 

conferred a significant advantage on 

them as compared to like facilities that 

are required to meet our ‘‘separateness 

and control’’ requirements and are 

closely monitored. Therefore, although 

we are finalizing regulations that will 

allow grandfathered HwHs and satellite 

facilities the ability to increase their 

square footage, we are not allowing 

grandfathered facilities an increase in 

the number of beds because such an 


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increase would result in unjustifiable 

additional payments to the 

grandfathered HwH and inappropriate 

additional costs to the Medicare 

program. 

With respect to the childrens’ hospital 

that indicated that it wanted to be able 

to add additional beds to its hospital in 

order to establish mental health beds for 

children and adolescents, we note the 

following. First, grandfathered HwHs 

are not precluded from increasing the 

number of beds, and in fact, they may 

do so at any time, so long as they 

comply with the separateness and 

control requirements. In addition, the 

fiscal intermediary for the grandfathered 

childrens’ HwHs that commented on 

this issue has indicated that based upon 

the hospital’s average inpatient census 

figures, there appear to be sufficient 

beds available at the hospital to 

establish inpatient mental health 

services for children and adolescents 

without adding additional beds. 

In response to the commenter’s 

suggestions of either allowing a 

‘‘modest’’ increase in bed numbers 

equivalent to that permitted for 

physician-owned specialty hospitals 

under Pub. L. 108–173 or of 10 percent, 

or allowing an increase in bed numbers 

if the grandfathered HwH was only 

admitting a ‘‘de minimus’’ percentage of 

patients from its host, we do not believe 

that allowing any increase in the 

number of beds for a grandfathered 

HwH is either necessary or appropriate. 

We also do not believe that it is 

appropriate to establish a distinction 

between grandfathered HwHs 

depending upon the hospital category of 

the host, as did the commenters 

referring to a LTCH HwH that is colocated with an IRF. Nor do we believe 

that it would be appropriate to broaden 

this commenter’s suggested exemption 

to grandfathered HwHs that are on the 

campus of an acute care hospital but are 

physically co-located with IRFs or IPFs. 

Our intent in establishing the 

grandfathering provisions for HwHs and 

satellite facilities was never to establish 

separate classes of grandfathered 

providers. Rather, it was to protect 

settled expectations that existed at the 

time that the grandfathering rules were 

put in place. In addition, in each of 

these configurations, an increase in bed 

size could result in a significant 

increase in Medicare utilization and 

payment and given the close integration 

between a grandfathered HwH or 

satellite and its host hospital, we believe 

the potential for inappropriate Medicare 

spending increases exists. 

As discussed above, although the 

original ‘‘separateness and control’’

regulations focused on the particular 

configuration of an acute care host being 

paid under the IPPS and a LTCH being 

paid under the TEFRA system (59 FR 

45389 through 45393), the regulations 

were extended for FY 1998 (62 FR 

46014) to include all hospitals excluded 

from the IPPS and not just those that 

were co-located with an acute care 

hospital. (In the FY 1999 IPPS final rule, 

among other rules, we established 

‘‘separateness and control’’

requirements for satellites (65 FR 41532 

through 41535)). Thus, contrary to the 

commenter’s assertion, our concern 

with HwHs is not limited to an acute 

care hospital co-located with a LTCH 

HwH.). Despite the fact that the LTCH 

HwH commenter received very few 

patients from its host IRF, we do not 

believe that the behavior of one 

grandfathered HwH can be generalized 

to indicate the behavior of an entire 

LTCH industry or the behavior of all 

grandfathered facilities. Although we 

endorse the behavior that the 

commenter describes, we do not believe 

that it is necessary or appropriate to 

establish an additional exemption that 

would allow a grandfathered HwH that 

is already advantaged by not having to 

comply with ‘‘separateness and control’’

regulations to expand its number of 

beds solely because it is not ‘‘gaming’’

the system but rather it is functioning 

within accepted Medicare policies and 

procedures. 

Comment: One commenter asked us 

to clarify whether CMS would permit a 

grandfathered HwH that reduced its size 

and bed number from the number that 

it had at the time at which it had been 

grandfathered to return to that original 

size and bed number at a future time 

without threatening its grandfathered 

status. A number of commenters asked 

CMS to specify that grandfathered 

HwHs would be able to add or 

discontinue direct patient care services 

in the same manner as any other 

hospital and whether the scope and 

amount of those services would be 

limited to those that were in place when 

the HwH was grandfathered. 

Specifically, commenters asked whether 

a grandfathered HwH could provide 

outpatient services or establish provider 

based services. 

Response: After considering the 

question raised by the first commenter, 

we have decided to adopt a policy 

under which a grandfathered HwH that 

reduced its bed number from the point 

at which it had been grandfathered 

would be permitted to return at a future 

time to the number of Medicare-certified 

beds that existed at the time it was 

grandfathered, as governed either by 

§ 412.22(f)(1) or (f)(2), without 

threatening its grandfathered status. 

Specifically, we are revising 

§ 412.22(f)(3) to provide that if a 

hospital decreases its number of beds 

below the number of beds considered to 

be part of the hospital on September 30, 

1995, it may subsequently increase the 

number of beds at any time as long as 

the resulting total number of beds 

considered to be part of the hospital 

does not exceed the number in effect on 

September 30, 1995 (for hospitals that 

continue to operate under the same 

terms and conditions in effect on that 

date, as described in § 412.22(f)(1)) or 

the number in effect on September 30, 

2003, as described in § 412.22(f)(1) (for 

hospitals that changed the terms and 

conditions under which they operated 

after September 30, 1995 but before 

October 1, 2003), as described in 

§ 412.22(f)(2). We are including similar 

changes in § 412.22(h)(4) (applicable to 

satellites of IPPS-excluded hospitals) 

and § 412.25(h)(4) (applicable to 

satellites of IPPS-excluded units). We 

believe this policy is consistent with our 

stated intent to allow hospitals that 

were in existence prior to the 

implementation of the HwH or the 

satellite rules to continue to operate 

under the same terms and conditions 

they had operated under at the time 

those provisions were implemented. 

Allowing a hospital that had decreased 

its number of beds below the number it 

had as of the date of the implementation 

of the HwH and satellite provisions to 

increase its number of beds up to the 

level it had on the implementation date, 

allows the hospital to maintain its 

original ‘‘terms and conditions’’. These 

changes, like the rest of our revisions to 

sections 412.22 and 412.25, will be 

effective for cost reporting periods 

beginning on or after October 1, 2006. 

In response to the question as to 

whether a grandfathered HwH could 

provide outpatient services or establish 

provider-based services, we wish to note 

that the statutory provisions of section 

1886(d)(1)(B) of the Act govern 

Medicare payment for inpatient hospital 

services of hospitals and units that are 

excluded from the IPPS. Our HwH 

regulations at § 412.22 address the 

relationship between an inpatient acute 

care hospital payable under the IPPS 

and an inpatient hospital that is 

excluded from the IPPS that are colocated. For this reason, our HwH 

regulations, including the exemption for 

grandfathered facilities, only address 

space used for inpatient services and 

this would also be true for satellite 

facilities. As has always been the case, 

an HwH or satellite facility would be 

able to discontinue or to initiate 

noninpatient services, including onsite 


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or offsite outpatient hospital services 

without compromising its grandfathered 

status. Such changes in scope of 

outpatient services or the establishment 

of provider-based departments would of 

course have to be done in compliance 

with other applicable regulations, such 

as 42 CFR 413.65 governing providerbased status for facilities or 

organizations. 

Comment: Several commenters urged 

CMS to make an exception for 

grandfathered children’s hospitals and 

allow them to expand square footage 

and also bed numbers without any 

deleterious impact on their status as 

hospitals certified by Medicare as 

exempt from the IPPS. The commenters 

noted that there are only three 

grandfathered children’s hospitals. One 

commenter emphasized that, as opposed 

to other excluded HwHs, children’s 

hospitals do not serve a Medicare 

population, because very few 

beneficiaries are children. Therefore, 

any expansion that CMS allows for the 

three grandfathered facilities would not 

lead to increased Medicare costs. 

Although these HwHs do not treat a 

significant number of Medicare 

beneficiaries, however, the commenters 

emphasize that loss of the Medicare 

exclusion from the IPPS would have a 

significant and negative impact on their 

Medicaid reimbursements as well as on 

their ability to receive funds to train 

residents under the Federal CHGME. 

The commenters believed that, despite 

the fact that each of the children’s 

hospitals are major Medicaid providers, 

the number of beds in a facility has no 

bearing on whether or not a patient is 

deemed Medicaid eligible. Furthermore, 

they added, since Federal funding for 

State Medicaid disproportionate share 

hospital payments is capped, if these 

hospitals are allowed to grow, such 

growth would not cause the Federal 

portion of Medicaid to exceed the caps. 

The commenters claimed that there is 

no benefit to Medicare from applying 

the prohibition against growth or 

increase in bed numbers to children’s 

hospitals; rather, they believe that there 

would be significant harm to these 

hospitals and to their community if they 

had to choose one of the three 

alternatives open to them: not 

expanding to serve their communities; 

losing their Medicare IPPS-exempt 

status; or altering their administrative 

and medical governance with regard to 

their co-located hospital, which would 

pose significant legal, operational, and 

financial barriers. 

This commenter further asserted that 

the three reasons why CMS has 

established special regulations for 

grandfathered HwHs are not germane for 

children’s hospitals, that is, ‘‘to prevent 

proliferation of LTCHs that function as 

units of host acute care hospitals; to 

prevent the avoidance of TEFRA target 

rates; and to avoid two Medicare 

payments for one episode of care.’’ The 

commenter also asserted the following 

points: there is no proliferation of 

children’s hospitals; children are 

admitted directly to their facilities and 

do not spend time in the acute care 

hospital, so there are no issues about 

two hospital payments for one spell of 

illness; and the three grandfathered 

children’s HwHs have not reorganized 

since they were established at least 30 

years ago, long before this category was 

recognized for payment purposes by 

CMS. 

Some commenters stated that CMS 

has established a precedent of treating 

children’s hospitals differently from 

other excluded hospital types in 

establishing our regulations at 

§ 412.22(i), which exempted children’s 

hospitals from the general policy that 

disallowed excluded hospitals with 

satellite facilities that were in existence 

prior to October 1, 1997, from 

expanding their total bed numbers (the 

sum of the beds in the hospital and the 

satellite) beyond the number that they 

had on October 1, 1997. These 

commenters further maintained that 

CMS has stated that it believes that the 

grandfathering regulations for satellite 

regulations and grandfathering 

regulations for HwHs should be 

consistent and that, specifically, the 

satellite regulations at § 412.22(h)(2)(i) 

exempt children’s hospitals from the 

limitation on bed number expansion to 

which other excluded hospital satellites 

are subject. Therefore, the commenter 

requested that CMS provide the same 

exception for grandfathered children’s 

HwH and allow expansion in the 

number of beds without compromising 

their grandfathered status. 

Response: The commenters have 

urged us to establish a policy that would 

distinguish grandfathered children’s 

HwHs from the other categories of 

grandfathered HwHs and allow them to 

expand both in square footage and in 

number of beds. We understand the 

commenters’ statements that, although 

the facilities do not serve a significant 

Medicare population and hence there 

would be little or no additional costs to 

the Medicare program should they be 

permitted to expand, their continued 

status as hospitals excluded from the 

IPPS under Medicare is important to 

them because it might enhance their 

ability to obtain higher Medicaid 

payment or more for CHGME. 

As we have noted above, we are 

finalizing a policy for all grandfathered 

excluded HwHs that would allow them 

to increase or decrease their square 

footage without compromising their 

status of IPPS-excluded hospitals or 

their grandfathered status and this 

policy would also be applicable to the 

three grandfathered children’s HwHs. 

We are making this change because we 

believe that the commenters have 

presented cogent arguments regarding 

their facility’s need to physically 

expand in order to accommodate new 

medical equipment and services as well 

as to meet new administrative needs in 

order to continue to deliver high quality 

medical care. However, we have stated 

that we are not allowing grandfathered 

HwHs to increase their number of beds 

without compromising their 

grandfathered status. The commenters 

claimed that children’s HwHs treat few 

Medicare beneficiaries, and therefore 

there would be no significant additional 

costs to the Medicare system should 

they be allowed to increase their bed 

numbers. Because a change allowing 

children’s HwHs to keep grandfathered 

status while increasing their number of 

beds would not significantly increase 

Medicare spending but would increase 

Medicaid payments to the hospitals, 

these hospitals recommend that such a 

change be made. 

We considered this comment 

carefully but do not find it persuasive. 

As stated above, a key objective of 

revising our HwH and satellite 

grandfathering regulations is to provide 

a high degree of uniformity and 

consistency for all grandfathered IPPSexcluded facilities. We do not believe it 

would be consistent with this objective 

if we were to single out a particular type 

of excluded facility for special, more 

favorable treatment simply because the 

patient population treated by the 

hospital typically includes very few 

Medicare patients. (In addition, even 

though Medicare payment amounts 

might not increase in this circumstance, 

we find it important to maintain a high 

level of credibility in the Medicare 

system because it is typically used as a 

reference for Medicaid payments.) We 

also do not believe the absence of 

adverse Medicare cost impact is a 

sufficient reason for making a change to 

national Medicare policy solely in order 

to increase Medicaid payments to a 

select class of hospitals. In this context, 

we note under Medicaid, the States are 

not bound to follow Medicare payment 

rules for children’s hospitals, but 

instead have considerable flexibility to 

modify their individual State plans to 

provide the level of payments for 

services that will best meet the needs of 

Medicaid recipients in the particular 


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State. To the extent additional payment 

under Medicaid is appropriate in a 

State, we believe provision for it should 

be made through the State Medicaid 

plan rather than by a national Medicare 

change affecting all States. Moreover, as 

we have noted, our data reveal that the 

there presently is no shortage of bed 

capacity for the three grandfathered 

children’s HwHs, but that, on the 

contrary, all three are operating below 

the licensed bed capacity under State 

law. Thus, it appears that the current 

number of beds in these hospitals is 

adequate. Further, we wish to 

emphasize that grandfathered facilities 

remain free at any time to increase their 

number of beds so long as the applicable 

separateness and control regulations are 

met. 

In regard to the comment that CMS 

should allow grandfathered children’s 

HwHs to increase their bed size without 

losing their grandfathered status 

because CMS has established a 

precedent for special treatment of 

children’s hospitals through the 

regulations at § 412.22(h)(2)(i), which 

exempt children’s hospitals from the 

satellite restrictions applicable to 

certain other types of IPPS-excluded 

hospitals, we believe this comment 

reflects a misunderstanding of the scope 

and purpose of § 412.22(h)(2)(i). 

To respond fully to this comment, it 

will be necessary to review the 

background of § 412.22(h)(2)(i). Under 

the BBA of 1997, certain types of 

hospitals and hospital units which were 

first excluded from the IPPS for a cost 

reporting period beginning on or after 

October 1, 1997 were paid under lower 

TEFRA ceilings than hospitals and units 

that were excluded from the IPPS for a 

cost reporting period beginning before 

that date (64 FR 41533). Following 

enactment of this provision, CMS 

became aware of some interest by 

existing hospitals in establishing 

satellite units in new locations that 

would function in much the same way 

as new hospitals, but would qualify for 

payment under the higher TEFRA 

ceilings applicable to previouslyexcluded hospitals. To prevent satellite 

facilities of this type from being used to 

circumvent the BBA provision, we 

added new regulatory requirements, in 

§ 412.22(h)(2)(i). Under those 

requirements, an IPPS-excluded 

hospital’s number of beds, including 

both beds at the main campus and beds 

at any satellite locations, could not 

exceed the hospital’s number of beds on 

the last day of its last cost reporting 

period beginning before October 1, 

1997. As noted earlier, the lower TEFRA 

ceilings imposed by the BBA applied 

only to certain types of hospitals, 

specifically long-term care, psychiatric, 

and rehabilitation hospitals. They did 

not apply to children’s hospitals. In 

determining the scope of section 

412.22(h)(2)(i), therefore, we decided 

not to impose the satellite restrictions 

on children’s hospitals because those 

new children’s hospitals were not 

subject to the new, lower TEFRA 

ceilings and therefore would have no 

incentive to attempt to evade them. 

In other words, the inapplicability of 

§ 412.22(h)(2)(i) to children’s hospitals 

does not reflect any decision by CMS to 

provide special, favorable treatment for 

children’s hospitals by excluding them 

from a restriction that would otherwise 

apply to them. On the contrary, it 

simply reflects a policy decision by 

CMS that a regulation designed to 

prevent a particular abusive practice 

should not be applied to those hospitals 

that would not have an incentive to 

engage in that practice. 

(Although not raised by any 

commenter, a question might arise as to 

why CMS did not exempt cancer 

hospitals from the bed size restriction 

since they, like children’s hospitals, 

were not subject to the lower TEFRA 

ceilings imposed by the BBA. The 

legislative provision under which 

cancer hospitals are excluded from the 

IPPS at section 1886(d)(1)(B)(v)(I), (II) 

and (III)] limits cancer hospital status to 

those specified hospitals. These 

provisions effectively prevent the 

recognition of new cancer hospitals. We 

were concerned that this provision 

might create an incentive for the 

opening of new satellites in an attempt 

to circumvent the restriction inherent in 

the legislative provision, which would 

be an abusive practice of the same type 

as using satellites to evade the BBA 

provisions. To counter the incentive 

that might exist for such a practice, 

cancer hospitals have not been excluded 

from the scope of § 412.22(h)(2)(i).) 

We also would address the 

commenter’s specific assertions that 

children’s hospitals should not be 

subject to general restrictions on growth 

that we have established for 

grandfathered HwHs and satellite 

facilities because of the following 

reasons: there is no proliferation of 

children’s hospitals; children are 

admitted directly to their facilities and 

do not spend time in acute care 

hospitals; the three grandfathered 

children’s HwHs have not reorganized 

since they were established at least 30 

years ago, long before this category was 

established for payment purposes by 

CMS. Although these assertions may be 

accurate, we do not believe that they are 

germane to the issue of the revisions of 

the regulations for grandfathered HwHs 

and satellite. 

In this final rule, we are finalizing 

policies that revise the preclusion on 

changing ‘‘terms and conditions’’ and 

will allow grandfathered HwHs and 

satellite facilities to decrease their 

square footage or bed numbers and also 

to increase their square footage. As 

discussed above, expansion in square 

footage of the three grandfathered 

children’s HwHs, could result in 

increased costs to the Medicare 

program, since children’s hospitals are 

paid for under the TEFRA system. We 

have determined, however, that the 

increased costs will be ‘‘de minimus’’

and we believe that such costs to the 

Medicare program associated with 

increases in square footage are 

outweighed by the benefits associated 

with advancements in technology and 

other patient care enhancements that 

may be achieved through changes to 

hospital facilities that concurrently 

increase the square footage of the 

facilities. 

Comment: One commenter 

representing a cancer hospital, which 

the commenter identifies as the only 

grandfathered hospital in this provider 

category, stated that limiting the growth 

of this cancer hospital is inequitable and 

punitive since it is the only cancer 

hospital being affected. The commenter 

stated that the regulatory criteria have 

ensured that there will be no future 

hospitals in this category developed 

and, therefore, our concerns about the 

negative impact of HwH growth on the 

Medicare system has no policy rationale 

in this case. The commenter urged CMS 

to exempt this cancer hospital from the 

growth restrictions for grandfathered 

HwHs. 

Response: We do not agree that the 

grandfathering provision for HwHs in 

existence before September 30, 1995, is 

‘‘inequitable or punitive.’’ Although we 

understand that the specific statutory 

provision at section 1886(d)(1)(B)(v) of 

the Act and the regulatory criteria at 

§ 412.23(f) make it unlikely that there 

will be additional cancer HwHs 

established, we reiterate that our 

grandfathering policy for HwHs was not 

established in order to limit HwH 

growth. Our goal, as noted above, was 

to enable hospitals excluded from the 

IPPS that were co-located prior to the 

recognition of HwHs as an entity to 

continue in their present arrangement 

with their ‘‘host’’ hospital without 

having to comply with the regulatory 

framework that we were establishing for 

HwHs. Because we were giving these 

hospitals a significant advantage, we 

believe that it was reasonable and 

equitable to put restrictions on their 


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growth unless they elected to comply 

with the HwH regulations at § 412.22(e). 

As we have indicated previously, 

grandfathered facilities remain free at 

any time to increase their beds so long 

as they comply with separateness and 

control requirements. 

Based on our reconsideration of our 

proposed policy, at this time we are 

finalizing regulations at § 412.22(f)(3) 

that allow grandfathered HwHs to 

increase in square footage because we 

believe that there have been significant 

clinical advances, some of which are 

detailed elsewhere in these responses, 

reasonably requiring a hospital to 

physically expand in order to 

accommodate new equipment or 

treatment modalities that would enable 

it to continue to offer the highest level 

medical care to its patients. We could 

also envision that circumstances under 

which changing administrative or 

otherwise non-clinical needs could 

require additional space. However, we 

emphasize that we do not believe that 

any of these changes require the 

establishment of additional beds. 

Therefore, although the commenter’s 

hospital will be permitted to increase its 

square footage, we are not establishing 

an exemption for a grandfathered cancer 

HwH from the limitation on increasing 

the number of beds. 

After consideration of the public 

comments received, we are revising 

§ 412.22(f)(3) and (h)(5) and 

§ 412.25(c)(4) of the regulations to state 

that grandfathered HwHs and satellites 

will be permitted to decrease their 

square footage or number of beds, or 

both or increase their square footage 

without compromising their 

grandfathered status. This policy is 

effective for cost reporting periods 

beginning on or after October 1, 2006. 

Because grandfathered HwHs or 

grandfathered satellite facilities may be 

co-located with an acute care hospital or 

may be co-located with another 

excluded hospital (69 FR 49198), we 

want to emphasize that under our policy 

revisions described above, where the 

HwH or satellite facility decreases its 

number of beds or square footage, there 

could be an impact on the host hospital 

if the hospital is also a PPS-exempt 

hospital and is also exempted because 

of grandfathering from compliance with 

the ‘‘separateness and control’’

requirements. (Because excluded 

hospitals are prohibited from having 

excluded hospital units under 

§ 412.25(a)(1)(ii), this discussion is 

limited to HwHs and satellite facilities 

of hospitals.) For example, if 

grandfathered HwH ‘‘A’’ is co-located 

with another hospital excluded from the 

IPPS, hospital ‘‘B’’ (which is a 

rehabilitation hospital), a decrease in 

the number of beds in hospital ‘‘A’’

could impact the grandfathered status of 

hospital ‘‘B’’ if hospital ‘‘B’’ absorbed 

the extra beds. In such a case, if the 

determination were made that hospital 

‘‘B’’ would expand, in order to maintain 

status as an excluded hospital, hospital 

‘‘B’’ would then have to meet the 

applicable ‘‘separateness and control’’

requirements at § 412.22(e). 

6. Changes to the Methodology for 

Determining LTCH Cost-to-Charge 

Ratios (CCRs) and the Reconciliation of 

High-Cost and Short-Stay Outlier 

Payments under the LTCH PPS 

a. Background 

In the June 9, 2003 IPPS high-cost 

outlier final rule (68 FR 34498), we 

made revisions to our policies 

concerning the determination of LTCHs’

CCRs and the reconciliation of high-cost 

and short-stay outlier payments under 

the LTCH PPS. As we stated in that final 

rule, (68 FR 34507), because the LTCH 

PPS high-cost outlier and short-stay 

outlier policies are modeled after the 

IPPS outlier policy, we believe they are 

susceptible to the same payment 

vulnerabilities and, therefore, merited 

revision. 

We revised our regulations to specify 

that fiscal intermediaries will use either 

the most recent settled cost report or the 

most recent tentative settled cost report, 

whichever is from the later cost 

reporting period, because we believe 

that a hospital has the ability to 

inappropriately increase its outlier 

payments during the time lag between 

the current charges and the CCR from 

the settled cost report, through dramatic 

charge increases. Using either the most 

recent settled cost report or the most 

recent tentative settled cost report, 

whichever is from the later cost 

reporting period, in many cases, reduces 

the time lag for updating CCRs by a year 

or more. 

We also revised the regulations to 

specify that, in the event more recent 

charge data indicate that an alternative 

CCR would be more appropriate, CMS 

has the authority to direct the fiscal 

intermediary to change the LTCH’s CCR 

to reflect the change evidenced by the 

more recent data. We made this change 

because even the later (that is, most 

recent) CCRs calculated from the 

tentatively settled cost reports would 

overestimate costs for hospitals that 

have continued to increase charges 

much faster than costs during the time 

between the tentatively settled cost 

report and the time when the claim is 

processed. In addition, we further 

revised the regulations to allow a 

hospital to contact its fiscal 

intermediary to request that its 

otherwise applicable CCR be changed if 

the LTCH presents substantial evidence 

that its CCR is inaccurate (68 FR 34497 

and 34506 through 34508). 

Also in the June 9, 2003 final rule (68 

FR 34499 through 34500 and 34506 

through 34507), we revised the 

regulations to specify that a fiscal 

intermediary may use a statewide 

average CCR if it is unable to determine 

an accurate CCR in one of three 

circumstances discussed in greater 

detail below. We made this revision 

because we noted that as hospitals raise 

their charges faster than their costs 

increase, over time their CCRs will 

decline. If hospitals continue to increase 

charges at a faster rate than their costs 

increase over a long period of time, or 

if they increase charges at extreme rates, 

their CCRs may fall below the range 

considered reasonable and, under our 

former policy, fiscal intermediaries 

would, in most cases, assign a statewide 

average CCR. These statewide averages 

are generally considerably higher than 

the threshold. Therefore, prior to the 

change in the regulations, these 

hospitals benefited from an artificially 

high ratio being applied to their already 

high charges. Furthermore, hospitals 

could continue to increase charges faster 

than costs, without any further 

downward adjustment to their CCR. 

In addition, in the June 9, 2003 final 

rule (68 FR 34500 through 34502 and 

34506 through 34508), we added a 

provision to our regulations to provide 

that outlier payments would become 

subject to reconciliation when hospitals’

cost reports are settled. We noted that 

we had become increasingly aware that 

some hospitals had taken advantage of 

the former outlier policy by increasing 

their charges at extremely high rates, 

knowing that there would be a time lag 

before their CCRs would be adjusted to 

reflect the higher charges. We believed 

that even the revisions to the regulations 

described above would not completely 

eliminate all such opportunity. We 

explained that we believed that a 

hospital would still be able to 

dramatically increase its charges by far 

above the rate-of-increase in costs 

during any given year. 

In the RY 2007 LTCH PPS proposed 

rule (71 FR 4648, 4674 through 4676, 

and 4690 through 4692), we discussed 

our current methodology for 

determining hospitals’ CCRs under the 

LTCH PPS high-cost and short-stay 

outlier policies, and we presented 

proposals to refine our methodology for 

determining the annual CCR ceiling and 

statewide average CCRs. In that same 

proposed rule, we also discussed our 


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existing policy for the reconciliation of 

LTCH PPS high-cost and short-stay 

outlier payments, along with our 

proposal to codify in Subpart O of 42 

CFR Part 412 those policies, including 

proposed modifications and editorial 

clarifications to those existing policies. 

In that RY 2007 LTCH PPS proposed 

rule, we proposed that the proposed 

revisions to the policies governing the 

determination of LTCHs’ CCRs and the 

reconciliation of high-cost and shortstay outlier payments would be effective 

October 1, 2006, noting that historically, 

annual updates to LTCH CCR ceiling 

and statewide average CCRs have been 

effective on October 1. In addition, our 

proposal stated that the LTCH CCR 

ceiling and statewide average CCRs that 

would be effective October 1, 2006, 

would be presented in the annual IPPS 

proposed and final rules. 

As we stated in both the RY 2007 

LTCH PPS final rule (71 FR 27832 

through 27833 and 27871) and the FY 

2007 IPPS proposed rule (71 FR 24127), 

we received a few specific comments on 

this portion of the RY 2007 LTCH PPS 

proposed rule concerning the proposed 

changes to the policies governing the 

determination of LTCHs’ CCRs. As 

mentioned below, one commenter in 

this final rule supported our proposal. 

Several other commenters referenced 

one of the specific comments raised by 

another commenter on the proposed 

changes to the methodology for 

determining LTCH CCRs in their own 

comments on the RY 2007 LTCH PPS 

proposed rule. In addition, a commenter 

on the RY 2007 LTCH PPS proposed 

rule included a synopsis of our 

proposed changes concerning the 

determination of LTCHs’ CCRs. Based 

on the commenter’s synopsis of the 

proposed changes, we believe that the 

commenters clearly understood the 

nature and purpose of the proposed 

changes. However, the commenter 

pointed out that, in the RY 2007 LTCH 

PPS proposed rule, we did not provide 

an analysis of the effect of this proposed 

change, nor did we provide an example 

of the new CCR values under this 

proposed methodology. Another 

commenter did not ‘‘object in concept to 

the proposed combination of [IPPS] 

operating and capital cost-to-charge 

ratios’’ (to compute a ‘‘total’’ CCR for 

each IPPS hospital by adding together 

each hospital’s operating CCR and its 

capital CCR) from which to compute the 

LTCH CCR ceiling and applicable 

statewide average CCRs. However, the 

commenter also pointed out that we did 

not provide any impact data and 

requested that we defer adoption of that 

proposed change until such data are 

provided for comment. 

Therefore, in light of the comments 

referenced above, we proposed in the 

FY 2007 IPPS proposed rule (71 FR 

24126 through 24135) the same changes 

to the policies governing the 

determination of LTCHs’ CCRs and the 

reconciliation of high-cost and shortstay outlier payments that we proposed 

in the RY 2007 LTCH PPS proposed 

rule. We included in the FY 2007 IPPS 

proposed rule the values of the 

proposed LTCH CCR ceiling and the 

proposed statewide average LTCH CCRs 

that would be effective October 1, 2006, 

based on our proposed policy changes, 

along with the values of the proposed 

LTCH CCRs that would be determined 

under our current methodology. We also 

indicated that we would respond further 

to any comments received on the 

proposed changes to the policies 

governing the determination of LTCHs’

CCRs and the reconciliation of LTCH 

PPS high-cost outlier and short-stay 

payments presented in the FY 2007 

IPPS proposed rule in the FY 2007 IPPS 

final rule that will be published this 

summer. We received two public 

comments concerning the proposed 

changes to the policies governing the 

determination of LTCHs’ CCRs and the 

reconciliation of LTCH high-cost outlier 

and short-stay payments presented in 

the FY 2007 IPPS proposed rule (71 FR 

24125 through 24136). As discussed in 

greater detail below in this section, in 

this final rule, we are finalizing the 

proposed changes to the policies 

governing the determination of LTCHs’

CCRs and the reconciliation of LTCH 

high-cost outlier and short-stay 

payments as proposed. In the RY 2007 

LTCH PPS final rule (71 FR 27871), we 

revised the short-stay outlier payment 

formula based on the existing regulatory 

language at § 412.529(c) concerning the 

determination of LTCH CCRs and the 

reconciliation of short-stay outlier 

payments since we did not finalize any 

changes to our policy regarding the 

determination of LTCHs’ CCRs and the 

reconciliation of LTCH PPS short-stay 

outlier payments in that LTCH PPS final 

rule. 

In that same final rule, we noted that, 

to the extent the policy changes we 

proposed in the FY 2007 IPPS proposed 

rule regarding the determination of 

LTCHs’ CCRs and the reconciliation of 

short-stay outlier payments are 

implemented, we may need to make 

conforming changes to the regulatory 

language in § 412.529 in the FY 2007 

IPPS final rule to ensure that any such 

changes are consistent with (and do not 

contradict) the changes we made to 

§ 412.529 in the RY 2007 LTCH PPS 

final rule. Accordingly, in adopting the 

proposed changes to the regulations 

regarding the determination of LTCHs’

CCRs and the reconciliation of outlier 

payments in this final rule, we are 

making conforming changes to the 

regulatory language in § 412.529 as 

necessary based on the changes to the 

short-stay outlier policy at § 412.529 

established in the RY 2007 LTCH PPS 

proposed rule (71 FR 27899 through 

27900). 

Comment: One commenter supported 

our proposed changes to the 

methodology for determining LTCH 

CCRs and LTCH PPS outlier 

reconciliation. The commenter was 

particularly appreciative of the impact 

analysis presented in the FY 2007 IPPS 

proposed rule. 

Response: We appreciate the 

commenter’s support and are pleased 

that our impact analysis was able to 

assist in the understanding of our 

proposal. 

b. High-Cost Outliers 

Under the broad authority conferred 

upon the Secretary by section 123 of the 

BBRA as amended by section 307(b) of 

BIPA, when we implemented the LTCH 

PPS, we established an adjustment for 

additional payments for outlier cases 

that have extraordinarily high-costs 

relative to the costs of most discharges 

at § 412.525(a). Providing additional 

payments for outliers strongly improves 

the accuracy of the LTCH PPS in 

determining resource costs at the patient 

level and hospital level. Specifically, 

under § 412.525(a), we make outlier 

payments for any discharge if the 

estimated cost of the case exceeds the 

adjusted LTCH PPS payment for the 

LTC–DRG plus a fixed-loss amount. 

Under the LTCH PPS high-cost outlier 

policy, the LTCH’s loss is limited to the 

fixed-loss amount and a fixed 

percentage of costs above the marginal 

cost factor. We calculate the estimated 

cost of a case by multiplying the overall 

hospital CCR by the Medicare allowable 

covered charge. In accordance with 

§ 412.525(a)(3), we pay outlier cases 80 

percent of the difference between the 

estimated cost of the patient case and 

the outlier threshold (the sum of the 

adjusted Federal prospective payment 

for the LTC–DRG and the fixed-loss 

amount). 

c. Short-Stay Outliers 

When we implemented the LTCH 

PPS, under § 412.529, we established a 

special payment policy for short-stay 

outlier cases, that is, LTCH PPS cases 

with a length of stay that is less than or 

equal to five-sixths of the geometric 

average length of stay for each LTC–

DRG. Generally, LTCHs are defined by 


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statute as having an average length of 

stay of greater than 25 days. We believe 

that a short-stay outlier payment 

adjustment results in more appropriate 

payments, because these cases most 

likely would not receive a full course of 

a LTCH-level of treatment in such a 

short period of time and a full LTC–DRG 

payment may not always be appropriate. 

A short-stay outlier is defined at 

§ 412.529(a) as a LTCH discharge with a 

length of stay of up to and including 

five-sixths the geometric average length 

of stay for the LTC–DRG. Under the 

short-stay outlier policy at 

§ 412.529(c)(1), for LTCH PPS 

discharges occurring before July 1, 2006, 

in general, we adjust the per discharge 

payment under the LTCH PPS by the 

least of 120 percent of the estimated cost 

of the case, 120 percent of the LTC–DRG 

specific per diem amount, or the full 

LTC–DRG payment. Under the shortstay outlier policy at § 412.529(c)(2), for 

LTCH PPS discharges occurring on or 

after July 1, 2006, in general, we adjust 

the per discharge payment under the 

LTCH PPS by the least of 100 percent 

of the estimated cost of the case, 120 

percent of the LTC–DRG specific per 

diem amount, the full LTC–DRG 

payment, or a blend of an amount 

comparable to the IPPS per diem 

amount (capped at the full IPPS 

comparable amount) and the 120 

percent of the LTC–DRG specific 

amount (71 FR 27899). Consistent with 

the LTCH PPS high-cost outlier policy, 

we calculate the estimated cost of a case 

by multiplying the overall hospital CCR 

by the Medicare allowable covered 

charges. 

d. CCR Ceiling 

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’’ LTCHspecific CCR based on the sum of LTCH 

operating and capital-related costs (as 

described in Chapter 3, section 150.24, 

of the Medicare Claims Processing 

Manual (CMS Pub. 100–4)) as compared 

to total charges. A LTCH’s CCR is 

calculated by dividing its total Medicare 

costs (that is, the sum of its operating 

and capital inpatient routine and 

ancillary costs) by its total Medicare 

charges (that is, the sum of its operating 

and capital inpatient routine and 

ancillary charges). (Instructions 

regarding the changes established in the 

June 9, 2003 IPPS high-cost outlier final 

rule for both LTCHs and IPPS hospitals 

can be found in Program Transmittal A–

03–058 (Change Request 2785; July 3, 

2003).) 

Under our current policy, a LTCH is 

assigned the applicable statewide 

average CCR instead of using its CCR 

computed from data in its most recent 

(settled or tentatively settled) cost report 

if, among other things, the LTCH’s CCR 

is found to be in excess of the applicable 

maximum CCR threshold. The 

applicable maximum CCR threshold is 

the combined IPPS operating and 

capital CCR ceiling. For instance, for FY 

2006, under the current policy, the IPPS 

operating CCR ceiling is 1.254 and the 

IPPS capital CCR ceiling is 0.169 (70 FR 

47496). Therefore, under our current 

policy, the combined operating and 

capital CCR ceiling is 1.423 (1.254 + 

0.169 = 1.423) as specified in Program 

Transmittal 692 (Change Request 4046, 

September 30, 2005). 

These ceilings represent 3.0 standard 

deviations from the mean of the log 

distribution of operating and capital 

cost-to-charge ratios for all IPPS 

hospitals. As we explained in the June 

9, 2003 final rule (68 FR 34507), LTCH 

CCRs above this threshold are most 

likely due to faulty data reporting or 

entry, and, therefore, these CCRs should 

not be used to identify and make 

payments for outlier cases. Such data 

are clearly errors and should not be 

relied upon. (There are also other 

circumstances, discussed below, when 

we use a statewide CCR instead of a 

LTCH-specific CCR.) 

Under the current methodology, we 

determine a ‘‘combined’’ statewide 

average CCR for LTCHs located in rural 

areas of a State that accounts for 

operating and capital costs and charges 

and a ‘‘combined’’ statewide average 

CCR for LTCHs located in urban areas 

of a State that accounts for operating 

and capital-related costs and charges. In 

order to calculate a combined statewide 

average CCR under our current 

methodology, we first calculate separate 

statewide average operating CCRs and 

capital CCRs. Under the IPPS, two 

statewide average operating CCRs are 

computed for each State: a statewide 

average CCR for rural areas and a 

statewide average CCR for urban areas. 

One statewide average capital CCR is 

computed for each State (applicable to 

both urban and rural areas). We use the 

same capital CCR for urban and rural 

areas because capital costs are the same 

regardless of geographic location. 

(Below we discuss our proposed 

revisions to this methodology, which we 

are adopting as final in this final rule.) 

As we explained in the RY 2006 

LTCH PPS final rule (70 FR 24192), we 

believe it is appropriate to use the 

combined IPPS operating and capital 

CCR ceiling and the applicable 

combined IPPS statewide average urban 

and rural CCRs in determining LTCHs’

CCRs because LTCHs’ cost and charge 

structures are similar to that of IPPS 

acute care hospitals. For instance, 

LTCHs are certified as acute care 

hospitals, as set forth in section 1861(e) 

of the Act, to participate as a hospital 

in the Medicare program, and these 

hospitals, in general, are paid as LTCHs 

only because their Medicare average 

length of stay is greater than 25 days 

(§ 412.23(e)). Furthermore, as also 

explained in that same final rule, prior 

to qualifying as a LTCH under 

§ 412.23(e)(2)(i), a hospital generally is 

paid as an acute care hospital under the 

IPPS during the period in which it 

demonstrates that it has an average 

length of stay of greater than 25 days. In 

addition, because there are less than 400 

LTCHs, and they are unevenly 

geographically distributed throughout 

the United States, there may not be 

sufficient LTCH CCR data to determine 

an appropriate LTCH PPS CCR ceiling 

using LTCH data. 

Because LTCHs have a single ‘‘total’’

CCR (rather than separate operating and 

capital CCRs), under the broad authority 

of section 123 of the BBRA and section 

307(b)(1) of BIPA, in the FY 2007 IPPS 

proposed rule (71 FR 24128 through 

24129 and 24132 through 24133), we 

proposed to revise our regulations for 

high-cost outliers and short-stay outliers 

(§§ 412.525(a)(4) and 412.529(c)(5), 

respectively) to specify that, for 

discharges occurring on or after October 

1, 2006, if a LTCH’s CCR is in excess of 

the LTCH CCR ceiling (which would be 

calculated as 3 standard deviations 

above the corresponding national 

geometric mean total CCR (established 

and published annually by CMS)), the 

fiscal intermediary may use a statewide 

average CCR (also established annually 

by CMS and discussed in more detail 

below). (We also proposed a change in 

our methodology for calculating the 

applicable statewide average CCRs 

under the LTCH PPS, which we are 

finalizing in this final rule, as discussed 

in greater detail below.) 

Specifically, for purposes of 

determining a LTCH’s CCR under the 

LTCH PPS high-cost and short-stay 

outlier policies at §§ 412.525(a)(4) and 

412.529 respectively, for discharges 

occurring on or after October 1, 2006, 

we proposed that we would determine 

the single ‘‘total’’ CCR ceiling, based on 

IPPS CCR data, by first calculating the 

total (that is, operating and capital) IPPS 

CCR for each hospital and then 

determining the average total CCR for all 

IPPS hospitals. For example, if an IPPS 

hospital’s operating CCR is 0.432 and its 

capital CCR is 0.027, its total CCR 

would be 0.459 (0.432 + 0.027 = 0.459). 


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This calculation would be repeated for 

all IPPS hospitals in order to determine 

a total CCR for all IPPS hospitals. Next, 

the total IPPS CCR would be used to 

determine the average total IPPS CCR 

and standard deviation across all IPPS 

hospitals. The LTCH CCR ceiling would 

then be established at 3 standard 

deviations from the national geometric 

mean total IPPS CCR, rather than 

determining the LTCH total CCR ceiling 

as we do under our current policy by 

adding the separate IPPS operating CCR 

and capital CCR ceilings, which are 

each separately determined at 3 

standard deviations from the average 

operating IPPS CCR and average capital 

IPPS CCR, respectively. 

Under this proposed policy, we 

would use the same IPPS CCR data that 

we currently use to annually determine 

the separate IPPS operating CCR and 

capital CCR ceilings (that we add 

together under our current policy to 

determine the annual CCR ceiling for 

LTCHs) to compute IPPS hospitalspecific total CCRs that would be used 

to determine the single LTCH total CCR 

ceiling. We believe that determining a 

LTCH CCR ceiling based on IPPS total 

(operating and capital-related) Medicare 

costs and charges rather than adding the 

separate IPPS CCR ceilings determined 

from operating CCRs and capital CCRs, 

respectively, would be more consistent 

with the LTCH PPS single payment, 

which does not differentiate payments 

between operating and capital-related 

costs. We noted that we still believe that 

it is appropriate to continue to use IPPS 

data to determine the annual LTCH CCR 

ceiling. 

We also explained in both the RY 

2007 LTCH PPS proposed rule (71 FR 

4675) and the FY 2007 IPPS proposed 

rule (71 FR 24129), that these proposed 

revisions to our policy concerning the 

determination of the annual LTCH CCR 

ceiling would be effective for discharges 

occurring on or after October 1, 2006, 

rather than July 1, 2006. We proposed 

this approach because we proposed to 

continue to use the same IPPS data used 

to determine the individual IPPS 

operating and capital CCR ceilings 

established and published annually in 

the IPPS proposed and final rules. 

Because both the separate IPPS 

operating and capital CCRs ceilings and 

the new LTCH ‘‘total’’ CCR ceiling 

would be determined using the same 

data, we believe it would be 

administratively expedient to continue 

to establish the LTCH CCR ceiling to be 

effective for discharges occurring on or 

after October 1 of each year. (As stated 

previously, this is consistent with our 

current policy, where the LTCH CCR 

ceiling is updated annually on October 

1.) Therefore, under this proposal, the 

public would continue to consult the 

annual IPPS proposed and final rules for 

changes to the LTCH CCR ceiling that 

would be effective for discharges 

occurring on or after October 1. Under 

this proposal, the current LTCH CCR 

ceiling established for discharges 

occurring on or after October 1, 2005, in 

the FY 2006 IPPS final rule would 

remain in effect for discharges occurring 

on or before September 30, 2006. 

Comment: One commenter questioned 

why CMS’ proposal concerning LTCH 

CCRs did not utilize a floor for applying 

the statewide average similar to using a 

ceiling. The commenter explained that 

even though a hospital could increase 

payment by increasing its charges, if a 

hospital has a historically low CCR, 

then it should be assigned the statewide 

average. 

Response: As discussed in the June 9, 

2003 outlier final rule (68 FR 34494 and 

34507), we no longer assign the 

statewide average when a hospital’s 

CCR falls below a minimum CCR 

threshold or ‘‘floor,’’ as we believe a 

LTCH could arbitrarily increase its 

charges in order to maximize outlier 

payments. Even though this increase in 

charges should result in a lower CCR in 

the future (due to the time lag in cost 

report settlement), a floor would result 

in a LTCH being assigned the statewide 

average CCR. This would result in 

inappropriately higher outlier payments 

because in order to avoid making 

excessive outlier payments, under both 

our current policy and the proposed 

LTCH CCR policy, we apply the LTCH’s 

actual CCR no matter how low the 

hospital’s CCR falls. This policy for 

LTCHs is consistent with the policy we 

have adopted under the IPPS. 

Under both our current policy and the 

proposed LTCH CCR policy, we apply a 

CCR maximum threshold or ‘‘ceiling’’

for those hospitals beyond three 

standard deviations of the national 

mean CCR to address what we believe 

is questionable data. As we explained in 

the FY 2007 IPPS proposed rule (71 FR 

24127), CCRs above this threshold are 

most likely due to faulty data reporting 

or entry, and, therefore, these CCRs 

should not be used to identify and make 

payments for outlier cases. Such data 

are likely errors and should not be 

relied upon, and therefore, we assign 

the hospital the statewide average CCR. 

We note that, if a hospital has a 

historically low CCR, then a consistent 

pattern of a low CCR suggests that this 

CCR is reflective of their actual ratio of 

costs to charges as opposed to an 

instance of the data being aberrant. 

Therefore, we believe application of the 

statewide average CCR is not necessary. 

While it is possible that this low CCR 

may be based on questionable data, 

under both our current policy and the 

proposed LTCH CCR policy, a hospital 

may request its fiscal intermediary to 

use a different (higher or lower) CCR 

based on substantial evidence presented 

by the hospital. 

We did not remove the ceiling similar 

to removing the floor, as the 

vulnerability of a hospital gaming the 

outlier payment system applies to 

hospitals raising their charges, thus 

lowering their CCR and then receiving 

the statewide average (if a floor was in 

place). Hospitals with high CCRs reflect 

costs that are high or exceed their 

charges, which is uncommon. 

Therefore, as stated above, we believe if 

a hospital does cross the ceiling, it is 

likely due to an error and we assign the 

statewide average. However, as noted 

above, a hospital may request its fiscal 

intermediary to use a different (higher 

or lower) CCR based on substantial 

evidence presented by the hospital even 

if a hospital’s CCR is above the ceiling. 

Therefore, consistent with our current 

CCR policy, the applicable statewide 

average CCR will only be assigned when 

a LTCH’s CCR exceeds the maximum 

CCR threshold (ceiling) determined as 

three standard deviations of the national 

mean total CCR (as described above), 

and not when it falls below the 

minimum threshold (floor). 

We received no other comments and 

after consideration of the public 

comments received, we are adopting as 

final, without modification, the policy 

proposed in the proposed rule. 

Accordingly, in this final rule, under the 

broad authority of section 123 of the 

BBRA and section 307(b)(1) of BIPA, we 

are establishing under the LTCH PPS 

high-cost outlier policy at 

§ 412.525(a)(4)(iv)(C)(2) and the LTCH 

PPS short-stay outlier policy at 

§ 412.529(c)(3)(iv)(C)(2), that the fiscal 

intermediary may use a statewide CCR 

if it is unable to determine an accurate 

CCR for a LTCH if, amoung other things, 

a LTCHs’ CCR is in excess of 3 standard 

deviations above the corresponding 

national geometric mean cost-to-charge 

ratio. Furthermore, 

§§ 412.525(a)(4)(iv)(C)(2) and 

412.529(c)(3)(iv)(C)(2) specify that CMS 

will establish and publish this mean 

annually. As discussed above, as 

proposed, for discharges occurring on or 

after October 1, 2006, the LTCH total 

CCR ceiling will be calculated as three 

standard deviations above the 

corresponding national geometric mean 

total CCR, which will be determined 

based on IPPS CCR data, by first 

calculating the total (that is, operating 

and capital) IPPS CCR for each hospital 


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and then determining the average total 

IPPS CCR for all hospitals. As noted in 

the FY 2007 IPPS proposed rule (71 FR 

24129) and reiterated above, consistent 

with our current policy, the LTCH total 

CCR ceiling will be updated annually 

and will be effective for discharges 

occurring on or after October 1 of each 

year. Therefore, the public should 

continue to consult the annual IPPS 

proposed and final rules for changes to 

the LTCH CCR ceiling that would be 

effective for discharges occurring on or 

after October 1. 

In the FY 2007 IPPS proposed rule, 

based on IPPS total CCR data from the 

December 2005 update to the ProviderSpecific File, we proposed a total CCR 

ceiling of 1.313 under the LTCH PPS 

that would be effective October 1, 2006. 

Furthermore, in the FY 2007 IPPS 

proposed rule, we proposed that, if 

more recent data are available, we 

would use those data to determine the 

final total CCR ceiling under the LTCH 

PPS for FY 2007 using the proposed 

methodology described above. Based on 

the latest available data (data from the 

March 2006 update to the ProviderSpecific File), for this final rule, the 

CCR ceiling under our proposed 

methodology would be 1.321. 

The LTCH CCR ceiling determined 

under our current ‘‘combined’’

methodology using the most recent data 

would result in a slightly higher LTCH 

CCR ceiling (that is, 1.26 + 0.154 = 

1.414) for FY 2007 compared to the 

‘‘total’’ CCR ceiling of 1.321 for FY 2007 

calculated using our new methodology. 

However, based on CCRs from the 

March 2006 update of the ProviderSpecific File, there are no LTCHs that 

have a CCR that is greater than the 

ceiling of 1.321 (the highest LTCH CCR 

in the current database of 392 LTCHs is 

1.27). 

e. Statewide Average CCRs 

In addition to being authorized to 

assign the applicable statewide average 

CCR to a LTCH whose CCR is above the 

ceiling, the fiscal intermediary may use 

the applicable statewide average CCR in 

other circumstances. In the June 9, 2003 

IPPS high-cost outlier final rule, we also 

established our current policy that the 

fiscal intermediary may use the 

applicable statewide average CCR for 

LTCHs for whom data with which to 

calculate a CCR are not available (for 

example, missing or faulty data) or for 

new LTCHs that have not yet submitted 

their first Medicare cost report. For this 

purpose, a ‘‘new’’ LTCH is defined as an 

entity that has not accepted assignment 

of an existing hospital’s provider 

agreement in accordance with § 489.18. 

We note that, consistent with our 

current policy, either CMS or the LTCH 

may request the use of a different 

(higher or lower) CCR based on 

substantial evidence that such a CCR 

more accurately reflects the LTCH’s 

actual costs and charges. This applies to 

new LTCHs (as defined above) as well. 

For instance, CMS may determine that 

the applicable statewide average CCR 

should not be applied to hospitals that 

convert from acute care IPPS hospitals 

to LTCHs and receive new LTCH 

provider numbers. Rather, the cost and 

charge data from the IPPS hospitals’ cost 

reports (even if they are for more or less 

than a 12-month cost reporting period) 

would be used to determine the LTCH’s 

CCR. 

In addition to proposing to revise our 

methodology for determining the annual 

CCR ceiling under the LTCH PPS for 

discharges occurring on or after October 

1, 2006, under the broad authority of 

section 123 of the BBRA and section 

307(b)(1) of BIPA, in the FY 2007 

proposed rule (71 FR 24131 through 

24134), we proposed to revise our 

regulations for high-cost outliers and 

short-stay outliers (§§ 412.525(a)(4) and 

412.529(c)(5), respectively) for 

discharges occurring on or after October 

1, 2006, to codify in Subpart O of 42 

CFR Part 412 the remaining LTCH PPS 

outlier policy changes that were 

established in the June 9, 2003 IPPS 

high-cost outlier final rule (68 FR 34506 

through 34513), including proposed 

modifications and editorial 

clarifications to those existing policies 

established in that final rule, which are 

discussed in greater detail below in this 

section. We proposed these additional 

revisions to §§ 412.525(a)(4) and 

412.529(c)(5) because we believe that 

making these revisions would more 

precisely describe the application of 

those policies as they relate to the 

determination of LTCH CCRs and 

because these proposed changes would 

be consistent with the proposed changes 

to the calculation of the LTCH CCR 

ceiling discussed above in this section. 

Specifically, we proposed to specify 

under the LTCH PPS high-cost outlier 

policy at § 412.525(a)(4) and the LTCH 

PPS short-stay outlier policy at 

§ 412.529 that the fiscal intermediary 

may use a statewide average CCR, which 

would be established annually by CMS, 

if it is unable to determine an accurate 

CCR for a LTCH in one of the following 

three circumstances: (1) new LTCHs that 

have not yet submitted their first 

Medicare cost report (for this purpose, 

consistent with current policy, a new 

LTCH would be defined as an entity that 

has not accepted assignment of an 

existing hospital’s provider agreement 

in accordance with § 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 may 

consider in determining a LTCH’s CCR 

included data from a different cost 

reporting period for the LTCH, data 

from the cost reporting period preceding 

the period in which the hospital began 

to be paid as a LTCH (that is, the period 

of at least 6 months that it was paid as 

a short-term acute care hospital), or data 

from other comparable LTCHs, such as 

LTCHs in the same chain or in the same 

region.) 

We did not receive any public 

comments on our proposal. Therefore, 

in this final rule, we are adopting as 

final, without modification, our 

proposed policy. Accordingly, under the 

broad authority of section 123 of the 

BBRA and section 307(b)(1) of BIPA, in 

this final rule, we are establishing 

§§ 412.525(a)(4)(iv)(C)(1) through (3) 

and 412.529(c)(3)(iv)(C)(1) through (3), 

which specify that the fiscal 

intermediary may use a statewide 

average CCR if it is unable to determine 

an accurate CCR for a LTCH in one of 

the following three circumstances: (1) 

new LTCHs that have not yet submitted 

their first Medicare cost report (for this 

purpose, consistent with current policy, 

a new LTCH would be defined as an 

entity that has not accepted assignment 

of an existing hospital’s provider 

agreement in accordance with § 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 may 

consider in determining a LTCH’s CCR 

included data from a different cost 

reporting period for the LTCH, data 

from the cost reporting period preceding 

the period in which the hospital began 

to be paid as a LTCH (that is, the period 

of at least 6 months that it was paid as 

a short-term acute care hospital), or data 

from other comparable LTCHs, such as 

LTCHs in the same chain or in the same 

region.) These regulations further 

specify that the statewide average CCRs 

used under the LTCH PPS, as described 

in greater detail below, will be 

established annually by CMS. 

Also, in the FY 2007 IPPS proposed 

rule (71 FR 24130 through 24131 and 

24133 through 24134) we described our 

existing methodology for calculating the 

combined statewide average CCR for 

rural and urban LTCHs. Under the 

proposed LTCH PPS high-cost outlier 

policy at § 412.525(a)(4) and the 


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proposed LTCH PPS short-stay outlier 

policy at § 412.529 for discharges 

occurring on or after October 1, 2006, 

we proposed to compute statewide 

average CCRs for use under the LTCH 

PPS in a manner similar to the way we 

proposed to compute LTCH PPS CCR 

ceilings. Specifically, under this 

proposed policy, we would use the 

same IPPS CCR data that we currently 

use to annually establish the separate 

IPPS operating and capital statewide 

CCRs to compute statewide average total 

CCRs. Below we outline our proposed 

methodology for calculating the total 

statewide average CCR for a rural LTCH: 

Step 1: Calculate the total CCR for 

each rural IPPS hospital by adding 

together its operating CCR and its 

capital CCR. 

Step 2: Calculate the weighted average 

total CCR for all rural IPPS hospitals in 

the State (as shown in the third column 

of Table 8C of the Addendum to the FY 

2007 IPPS proposed rule). This same 

proposed methodology would be 

applied when determining the ‘‘total’’

statewide average CCR for LTCHs 

located in urban areas, except that we 

would replace ‘‘rural IPPS hospitals’’

with ‘‘urban IPPS hospitals’’ in Steps 1 

and 2. Under this proposal, the 

underlying data, that is, the IPPS CCRs, 

would remain the same. (We note that 

the weighted average total CCR for all 

urban IPPS hospitals in the State is 

shown in the second column of Table 

8C of the Addendum to this final rule 

and the weighted average total CCR for 

all rural IPPS hospitals in the State is 

shown in the third column of Table 8C 

of the Addendum to this final rule, 

based on the policies finalized in this 

final rule as discussed below.) 

We also proposed that these statewide 

average ‘‘total’’ (operating and capital) 

CCRs that would be used under the 

LTCH PPS would continue to be 

published annually in the IPPS 

proposed and final rules, and, therefore, 

the public would continue to consult 

the annual IPPS proposed and final 

rules for changes to the applicable 

statewide average total CCRs that would 

be effective for discharges occurring on 

or after October 1. Under this proposal, 

the current applicable statewide average 

operating and capital CCRs, established 

for discharges occurring on or after 

October 1, 2005, would remain in effect 

for discharges occurring on or before 

September 30, 2006. Our rationale for 

proposing to establish statewide average 

‘‘total’’ CCRs (as described above in this 

section) based on IPPS data under the 

proposed revisions to the high-cost 

outlier policy at § 412.525(a)(4) and 

short-stay outlier policy at § 412.529 is 

the same as the one stated above for 

proposing to use IPPS data to determine 

a ‘‘total’’ LTCH CCR ceiling. 

We did not receive any public 

comments on our proposed changes. 

Therefore, we are adopting them as final 

without modification. Accordingly, 

under the broad authority of section 123 

of the BBRA and section 307(b)(1) of 

BIPA, in this final rule, under 

§§ 412.525(a)(4)(iv)(C) and 

412.529(c)(3)(iv)(C), as proposed and as 

described above, for discharges 

occurring on or after October 1, 2006, 

the applicable LTCH statewide average 

total CCRs will be determined based on 

IPPS CCR data in a manner similar to 

the way we will be computing the LTCH 

PPS CCR ceiling, as discussed above. As 

also noted in the FY 2007 IPPS 

proposed rule (71 FR 24129 and 24134) 

and reiterated above, consistent with 

our policy, the LTCH PPS statewide 

average total CCRs will be updated 

annually and will be effective for 

discharges occurring on or after October 

1 of each year. Therefore, the public 

should continue to consult the annual 

IPPS proposed and final rules for 

changes to the LTCH PPS statewide 

average total CCRs that would be 

effective for discharges occurring on or 

after October 1. 

We also proposed to determine the 

urban and rural statewide average total 

CCRs for Maryland LTCHs paid under 

the LTCH PPS using, as a proxy, the 

national average total CCR for urban 

IPPS hospitals and the national average 

total CCR for rural IPPS hospitals, 

respectively (71 FR 24130 through 

24131 and 24134). As we explained in 

the FY 2007 IPPS proposed rule, we 

proposed this proxy because we believe 

that the CCR data on the ProviderSpecific File for Maryland hospitals 

may not be accurate. This is because 

acute care hospitals in Maryland are 

operating under a waiver of Medicare’s 

ratesetting methodologies for inpatient 

and outpatient services under the 

authorities of sections 1814(b)(3) and 

1833(a)(2) of the Act. The State’s Health 

Services Cost Review Commission 

(HSCRC) is the regulatory body that 

establishes hospital-specific rates for all 

hospital services in Maryland. 

Because all Maryland short-term acute 

care hospitals are paid based on the 

hospital-specific rates set by the HSCRC 

rather than under the IPPS, CCRs are not 

required to determine their Medicare 

payments (as they are for other acute 

care hospitals that are not governed 

under the waiver at sections 1814(b)(3) 

and 1833(a)(2) of the Act, and who are 

reimbursed for their treatment of 

Medicare patients under the IPPS). 

Therefore, CCRs in the Provider-Specific 

File for Maryland acute care hospitals, 

for the most part, are missing (because 

they are not used for payment). Those 

CCRs that are inputted into the 

Provider-Specific File for Maryland 

acute care hospitals by the fiscal 

intermediary are most likely unaudited 

because they are not used for making 

payments. For all these reasons, we are 

concerned that CCRs for Medicare acute 

care hospitals located in Maryland that 

are in the Provider-Specific File may not 

be reliable. Therefore, we believe that 

they should not be used as proxies for 

setting the statewide average total CCRs 

for Maryland LTCHs. 

As we discussed in the FY 2007 IPPS 

proposed rule (71 FR 24130 and 24134), 

we believe it would be more appropriate 

to establish statewide average total CCRs 

for Maryland LTCHs based on national 

average total CCRs of IPPS hospitals that 

were audited by fiscal intermediaries. 

Therefore, we proposed to establish 

statewide average total CCRs for 

Maryland LTCHs based on the national 

average total CCRs of all IPPS hospitals 

because we believe that the average of 

the CCRs of all the IPPS hospitals across 

the country that were audited by fiscal 

intermediaries would be based on 

sufficient rigorous complete data that 

would be a representative proxy for the 

ratio of costs-to-charges of LTCHs in 

Maryland that are subject to LTCH PPS. 

(We note that, under our proposal, the 

fiscal intermediary may assign the 

statewide average CCR in one of three 

circumstances (that is, ‘‘new’’ LTCHs, as 

defined above; LTCHs with a CCR that 

is in excess of the LTCH ceiling; and 

LTCHs with unavailable data, as 

discussed above).) We solicited 

comments or suggestions for an 

alternative proxy statewide average CCR 

to use for LTCHs that are located in 

Maryland and are paid under the LTCH 

PPS in the FY 2007 IPPS proposed rule. 

We did not receive any public 

comments on our proposal or any 

alternative proxy statewide average CCR 

to use for LTCHs that are located in 

Maryland and are paid under the LTCH 

PPS. Therefore, under the broad 

authority of section 123 of the BBRA 

and section 307(b)(1) of BIPA, we are 

adopting our proposed methodology for 

determining the statewide average CCR 

for Maryland under the LTCH PPS as 

final without modification. 

In the FY 2007 IPPS proposed rule (71 

FR 24130 and 24134) we stated that, if 

more recent data are available for the 

final rule, we would use those data to 

determine the final LTCH PPS statewide 

average CCRs for FY 2007 using the 

proposed methodology describe above 

that we are adopting as final in this final 

rule. Therefore, in this final rule, based 

on the most recent complete IPPS total 


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CCR data from the March 2006 update 

of the Provider-Specific File, the final 

LTCH PPS statewide average total CCRs 

for urban and rural hospitals that will be 

effective October 1, 2006, are presented 

in Table 8C of the Addendum to this 

final rule. (As was proposed, we note 

that for this final rule, as is the case 

under the IPPS, all areas in the District 

of Columbia, New Jersey, Puerto Rico, 

and Rhode Island are classified as 

urban, and therefore there are no rural 

statewide average total CCRs listed for 

those jurisdictions in Table 8C of the 

Addendum to this final rule. As was 

proposed, we also note that for this final 

rule, as is the case under the IPPS, 

although Massachusetts 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 2006, and therefore there are no 

rural statewide average total CCR listed 

for rural Massachusetts in Table 8C of 

the Addendum of this final rule.) 

Comparing the statewide average 

‘‘total’’ CCRs in Table 8C of the 

Addendum to this final rule to the 

‘‘combined’’ statewide average CCRs 

that would have been calculated using 

our existing methodology shows that the 

changes to our methodology for 

determining LTCH statewide average 

CCRs results in only minor changes in 

the average CCR for each State. In 

particular, the largest decrease in a 

statewide average CCR (with the 

exception of Maryland, as discussed 

above) will be in urban Wyoming (¥0.7 

percent). However, there is currently 

only 1 LTCH located in Wyoming. The 

largest increase in a statewide average 

CCR will be in urban District of 

Columbia (0.7 percent), and there are 

currently only 2 LTCHs located in the 

District of Columbia. 

f. Data Used to Determine a CCR 

Similar to our current policy, in the 

FY 2007 IPPS proposed rule (71 FR 

24131 and 24134), we also proposed to 

specify under our proposed revision to 

the LTCH PPS high-cost outlier policy at 

§ 412.525(a)(4) and the LTCH PPS shortstay outlier policy at § 412.529 that, for 

discharges occurring on or after October 

1, 2006, the CCR applied at the time a 

claim is processed would be based on 

either the most recently settled cost 

report or the most recent tentatively 

settled cost report, whichever is from 

the latest cost reporting period. 

Furthermore, in the same proposed rule, 

we proposed under the LTCH PPS highcost outlier policy at § 412.525(a)(4) and 

the LTCH PPS short-stay outlier policy 

at § 412.529 to state that CMS may 

specify an alternative to the CCR 

computed from the most recently settled 

cost report or the most recent tentatively 

settled cost report, whichever is later 

(under proposed §§ 412.525(a)(4)(iv)(B) 

and 412.529(c)(3)(iv)(B)), or a hospital 

may also request that the fiscal 

intermediary use a different (higher or 

lower) CCR based on substantial 

evidence presented by the hospital. 

These proposed revisions to our policy 

for determining a LTCH’s CCR for 

discharges occurring on or after October 

1, 2006, under the proposed revisions to 

the LTCH PPS high-cost and short-stay 

outlier policies, described above, are 

similar to our existing policy 

established in the June 9, 2003 IPPS 

high-cost outlier final rule (68 FR 34506 

through 34513). In addition, we 

proposed a technical correction to 

existing § 412.525(a)(3) to change the 

plural reference from cost-to-charge 

‘‘ratios’’ to the singular reference to a 

cost-to-charge ‘‘ratio’’ because, under 

the LTCH PPS, a single (total) CCR is 

computed for LTCHs. 

We did not receive any comment on 

our proposal. Therefore, we are 

adopting as final without modification 

the proposed policy changes. 

Accordingly, under the broad authority 

of section 123 of the BBRA and section 

307(b)(1) of BIPA, in this final rule, we 

are establishing under 

§§ 412.525(a)(4)(iv)(B) and 

412.529(c)(3)(iv) that, for discharges 

occurring on or after October 1, 2006, 

the CCR applied at the time a claim is 

processed will be based on either the 

most recently settled cost report or the 

most recent tentatively settled cost 

report, whichever is from the latest cost 

reporting period. Under the broad 

authority of section 123 of the BBRA 

and section 307(b)(1) of BIPA, we are 

also establishing at 

§§ 412.525(a)(4)(iv)(A) and 

412.529(c)(3)(iv)(A) that, for discharges 

occurring on or after October 1, 2006, 

CMS may specify an alternative to the 

CCR computed under new 

§§ 412.525(a)(4)(iv)(B) and 

412.529(c)(3)(iv)(B) (that is, computed 

from the most recently settled cost 

report or the most recent tentatively 

settled cost report, whichever is later), 

or a hospital may also request that the 

fiscal intermediary use a different 

(higher or lower) CCR based on 

substantial evidence presented by the 

hospital. In addition, as proposed, 

under the broad authority of section 123 

of the BBRA and section 307(b)(1) of 

BIPA, we are revising § 412.525(a)(3) to 

change the plural reference from cost-tocharge ‘‘ratios’’ to the singular reference 

to a cost-to-charge ‘‘ratio’’ in this final 

rule. 

g. Reconciliation of Outlier Payments 

Upon Cost Report Settlement 

In the June 9, 2003 IPPS high-cost 

outlier final rule (68 FR 34508 through 

34512), we established our policy for 

LTCHs that effective with LTCH PPS 

discharges occurring on or after August 

8, 2003, any reconciliation of outlier 

payments will be based upon the actual 

CCR computed from the costs and 

charges incurred in the period during 

which the discharge occurs. In that 

same final rule, we also established our 

current policy that for discharges 

occurring on or after August 8, 2003, at 

the time of any reconciliation, outlier 

payments may be adjusted to account 

for the time value of any underpayments 

or overpayments based upon a widely 

available index to be established in 

advance by the Secretary and will be 

applied from the midpoint of the cost 

reporting period to the date of 

reconciliation. Additional information 

on the administration of the 

reconciliation process under the IPPS is 

provided in Program Transmittal 707 

(Change Request 3966, October 12, 

2005). We note that, in addition to the 

changes to the high-cost outlier and 

short-stay outlier policies presented in 

this final rule, we are currently 

developing additional instructions on 

the administration of the existing 

reconciliation process under the LTCH 

PPS that would be similar to the IPPS 

reconciliation process. 

In the FY 2007 IPPS proposed rule (71 

FR 24131 and 24134), for discharges 

occurring on or after October 1, 2006, 

we proposed to codify into the LTCH 

PPS section of the regulations (Subpart 

O of 42 CFR Part 412) the provisions 

governing the determination of LTCHs’’

CCRs, including proposed modifications 

and editorial clarifications to our 

existing methodology for determining 

the annual LTCH CCR ceiling and 

applicable statewide average CCRs 

under the LTCH PPS. In addition, in 

that same proposed rule, under the 

broad authority of section 123 of the 

BBRA and section 307(b)(1) of BIPA, we 

proposed to revise §§ 412.525(a)(4), and 

412.529(c)(3) for discharges occurring 

on or after October 1, 2006, to codify in 

Subpart O of 42 CFR Part 412 the 

provisions discussed above concerning 

the reconciliation of LTCH PPS outlier 

payments, including proposed editorial 

clarifications discussed in greater detail 

below in this section, that would more 

precisely describe the application of 

those policies. We proposed the 

additional revisions to §§ 412.525(a)(4) 

and 412.529(c)(3) concerning the 

reconciliation of outlier payments, 

which are discussed in greater detail 


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below in this section, because these 

proposed changes would be consistent 

with the proposed changes to the 

calculation of the LTCH CCR ceiling 

discussed above. 

Specifically, we proposed under the 

LTCH PPS high-cost outlier policy at 

§ 412.525(a)(4) and the LTCH PPS shortstay outlier policy at § 412.529, similar 

to our current policy, to specify that, for 

discharges occurring on or after October 

1, 2006, any reconciliation of outlier 

payments would be based on the CCR 

calculated based on a ratio of costs to 

charges computed from the relevant cost 

report and charge data determined at the 

time the cost report coinciding with the 

discharge is settled. In addition, we 

proposed under the LTCH PPS high-cost 

outlier policy at § 412.525(a)(4)and the 

LTCH PPS short-stay outlier policy at 

§ 412.529, similar to our current policy, 

to specify that, for discharges occurring 

on or after October 1, 2006, at the time 

of any reconciliation, outlier payments 

may be adjusted to account for the time 

value of any underpayments or 

overpayments. Consistent with our 

current policy, we also proposed that 

such an adjustment would be based 

upon a widely available index to be 

established in advance by the Secretary 

and would be applied from the 

midpoint of the cost reporting period to 

the date of reconciliation. As we 

discussed in the FY 2007 IPPS proposed 

rule (71 FR 24131 and 24134), we 

proposed to make these additions to 

§§ 412.525(a)(4) and 412.529 because we 

believe that such proposed changes 

reinforce the concept that the LTCH PPS 

has a single payment rate for inpatient 

operating and capital-related costs (as 

discussed in greater detail previously), 

and because we believe it would be 

more appropriate and administratively 

simpler to include all of the regulatory 

provisions concerning the 

determination of LTCH PPS (high-cost 

and short-stay) outlier payments 

applicable under the LTCH PPS 

regulations in Subpart O of 42 CFR Part 

412. 

We did not receive any public 

comments on the proposed changes 

regarding the reconciliation of LTCH 

PPS outlier payments upon cost report 

settlement. Therefore, under the broad 

authority of section 123 of the BBRA 

and section 307(b)(1) of BIPA, we are 

adopting as final, without modification, 

the proposed changes to the regulations 

at § 412.525(a)(4)(iv)(D) through (E) for 

LTCH PPS high-cost outliers and 

§ 412.529(c)(3)(iv)(D) through (E) for 

LTCH PPS short-stay outliers regarding 

the methodology for determining LTCH 

CCRs and LTCH PPS outlier 

reconciliation. 

7. Technical Corrections Relating to 

LTCHs 

In the FY 2007 IPPS proposed rule (71 

FR 24135), we proposed to make the 

following technical changes to various 

sections of the regulations relating to 

LTCHs to update or correct crossreferences or to include inadvertently 

omitted provisions: a. In the following 

sections, we proposed to correct several 

incorrect cross-references in the existing 

regulations: 

• In § 412.505(b)(1), we proposed to 

change the cross-reference ‘‘§ 412.22(e) 

and (h)(5)’’ to the phrase ‘‘§ 412.22(e)(3) 

and (h)(6), if applicable’’. 

• In § 412.508(c)(3), we proposed to 

change the cross-reference ‘‘§ 1001.301’’

to ‘‘§ 1001.201.’’

• In § 412.541(b)(2)(i), we proposed to 

change the cross-reference 

‘‘§ 412.533(b)’’ to ‘‘§ 412.533(a)(5) and 

§ 412.533(c)’’ to correctly refer to the 

provisions on the determination of the 

LTCH PPS rates. 

b. We proposed to revise § 412.511 to 

change the cross-reference ‘‘§ 412.22(e) 

and (h)(5)’’ to the phrase ‘‘§ 412.22(e)(3) 

and (h)(6)’’ and to clarify the 

requirement that LTCHs must meet 

under §§ 412.22(e)(3) and (h)(6) to 

report co-location status as part of its 

overall reporting requirements. 

c. We proposed to revise § 412.525(d) 

by adding new paragraphs (d)(3) and 

(d)(4) to specify two additional payment 

adjustments to the per discharge 

payments under the LTCH PPS that 

were inadvertently omitted; that is, the 

special payment under the onsite 

transfer and readmission policy at 

§ 412.532 and the special payment 

provisions for LTCH HwHs and 

satellites of LTCHs at § 412.534. 

d. We proposed to revise 

§ 412.532(a)(2) to correct the crossreference to the definition of a satellite 

facility by changing ‘‘§ 412.22(f)’’ to 

‘‘§ 412.22(h)’’. In addition, we proposed 

to revise paragraph (b) of § 412.532 to 

include satellite facilities and SNFs as 

part of the definition of entities that may 

be ‘‘co-located’’ or ‘‘onsite’’ with a 

hospital. In existing § 412.532(a)(2) and 

(a)(3), we include satellite facilities and 

SNFs, respectively, within the onsite 

provider payment policy as entities that 

may be co-located with a LTCH, but 

omitted to mention them in § 412.532(b) 

as being included when we defined ‘‘colocated or onsite’’ facilities. We 

proposed to conform § 412.532(b) to 

include their mention. 

We did not receive any public 

comments on these technical changes 

and, therefore, are adopting them as 

final without modification. 

8. Cross-Reference Correction in 

Authority Citations for 42 CFR Parts 412 

and 413 

As stated earlier, on November 15, 

2004, we published in the Federal 

Register the final rule establishing a PPS 

for IPFs (69 FR 66922). As a part of that 

rule, we amended the authority citations 

for 42 CFR Parts 412 and 413 to include 

references to section 124 of Pub. L. 106–

113. Section 124 directed us to take 

various actions regarding a per diem 

PPS for IPFs. We included incorrect 

cross-references to the United States 

Statutes at Large citation for this 

provision. We proposed to amend the 

authority citations for Parts 412 and 413 

by removing the incorrect crossreference to ‘‘113 Stat. 1515’’ and 

inserting the correct cross-reference 

‘‘113 Stat. 1501A–332’’. 

We did not receive any public 

comments on the proposed crossreference correction and, therefore, are 

adopting it as final without 

modification. 

9. Report of Adjustment (Exceptions) 

Payments 

Section 4419(b) of Pub. L. 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 units, by reason of section 

1886(b)(4) of the Act, during the 

previous fiscal year. 

The process of requesting, 

adjudicating, and awarding an 

adjustment payment is likely to occur 

over a 2-year period or longer. First, an 

excluded hospital or excluded unit of a 

hospital must file its cost report for a 

fiscal year with its fiscal intermediary 

within 5 months after the close of its 

cost reporting period in accordance with 

§ 413.24(f)(2). The fiscal intermediary 

then reviews the cost report and issues 

a Notice of Program Reimbursement 

(NPR) within approximately 2 months 

after the filing of the cost report. If the 

hospital’s operating costs are in excess 

of the ceiling, the hospital may file a 

request for an adjustment payment 

within 180 days from the date of the 

NPR. The fiscal intermediary, or CMS, 

depending on the type of adjustment 

requested, then reviews the request and 

determines if an adjustment payment is 

warranted. This determination is often 

not made until more than 6 months after 

the date the request is filed. 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 


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fiscal intermediary or CMS during FY 

2005. 

The table below includes the most 

recent data available from the fiscal 

intermediaries and CMS on adjustment 

payments that were adjudicated during 

FY 2005. As indicated above, the 

adjustments made during FY 2005 only 

pertain to cost reporting periods ending 

in years prior to FY 2004. Total 

adjustment payments awarded to 

excluded hospitals and units during FY 

2005 are $21,362,945. The table depicts 

for each class of hospitals, in the 

aggregate, the number of adjustment 

requests adjudicated, the excess 

operating cost over ceiling, and the 

amount of the adjustment payments. 

Class of hospital Number Excess cost 

over ceiling 

Adjustment 

payments 

Rehabilitation ............................................................................................................................... 12 $ 4,753,618 $1,352,043 

Psychiatric .................................................................................................................................... 34 27,408,956 18,362,262 

Long-Term Care .......................................................................................................................... 2 2,147,623 1,485,380 

Children’s ..................................................................................................................................... — — —

Cancer ......................................................................................................................................... — — —

Religious Nonmedical.

Health Care Institution ................................................................................................................. 3 383,951 163,260 

B. Critical Access Hospitals (CAHs) 

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 

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. 

2. Sunset of Designation of CAHs as 

Necessary Providers: Technical 

Correction 

Under section 1820(c)(2)(B)(i) of the 

Act, a CAH is required to be located 

more than a 35-mile drive (or in the case 

of mountainous terrain or only 

secondary roads, a 15-mile drive) from 

a hospital or another CAH, unless the 

CAH is certified by the State as a 

necessary provider of health care 

services to residents in the area. Section 

405(h) of Pub. L. 108-173 amended 

section 1820(c)(2)(B)(i)(II) of the Act by 

adding language that terminated a 

State’s authority to waive the location 

requirement for a CAH by designating 

the CAH as a necessary provider, 

effective January 1, 2006. As a result of 

this amendment, as of January 1, 2006, 

States are no longer able to designate 

CAH status based upon a determination 

that an entity is a necessary provider of 

health care. However, section 405(h) of 

Pub. L. 108–173 also included a 

grandfathering provision for CAHs that 

are certified as necessary providers prior 

to January 1, 2006. Under this provision, 

a CAH that is designated as a necessary 

provider in its State’s rural health plan 

prior to January 1, 2006, is permitted to 

maintain its necessary provider 

designation. 

The regulations that specify the 

location requirements for CAHs 

described above are set forth at 42 CFR 

485.610(c). To implement the 

amendment made by section 405(h) of 

Pub. L. 108–173, we published a final 

rule in the Federal Register on August 

11, 2004 (69 FR 49271) to revise the 

regulations under paragraph (c) of 

§ 485.610. In that revision, we 

inadvertently included an erroneous 

date: In the second sentence of 

paragraph (c), we stated that a CAH that 

is designated as a necessary provider as 

of October 1, 2006, will maintain its 

necessary provider designation after 

October 1, 2006. Although a correction 

notice was published in the Federal 

Register on October 7, 2004 (69 FR 

60252), the notice corrected only the 

second citation of the date in that 

paragraph. As a result, the second 

sentence of § 485.610(c) continues to 

state, incorrectly, that a CAH that is 

designated as a necessary provider as of 

October 1, 2006, will maintain its 

necessary provider designation as of 

January 1, 2006. 

To avoid further confusion, and to 

ensure that the regulations 

implementing the CAH location 

requirement under section 

1820(c)(2)(B)(i)(II) of the Act specify that 

requirement accurately, we proposed to 

revise the second sentence of 

§ 485.610(c) to state that a CAH that was 

designated as a necessary provider on or 

before December 31, 2005, will maintain 

its necessary provider designation as of 

January 1, 2006. We note that this 

change would merely correct the 

previous error and does not reflect any 

change in our policy as to how the 

statutory provision is implemented. 

Comment: A number of commenters 

raised issues concerning the 

interpretative guidelines that we issued 

relating to implementation of the CAH 

necessary provider provision. 

Response: These interpretative 

guidelines were developed after the FY 

2005 IPPS final rule was published. We 

consider the comments that we received 

to be outside the scope of the May 12, 

2006 proposed rule and, therefore, are 

not responding to them in this final 

rule. However, we are considering these 

comments as part of our ongoing policy 

review efforts and will take appropriate 

action if warranted. 

In this final rule, we are adopting as 

final, without modification, the revision 

to the second sentence of § 412.610(c) 

described above. 

VII. Payment for Services Furnished 

Outside the United States 

A. Background 

Section 1862(a)(4) of the Act generally 

prohibits payment under Medicare for 

items and services furnished outside the 

United States. Under sections 1861(x) 

and 210(i) of the Act, ‘‘United States’’ is 

defined to include the 50 States, the 

District of Columbia, Puerto Rico, the 

Virgin Islands, Guam, and America 

Samoa. Furthermore, under Pub. L. 94–

241, ‘‘those laws which provide Federal 

services and financial assistance 

programs’’ apply to the Northern 

Mariana Islands to the same extent as 

they do to Guam. In addition, we have 

interpreted the term ‘‘United States’’ as 

including U.S. territorial waters. We 

consider shipboard services furnished 

in a port of the United States or within 

6 hours before arrival at, or departure 

from, a port of the United States to be 

furnished in the United States territorial 

waters (54 FR 41723). Therefore, in our 

regulations at § 411.9(a), we define the 

United States to include the 50 States, 

the District of Columbia, Puerto Rico, 

the Virgin Islands, Guam, American 

Samoa, the Northern Mariana Islands, 

and for purposes of services furnished 

on board ship, the territorial waters 


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adjoining the land areas of the United 

States. This general prohibition has 

exceptions, under which payment may 

be made for inpatient hospital services, 

emergency inpatient hospital services, 

and for physician and ambulance 

services associated with these hospital 

services that are furnished outside the 

United States. 

Payment may be made for inpatient 

hospital services if a Medicare 

beneficiary who is a United States 

resident received these services at a 

hospital located outside of the United 

States that either was closer to, or was 

substantially more accessible from, the 

beneficiary’s residence than the nearest 

United States hospital that was 

adequately equipped and available to 

treat the beneficiary. Payment may be 

made for emergency inpatient hospital 

services if a beneficiary was in the 

United States (or in Canada while 

traveling between Alaska and another 

State without unreasonable delay and 

by the most direct route) when the 

emergency arose, and the hospital 

located outside the United States was 

closer to, or substantially more 

accessible from, the place where the 

emergency arose than the nearest 

available adequately equipped hospital 

within the United States. Payment may 

be made for physician and ambulance 

services furnished in connection with 

these inpatient and emergency inpatient 

hospital services. Our existing 

regulations that implement these 

statutory provisions are located at 42 

CFR 409.3, 409.5, 410.14, 410.66, 411.9, 

413.74 and Subparts G and H of Part 

424. 

B. Proposed Clarification of Regulations 

Services that fall under these 

exceptions typically are furnished in 

Canada or Mexico. However, in 

accordance with section 1814(f) of the 

Act and the definition of the term 

‘‘United States’’ (42 CFR 411.9(a)), it is 

permissible for Medicare to pay for 

services furnished in foreign countries 

other than Canada and Mexico. For 

example, if a Medicare beneficiary who 

is in Guam needed emergency inpatient 

hospital services and the nearest 

available hospital adequately equipped 

to treat that beneficiary was located in 

the Philippines, Medicare payment 

would be permitted for the services. 

Several of our existing regulations 

(§§ 409.3, 409.5, 410.66, and 413.74) 

specifically refer to services furnished 

in Canada and Mexico and do not 

indicate that it is permissible for 

Medicare payment to be made for 

services furnished in other foreign 

countries. The references in these 

sections also are more limited than the 

provisions of 42 CFR Part 424, Subpart 

H, the portion of our regulations that 

addresses treatment furnished in a 

foreign country. Therefore, in the FY 

2007 IPPS proposed rule (71 FR 24136), 

we proposed to amend those regulations 

that refer to Canada and Mexico in order 

to conform them to the Act and to our 

other regulations addressing these 

situations. 

Comment: Commenters indicated that 

they believed additional clarification of 

the proposed revisions on payment for 

services outside the United States may 

be necessary to avoid confusion. 

Specifically, they noted that the 

example cited in the preamble states: if 

a Medicare beneficiary who is in Guam 

needed emergency inpatient hospital 

services and the nearest available 

hospital adequately equipped was 

located in the Philippines, Medicare 

payment would be permitted for the 

services. The commenters indicated that 

this statement and the proposed 

accompanying changes to the 

regulations raise several questions. First, 

does it matter that the beneficiary 

happens to be in Guam, or is there an 

expectation that the beneficiary resides 

in Guam? Second, does it matter if the 

beneficiary is in a United States 

Territory (that is, Guam), or would 

payment be permitted for services 

furnished to a beneficiary who was in 

another foreign country? Finally, what 

is the applicability of these provisions 

to a beneficiary who maintains 

residence outside the 50 States, the 

District of Columbia, Puerto Rico, the 

Virgin Islands, Guam, or American 

Samoa? 

Further, the commenters believed that 

CMS should evaluate the safety 

concerns of beneficiaries living outside 

the United States, but in close proximity 

to hospitals accredited by Joint 

Commission on Accreditation of 

Healthcare Organizations (JCAHO) in 

foreign countries. They stated that these 

beneficiaries are forced to travel great 

distances to reach hospitals in the U.S., 

sometimes at great risk to their health, 

while adequately equipped, accredited 

hospitals are immediately available to 

meet their health care needs. 

Response: If a Medicare beneficiary is 

in Guam (or any other U.S. Territory) 

and an emergency arises that results in 

the beneficiary receiving emergency 

inpatient services from a foreign 

hospital, Medicare may pay for such 

services irrespective of whether the 

beneficiary is a resident of Guam (or any 

other U.S. Territory). That is, section 

1814(f)(2) of the Act and 42 CFR 

424.122 do not require that a beneficiary 

be a resident of Guam (or any other U.S. 

Territory where an emergency occurs) in 

order for Medicare to pay for those 

services. Because section 1814(f)(2) of 

the Act and our regulations at § 424.122 

already directly address when Medicare 

payment may be made for emergency 

inpatient services furnished in foreign 

hospitals, it is unnecessary to outline 

those provisions again in 42 CFR 409.3, 

409.5, 410.66, and 413.74 of the 

regulations. 

With respect to the question 

concerning Medicare beneficiaries who 

maintain their residence outside the 50 

States, the District of Columbia, Puerto 

Rico, the Virgin Islands, Guam, 

American Samoa, or the Northern 

Mariana Islands as we noted above, 

section 1814(f)(2) of the Act and 

§ 424.122 of the regulations do not 

require that a beneficiary be a resident 

of Guam (or any other U.S. Territory 

where an emergency occurs) in order for 

Medicare to pay for emergency inpatient 

services that a Medicare beneficiary 

receives from a foreign hospital. 

However, section 1814(f)(1) of the Act 

and § 424.123 of the regulations require 

that, in order for payment to be made for 

nonemergency inpatient hospital 

services that a Medicare beneficiary 

receives at a hospital located outside the 

United States, the beneficiary must be a 

U.S. resident who received these 

nonemergency services at a hospital 

located outside of the United States that 

either was closer to, or was substantially 

more accessible from, the beneficiary’s 

residence than the nearest U.S. hospital 

that was adequately equipped and 

available to treat the beneficiary. 

With respect to beneficiaries who are 

forced to travel great distances to reach 

hospitals in the United States, although 

we are concerned about the health and 

safety of Medicare beneficiaries, CMS 

does not have the legal authority to 

expand upon the foreign services for 

which Medicare may make payment, 

because Medicare law prohibits 

payment for items and services 

furnished outside the United States, 

except for certain limited services (see 

sections 1814(f) and 1862(a)(4) of the 

Act). 

After consideration of the public 

comments received, we are adopting as 

final, without modification, the 

amendments to our existing regulations 

regarding services furnished outside the 

United States described above. 

In the FY 2007 IPPS proposed rule, 

we also proposed to make some related 

technical changes. In §§ 409.3(e) and 

424.123(c)(2), we proposed to change 

the references from the Joint 

Commission on Accreditation of 

Hospitals (JCAH) to the Joint 

Commission on Accreditation of 

Healthcare Organizations (JCAHO), the 


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current name of that organization. In 

§ 424.121(c), we proposed to change the 

obsolete cross-reference from § 405.313 

to the correct cross-reference, § 411.9. 

We did not receive any public 

comments on these technical changes. 

Therefore, we are adopting as final, 

without modification, the technical 

changes to §§ 409.3(e), 424.123(c)(2), 

and 424.121(c) described above. 

VIII. Payment for Blood Clotting Factor 

Administered to Inpatients With 

Hemophilia 

Section 1886(a)(4) of the Act excludes 

the costs of administering blood clotting 

factors to inpatients with hemophilia 

from the definition of ‘‘operating costs 

of inpatient hospital services.’’ Section 

6011(b) of Pub. L. 101–239 states that 

the Secretary of Health and Human 

Services shall determine the payment 

amount made to hospitals under 

Medicare Part A for the costs of 

administering blood clotting factors to 

individuals with hemophilia by 

multiplying a predetermined price per 

unit of blood clotting factor by the 

number of units provided to the 

individual. The regulations governing 

payment for blood clotting factors 

furnished to hospital inpatients and for 

payment for the furnishing fee are 

located in §§ 412.2(f)(8) and 412.115(b). 

In FY 2005, we made payments for 

blood clotting factors furnished to 

inpatients at 95 percent of average 

wholesale price (AWP), consistent with 

the rates then paid under section 

1842(o) of the Act for Medicare Part B 

drugs (including blood clotting factor 

furnished to beneficiaries who are not 

inpatients). 

Section 303 of Pub. L. 108–173 added 

section 1847A to the Act. Effective 

January 1, 2005, this section requires 

that almost all Medicare Part B drugs 

not paid on a cost or prospective basis 

be paid at 106 percent of average sales 

price (ASP), while section 1842(o)(5) of 

the Act provides for a Medicare Part B 

payment of a furnishing fee for blood 

clotting factor. On November 15, 2004, 

we published regulations in the Federal 

Register (69 FR 66310 through 66319) 

that implemented the provisions of 

section 1847A of the Act. These 

regulations are codified at Subpart K of 

Part 414 and § 410.63, respectively. 

The furnishing fee is updated each 

calendar year as specified by section 

1842(o)(5) of the Act. The furnishing fee 

for clotting factor for years after CY 2005 

is equal to the fee for the previous year 

increased by the percentage increase in 

the consumer price index (CPI) for 

medical care for the 12-month period 

ending with June of the previous year. 

This requirement is set forth in our 

regulations at § 410.63. 

In the FY 2006 IPPS final rule (70 FR 

47473), we amended our regulations at 

§§ 412.2(f)(8) and 412.115(b) to state 

that, for discharges occurring on or after 

October 1, 2005, we make payment for 

blood clotting factor administered to 

hospital inpatients using the Medicare 

Part B payment amounts for blood 

clotting factor as determined under 

Subpart K of 42 CFR Part 414 and for 

the furnishing fee as determined under 

§ 410.63. 

On November 21, 2005, we issued 

regulations in the Federal Register (70 

FR 70225) updating the furnishing fee 

payment amount for CY 2006. We 

announced that the increase in the CPI 

for medical care for the 12 months 

ending June 30, 2005 was 4.2 percent. 

Consequently, the furnishing fee for CY 

2006, initially established effective 

January 1, 2005, at $0.14 per unit of 

clotting factor, for CY 2006 was set at 

$0.146 per individual unit (I.U.) for 

blood clotting factor. We indicated in 

the preamble to that rule that while ‘‘the 

furnishing fee payment rate is 

calculated at 3 digits, the actual amount 

paid to providers and suppliers is 

rounded to 2 digits.’’

The fiscal intermediaries continue to 

use the Medicare Part B Drug Pricing 

File to make payments for blood clotting 

factor. The furnishing fee is included in 

the ASP price per unit sent with the 

Medicare Part B Drug Pricing File that 

is updated annually. By using the 

Medicare Part B Drug Pricing File, 

Medicare will be making consistent 

payments for blood clotting factor 

provided to inpatients and outpatients. 

For further updates on pricing, we refer 

readers to the Medicare Part B drug 

pricing regulations. 

Comment: Two commenters 

addressed the blood clotting policy in 

response to the proposed rule. One 

commenter supported CMS in its quest 

for a uniform approach for drug 

payment. Both commenters 

recommended that CMS continue to 

provide the additional payment for 

blood clotting factor administered to 

hemophiliac inpatients in the future 

even if severity-adjusted DRGs are 

implemented. 

Response: We appreciate the 

commenters’ support. The blood 

clotting factor policy will remain 

unchanged even if there are changes to 

the DRG system. CMS will continue to 

provide the additional payment for 

blood clotting factor administered to 

hemophilia inpatients. As we stated in 

our proposed rule (79 FR 24136) and 

restated in this final rule, by fiscal 

intermediaries utilizing the Medicare 

Part B Drug Pricing File, Medicare will 

be making consistent payments for 

blood clotting factor provided to 

inpatients and outpatients. For further 

updates on pricing, readers should refer 

to the Medicare Part B drug pricing 

regulations. 

IX. Limitation on Payments to Skilled 

Nursing Facilities for Bad Debt 

A. Background 

Under section 1861(v)(1) of the Act 

and § 413.89 of our existing regulations, 

Medicare may pay some or all of the 

uncollectible deductible and 

coinsurance amounts to those entities 

paid under a reasonable cost payment 

methodology that are eligible to receive 

payment for bad debt. Under our 

existing regulations, Medicare generally 

pays 100 percent of allowable bad debt 

amounts to most entities eligible to 

receive bad debt payment, including 

SNFs, CAHs, rural health clinics, 

federally qualified health clinics, 

community mental health clinics, health 

maintenance organizations reimbursed 

on a cost basis, competitive medical 

plans, and health care prepayment 

plans. To determine if bad debt amounts 

are allowable, the requirements at 

§ 413.89 and the Provider 

Reimbursement Manual (PRM) (CMS 

Pub. 15 Part 1, Chapter 3) must be met. 

However, under section 

1861(v)(1)(T)(iv) of the Act and our 

existing regulations, Medicare payments 

for allowable bad debt amounts for 

hospitals are reduced by 30 percent. 

Moreover, under our existing 

regulations, Medicare does not pay for 

bad debt amounts arising from 

anesthetists’ services paid under a fee 

schedule (§ 413.89(i)). In addition, 

although Medicare pays end-stage renal 

disease (ESRD) facilities 100 percent of 

allowable bad debt claims, these 

payments are capped at facilities’

unrecovered cost (§ 413.178 of the 

regulations). 

B. Changes Made by Section 5004 of 

Pub. L. 109–171 

Section 5004 of Pub. L. 109–171 (DRA 

of 2005) amended section 1861(v)(1) of 

the Act to mandate that, for cost 

reporting periods beginning on or after 

October 1, 2005, Medicare payments to 

SNFs for certain allowable bad debt 

amounts be reduced. Specifically, for 

Medicare beneficiaries who are not dual 

eligible individuals (as defined in 

section 1935(c)(6)(A)(ii) of the Act), 

allowable bad debt amounts attributable 

to the coinsurance amounts under the 

Medicare program are reduced by 30 

percent (deductibles are not applicable 

to patients in SNFs). Allowable bad debt 


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amounts for Medicare beneficiaries who 

are dual eligible individuals (as defined 

in section 1935(c)(6)(A)(ii) of the Act) 

will continue to be paid at 100 percent. 

C. Proposed Regulation Changes 

In the FY 2007 IPPS proposed rule (71 

FR 24137), we proposed to conform the 

Medicare regulations under § 413.89 to 

the provisions of section 5004 of Pub. L. 

109–171. Specifically, we proposed to 

revise paragraph (h) by redesignating 

the existing contents as paragraph (h)(1) 

and add a new paragraph (h)(2) to 

reflect this payment limitation. We 

proposed to include in paragraph (h)(2) 

a cross-reference to the definition of 

‘‘full-benefit dual eligible individual’’

found at § 423.772 of our regulations. In 

addition, we proposed to revise 

§ 413.89(a) to add a cross-reference to 

the existing limitations on payments to 

hospitals and the proposed new 

limitations on payments to SNFs found 

in paragraph (h), and to correct the 

cross-reference to the exception for 

payments for bad debts arising from 

anesthetists’ services paid under a fee 

schedule from ‘‘paragraph (h)’’ to 

‘‘paragraph (i).’’

Comment: One commenter expressed 

concern that under the proposed 

definition of a ‘‘full benefit dual eligible 

individual’’ found at § 423.772 of our 

regulations, SNFs will not only have to 

document that the patient is eligible for 

both Medicare and Medicaid services 

but also will now have to document that 

the patient has coverage under a 

prescription drug plan under Part D of 

Title XVIII of the Act or under an MA–

PD plan under Part C of Title XVIII of 

the Act. The commenter stated that the 

additional documentation will increase 

the burden on SNFs to provide 

documentation. 

Response: After reviewing the 

legislative background associated with 

section 5004 of Pub. L. 109–171, we 

determined that it was not the Congress’

intent to reduce bad debt payments to 

SNFs for individuals who are eligible 

for both Medicare and Medicaid, also 

known as dual eligible individuals. 

Section 5004 defines ‘‘dual eligible 

individuals’’ as individuals who are 

entitled to benefits under Part A of 

Medicare and are described in section 

1935(c)(6)(A)(ii) of the Act. 

The definition of a ‘‘full-benefit dual 

eligible individual’’ at section 

1935(c)(6)(A) of the Act is codified at 

§ 423.772 of the regulations. 

Specifically, section 1935(c)(6)(A) of the 

Act defines a ‘‘full-benefit dual eligible 

individual’’ in terms of both clause (i) 

and (ii). Section 1935(c)(6)(A)(i) of the 

Act (and paragraph (1) under the 

definition of ‘‘full-benefit dual eligible 

individual’’ at § 423.772) states that the 

individual must have coverage for the 

month for covered Part D drugs under 

a prescription drug plan under Part D of 

Title XVUIII of the Act or under an MA–

PD plan under Part C of title XVIII of the 

Act. Section 1935(c)(6)(A)(ii) of the Act 

(and paragraph (2) under the definition 

of ‘‘full-benefit dual eligible individual’’

at § 423.772) states the individual must 

be determined eligible by the State for 

medical assistance for full benefits 

under Title XIX of the Act under section 

1902(a)(10)(A) or section 1902(a)(10)(C), 

by reason of section 1902(f) of the Act, 

or under any other category of eligibility 

for medical assistance for full benefits 

under Title XIX of the Act. Clearly, the 

Congress did not include the criterion at 

section 1935(c)(6)(A)(i) of the Act (and, 

thus, paragraph (1) under the definition 

of ‘‘full-benefit dual eligible individual’’

at § 423.772) for defining dual eligible 

individuals to determine the 

applicability of the reduction of bad 

debt payments under section 5004 of 

Pub. L. 109–171. 

Accordingly, for this final rule, we are 

revising the proposed regulation text at 

new § 413.89(h)(2) to better conform 

with the language of the statute by 

defining a dual eligible individual as an 

individual who is entitled to benefits 

under Part A of Medicare and is 

determined eligible by the State for 

medical assistance under title XIX as 

described under paragraph (2) of the 

definition of a full-benefit dual eligible 

individual at § 423.772. We believe that 

this revision addresses the concerns 

expressed by the commenter. 

Comment: One commenter stated that, 

in April 2006, CMS issued revisions to 

the freestanding SNF Medicare cost 

reporting Form 2540–96 and 

instructions to implement the 

provisions of section 5004 of Pub. L. 

109–171 but has not issued similar 

revisions to the hospital-based (distinct 

part) SNF Medicare cost reporting Form 

2552–96. The commenter requested that 

CMS clarify whether the provisions of 

section 5004 will or will not apply to 

both freestanding and hospital-based 

SNFs. 

Response: Section 5004 of Pub. L. 

109–171 applies to both freestanding 

and hospital-based SNFs. We are 

currently preparing revisions to the 

hospital-based SNF Medicare cost 

reporting Form 2552–96 and 

instructions to implement the 

provisions of section 5004. We 

anticipate that the revisions will be 

issued in a Transmittal to the Provider 

Reimbursement Manual—Part 2 (Pub. 

#15–2) prior to the publication of this 

final rule. 

After consideration of the public 

comments received, we are adopting as 

final, with one modification, the 

amendments needed to conform our 

regulations to the provisions of section 

5004 of Pub. L. 109–171, and to add and 

correct the cross-references, as 

described above. 

X. MedPAC Recommendations 

We are required by section 

1886(e)(4)(B) of the Act to respond to 

MedPAC’s IPPS recommendations in 

our annual proposed IPPS rule. We have 

reviewed MedPAC’s March 2006 

‘‘Report to the Congress: Medicare 

Payment Policy’’ and have given it 

careful consideration in conjunction 

with the proposed policies set forth in 

this document. MedPAC’s 

Recommendation 2A states that ‘‘The 

Congress should increase payment rates 

for the acute inpatient and outpatient 

prospective payment systems in 2007 by 

the projected increase in the hospital 

market basket index less half of the 

Commission’s expectation for 

productivity growth.’’ This 

recommendation is discussed in 

Appendix B to this final rule. 

In section II.C. of the preamble of this 

final rule, we further address MedPAC’s 

2005 recommendations included in 

Recommendation 1 in the March 2005 

Report to Congress on Physician-Owned 

Specialty Hospitals as well as 

Recommendation 3, which 

recommended that the Secretary 

implement MedPAC’s recommended 

policies over a transition period. The 

recommendations in Recommendation 1 

relate to refining the DRGs used under 

the IPPS to more fully capture 

differences in severity of illness among 

patients; basing the DRG relative 

weights on the estimated cost of 

providing care rather than on charges; 

and basing the weights on the national 

average of hospitals’’ relative values in 

each DRG. In section II.E. of the 

preamble to this final rule, we also 

further address Recommendation 2 of 

the March 2005 Report on PhysicianOwned Specialty Hospitals, which 

recommended adjusting the DRG 

relative weights to account for 

differences in the prevalence of highcost outlier cases. 

For further information relating 

specifically to the MedPAC reports or to 

obtain a copy of the reports, contact 

MedPAC at (202) 653–7220, or visit 

MedPAC’s Web site at: 

www.medpac.gov. 


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XI. Health Care Infrastructure 

Improvement Program: Selection 

Criteria for Loan Program for 

Qualifying Hospitals Engaged in 

Cancer-Related Health Care and 

Forgiveness of Indebtedness 

A. Background 

Section 1016 of the Medicare 

Prescription Drug, Improvement and 

Modernization Act of 2003 (MMA) (Pub. 

L. 108–173) amended the Act to add 

section 1897, which establishes the 

Health Care Infrastructure Improvement 

Program. Section 1897 of the Act 

authorizes the Secretary to establish a 

loan program that provides loans to 

qualifying hospitals for payment of the 

capital costs of eligible projects. Section 

1897(d) of the Act specifies that an 

eligible project is a project of a 

qualifying hospital that is designed to 

improve the health care infrastructure of 

the hospital, including construction, 

renovation, or other capital 

improvements. Section 1897(b) of the 

Act requires the Secretary to establish 

the application process, the terms and 

conditions, and other requirements for 

the loan program. The statute was 

subsequently amended by section 6045 

of the Emergency Supplemental 

Appropriations Act for Defense, the 

Global War on Terror, and Tsunami 

Relief, 2005 (the Tsunami Relief Act of 

2005) (Pub. L. 109–13) to also provide 

that any determination made by the 

Secretary under section 1897 of the Act 

is not subject to any administrative or 

judicial review. 

Section 1897(c)(2) of the Act defines 

a ‘‘qualifying hospital’’ as a hospital or 

entity that is engaged in research in the 

causes, prevention, and treatment of 

cancer; and is designated as a cancer 

center by the National Cancer Institute 

(NCI) or is designated by the State 

legislature as the official cancer institute 

of the State and such designation by the 

State legislature occurred prior to 

December 8, 2003. Section 1897(c)(3) of 

the Act, as added by Pub. L. 109–13, 

specifies that an ‘‘entity’’ has the same 

meaning as specified in section 

501(c)(3) of the Internal Revenue Code 

of 1986 and is exempt from tax under 

section 501(a) of the Code; has at least 

one existing memorandum of 

understanding or affiliation agreement 

with a hospital located in the State in 

which the entity is located; and retains 

clinical outpatient treatment for cancer 

on site as well as laboratory research 

and education and outreach for cancer 

in the same facility. Section 1897(c)(3) 

of the Act is effective as if included in 

the enactment of Pub. L. 108–173. 

Section 1897(f) of the Act provides 

that the Secretary may forgive a loan 

provided to a qualifying hospital, under 

terms and conditions that are analogous 

to the loan forgiveness provision for 

student loans under part D of title IV of 

the Higher Education Act of 1965 (20 

U.S.C.1087a et seq.). However, the 

Secretary must condition such 

forgiveness on the establishment by the 

hospital of (1) an outreach program for 

cancer prevention, early diagnosis, and 

treatment that provides services to a 

substantial majority of the residents of 

the State or region, including residents 

of rural areas; (2) an outreach program 

for cancer prevention, early diagnosis, 

and treatment that provides services to 

multiple Indian tribes; and (3) unique 

research resources (such as population 

databases), or an affiliation with an 

entity that has unique research 

resources. 

In addition, section 1897(h) of the Act 

requires the Secretary to submit to 

Congress within 4 years after enactment 

of Pub. L. 108–173 a report on the 

projects for which loans are provided 

under section 1897 of the Act and a 

recommendation as to whether the 

Congress should authorize the Secretary 

to continue loans under this section 

beyond FY 2008. 

Prior to the enactment of Pub. L. 109–

13, section 1897(g) (1) of the Act 

provided for the appropriation of 

$200,000,000 to carry out the loan 

program. The funds allocated for the 

loan program are to remain available 

during the period beginning on July 1, 

2004, and ending on September 30, 

2008. However, the Congress rescinded 

$58,000,000, through Pub. L. 109–13, 

leaving $142,000,000 available for the 

loan program. Section 1897(g) of the Act 

also states that, of the $142,000,000, not 

more than $2,000,000 can be used for 

the administration of the loan program 

for each fiscal year from FY 2004 

through FY 2008). (We note that no 

administrative funding was used in FY 

2004.) 

B. Issuance of an Interim Final Rule 

With Comment Period and a Proposed 

Regulation 

On September 30, 2005, we published 

two rules in the Federal Register (an 

interim final rule with comment period 

(70 FR 57368) and a proposed rule (70 

FR 57376)) to establish the loan program 

to improve certain hospital 

infrastructure, including capital 

improvement, as provided for under the 

Health Care Infrastructure Improvement 

Program established under section 1897 

of the Act. In the September 30, 2005 

interim final rule with comment period, 

we set forth, under a new 42 CFR 

Chapter IV, Subchapter H, Part 505, the 

Federal regulations established by the 

Secretary governing requirements for 

qualifying hospitals or entities, the 

application process, and the criteria and 

conditions for selecting eligible projects 

under the loan program. In the 

September 30, 2005 proposed rule, we 

proposed to establish the loan 

forgiveness criteria for qualifying 

hospitals that receive loans under the 

Health Care Infrastructure Improvement 

Program. 

C. Provisions of the Interim Final Rule 

With Comment Period 

1. Loan Qualifying Criteria (§§ 505.3, 

505.5(a), and 505.11) 

In order to receive a loan under the 

Health Care Infrastructure Improvement 

Program, an applicant must meet the 

statutory definition of a qualifying 

hospital as defined in sections 

1897(c)(2) and (c)(3) of the Act. We 

incorporated these definitions in the 

regulations at § 505.3. 

We specified in the regulations at 

§ 505.11 that a qualifying hospital must 

submit an application to CMS by a 

specified date to request a loan for the 

capital costs of an eligible project. We 

specified the requirements and 

procedures for submittal of the 

application. 

In § 505.5(a), we provided that the 

capital costs for which a qualifying 

hospital may obtain a loan are limited 

to the reasonable costs incurred by the 

hospital, and capitalized on the 

Medicare cost report, for any facility or 

item of equipment that it has acquired 

the possession or use of at the time the 

loan funding is awarded. 

2. Selection Criteria (§ 505.5(b) and (c)) 

We established the criteria under 

which qualifying hospitals are 

prioritized for the loan program. We 

specified that we prioritize applicants 

that meet the following conditions: 

(a) The hospital is located in a State 

that, based on population density, is 

defined as a rural State. 

(2) The hospital is located in a State 

with multiple Indian tribes. 

We indicated that CMS will send 

written notice to qualifying hospitals 

that have been selected to participate in 

the loan program. 

3. Terms of the Loan (§§ 505.7 and 

505.9) 

Under the terms of the loan program, 

we specified that we require an 

authorized official of each qualifying 

hospital to execute a promissory note, 

loan agreement, or any other approved 

form that we may designate, to ensure 

compliance with the terms of the loan 

program. In the interim final rule, we 


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indicated that each loan recipient 

receives a lump sum distribution for 

which payment of principal and interest 

is deferred for 60 months beginning 

with the day of official notification to 

the qualifying hospital of loan award. 

The loan repayment period is 20 years. 

(However, as discussed in section XI.B. 

of this preamble, in the September 30, 

2005 proposed rule, we further 

proposed forgiveness criteria for loans, 

as directed by the statute.) 

In accordance with the loan criteria, 

the loan recipient must agree to make 

payments every month for 20 years until 

the loan, including interest, is repaid. A 

loan recipient may make full 

prepayment or partial prepayment 

without paying any prepayment charge. 

When a prepayment is made, the 

qualifying hospital must provide CMS 

with written notice. 

Furthermore, the loan recipient must 

agree that the provisions of a loan under 

section 1897 of the Act does not—

• Relieve the hospital of any 

obligation to obtain any required State 

or local permit or approval with respect 

to the project; 

• Limit the right of any unit of State 

or local government to approve or 

regulate any rate of return on private 

equity invested in the project; or 

• Otherwise supersede any State or 

local law (including any regulation) 

applicable to the construction or 

operation of the project. 

4. Public Comments Received on the 

Interim Final Rule With Comment 

Period 

We received seven public comments 

on the September 30, 2005 interim final 

rule. 

Comment: In general, commenters 

expressed concern that many qualifying 

hospitals providing cancer care to rural 

areas and Native populations 

throughout the country may not qualify 

to participate in the loan program since 

the regulatory criteria require that 

qualifying hospitals be located in one of 

the ten states listed. Moreover, one 

commenter was concerned that CMS 

may have misconstrued Congressional 

intent in establishing the selection 

criteria based on the statutory terms for 

loan forgiveness. The commenter noted 

that the proposed selection criteria 

relied on location and population rather 

than the merits of the application in 

order to award loans. Some commenters 

expressed concern that the selection 

criteria were too restrictive because 

preference was conferred to the 10 least 

populated states with the greatest 

numbers of Indian tribes in the country. 

Some commenters suggested that CMS 

expand the selection criteria to allow all 

qualifying hospitals that serve rural and 

Indian tribe populations to be 

considered for loan funds. In addition, 

one commenter suggested that in order 

to maximize the benefit to a greater 

number of applicants, CMS limit the 

amount of available loan funds to $10 

million per State. 

Response: The statute instructs the 

Secretary to establish criteria for 

selecting among qualifying hospitals 

that apply for a loan under this section. 

The criteria are to consider the extent to 

which the project for which the loan is 

sought is nationally or regionally 

significant, in terms of expanding or 

improving the healthcare infrastructure 

of the United States or the region or in 

terms of the medical benefit that the 

project will have. Section 1897 of the 

Act also provides for loan forgiveness 

and, in setting conditions for loan 

forgiveness, requires that qualifying 

hospitals establish certain outreach 

programs that include rural areas and 

Indian tribe populations. Therefore, we 

continue to believe it is appropriate to 

prioritize qualifying hospitals for 

purposes of making loans to qualifying 

hospitals based on rural and Indian tribe 

criteria as previously discussed in the 

interim final rule. We stated in the 

interim final rule that, ‘‘Since the statute 

outlines specific criteria in which to 

forgive loans, we believe that it is 

consistent with the Congressional intent 

to give priority to qualifying hospitals 

that meet at least some of the statutory 

conditions for loan forgiveness when 

selecting qualifying hospitals for the 

loan program’’ (70 FR 57369). We note 

that there are many outstanding 

hospitals providing cancer care in the 

country and we believe the selection 

criteria will allow us to select from 

applicants that both demonstrate merit 

and meet the priorities that are 

indicated in the statutory language for 

this loan program. 

In response to the comment regarding 

State limits on available loan funds, we 

disagree that a $10 million limit per 

State would be in the best interests of 

qualifying hospitals. Section 1897(d) of 

the Act directs that loan funds are to be 

used for qualifying projects, defined in 

statute as ‘‘designed to improve the 

healthcare infrastructure of the hospital, 

including construction, renovation, or 

other capital improvements.’’ We note 

that construction, renovation, or other 

capital improvement projects for 

qualifying hospitals providing cancer 

care are likely to be costly and require 

large expenditures. We believe limiting 

the loan amount to a total of $10 million 

for all applicants within a State could 

inadvertently cause some qualifying 

hospitals to receive insufficient funding 

for their eligible project. Insufficient 

funding may also hinder a qualifying 

hospital’s ability to establish the 

outreach programs and unique research 

resources that are required for loan 

forgiveness and intended to benefit the 

community through the qualifying 

hospital’s participation in this loan 

program. 

Comment: One commenter noted that 

the statutory language did not limit 

qualifying hospitals to entities that file 

cost reports and suggested that the 

regulations be modified to allow a state 

university/cancer research center that is 

not an entity described at section 

501(c)(3) of the Internal Revenue Code 

of 1986, but that meets all other 

requirements, to be considered a 

qualifying hospital under this loan 

program. In addition, the commenter 

asked why CMS proposed that a 

qualifying hospital that had not 

acquired the possession and use of 

assets which it intends as a qualifying 

project under this loan program must 

have entered into a contractual 

obligation for those projects before 

December 8, 2003, the date of enactment 

of Pub. L. 108–173. 

Response: We are not requiring that 

qualifying hospitals be entities that file 

cost reports. Since CMS is administering 

the program, we believe that it is 

appropriate to apply our reasonable cost 

methodology to determine the capital 

costs of an eligible project where 

applicable. We note that it is the statute 

that defines qualifying hospitals to 

include an entity described at section 

501(c)(3) of the Internal Revenue Code 

of 1986 and not a definition established 

through regulations. Finally, we believe 

it is appropriate to specify a deadline for 

which qualifying hospitals must have 

had a written commitment of assets 

intended as eligible projects. A deadline 

allows CMS to make a determination 

that the requested loan amount is 

reasonable and appropriate for the 

eligible project. Without a deadline we 

would not be able to determine the 

parameters of the eligible project. We 

chose December 8, 2003, because that 

was the date Pub. L. 108–173 was 

enacted. 

5. Provisions of This Final Rule 

This final rule finalizes the provisions 

set forth in the September 30, 2005 

interim final rule with comment, 

without modification. 

D. Proposed Rule on Forgiveness of 

Indebtedness 

In the September 30, 2005 proposed 

rule, we proposed to establish the loan 

forgiveness criteria for qualifying 

hospitals that are selected to participate 


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in the loan program under the Health 

Care Infrastructure Improvement 

Program. 

1. Conditions for Loan Forgiveness 

(§ 505.13) 

As specified in section 1897(f) of the 

Act, we proposed to forgive a loan 

provided to a qualifying hospital under 

terms and conditions that are analogous 

to the loan forgiveness provision for 

student loans under part D of title IV of 

the Higher Education Act of 1965 (20 

U.S.C. 1087a et seq.). The student loan 

program specifies that in order to be 

eligible for loan forgiveness, borrowers 

are required to satisfy certain 

conditions, such as completing a service 

obligation that satisfies certain terms 

and conditions as determined by the 

Secretary. Therefore, we proposed that, 

to fulfill the service obligation, 

borrowers must meet the loan 

forgiveness conditions based on the 

provisions of section 1897(f) of the Act. 

Section 1897(f) of the Act provides that 

the Secretary shall condition such 

forgiveness on the establishment by the 

hospital of (1) an outreach program for 

cancer prevention, early diagnosis, and 

treatment that provides services to a 

substantial majority of the residents of 

a State or region, including residents of 

rural areas; (2) an outreach program for 

cancer prevention, early diagnosis, and 

treatment that provides services to 

multiple Indian tribes; and (3) unique 

research resources (such as population 

databases), or an affiliation with an 

entity that has unique research 

resources. 

In addition, we proposed that the 

qualifying hospital must submit a 

written request for loan forgiveness to 

CMS by the effective date of the final 

rule (that is, October 1, 2006). 

2. Plan Criteria for Meeting the 

Conditions for Loan Forgiveness 

(§ 505.15) 

In the September 30, 2005 proposed 

rule, we proposed to specify the loan 

forgiveness criteria under three 

domains, as outlined in section XI.C.1 of 

this preamble, that are consistent with 

the sections 1897(f)(A), (f)(B), and (f)(C) 

of the Act: (a) Domain 1—Outreach 

program for cancer prevention, early 

diagnosis, and treatment that provides 

services to a substantial majority of the 

residents of a State or region, including 

residents of rural areas; (b) Domain 2—

Outreach program for cancer 

prevention, early diagnosis, and 

treatment that provides services to 

multiple Indian tribes; and (c) Domain 

3—Unique research resources (such as 

population databases), or an affiliation 

with an entity that has unique research 

resources. 

Specifically, we proposed to add 

§§ 505.13, 505.15, and 505.17 to provide 

that the qualifying hospital must 

designate in its plan to CMS—

• The population(s) for which it 

would target its outreach programs. 

• Sufficient detail to clearly describe 

how it would designate its targeted 

populations and that the populations 

designated should be in accordance 

with the provisions of the statute. 

• A detailed description of how it 

would identify the cancer types that it 

is targeting. 

• A detailed description of the 

approaches it would be conducting or 

implementing, including the reasons 

why the intervention approaches were 

selected and why they may make a 

difference in improving cancer care for 

the targeted population. 

• Improvement goals for the 

prevention, early diagnosis, and 

treatment, for each cancer type 

identified in its outreach programs. 

• At least one measure (for example, 

either an outcome measure or a process 

measure) used to track its progress in 

achieving the goals it has established for 

each area of prevention, early diagnosis, 

and treatment, for each cancer type 

identified in its plan. 

• A description of how it would 

establish or maintain existing unique 

research resources or how it would 

establish or maintain existing unique 

research resources or an affiliation with 

another entity that has unique research 

resources. 

We proposed at § 505.13(c) that the 

qualifying hospital must submit to CMS 

by the timeframe specified by the 

Secretary the following: (1) A written 

request for loan forgiveness; (2) a plan 

describing how the qualifying hospital 

would establish, implement or maintain 

existing outreach programs for its 

targeted populations; and (3) how it 

would establish or maintain existing 

unique research resources or an 

affiliation with an entity that has unique 

research resources over the loan 

deferment period. We proposed to make 

that timeframe 60 days after the 

publication of the final rule. 

In proposed § 505.3, we proposed to 

define ‘‘outreach programs’’ as formal 

cancer programs for teaching, diagnostic 

screening, therapy or treatment, 

prevention, or interventions to enhance 

the health and knowledge of their 

designated population(s). Likewise, we 

proposed to define ‘‘unique research 

resources’’ as resources that are used for 

the purpose of discovering or testing 

options related to the causes, 

prevention, and treatment of cancer. 

We invited specific public comments 

on the type of information that must be 

included in the plan and the timeframe 

for a qualifying hospital to submit its 

plan to CMS. We also solicited 

comments on whether we should 

provide more specific criteria for the 

qualifying hospital to use in defining its 

targeted populations. 

We believed that 60 days after the 

final rule publication date is reasonable 

time for qualifying hospitals intending 

to apply for loan forgiveness to prepare 

and submit their initial plan, since the 

loan deferment period is up to 60 

months after notification of acceptance 

in the program and the qualifying 

hospital would be assessed on its 

performance during the loan deferment 

period. 

Furthermore, we believed that 

requiring the qualifying hospitals to 

submit a plan in which they would 

determine the targeted population, the 

types of cancers (that is, the cancer 

types to be considered), goals for 

improving prevention, diagnosis, and 

treatment, and the measures to track 

their progress in reaching the goals 

provides flexibility to the qualifying 

hospitals as they develop, implement, or 

maintain their outreach programs. 

We also believed that it is appropriate 

to request this level of detail from the 

qualifying hospitals because section 

1897(h) of the Act requires the Secretary 

to submit a report to the Congress before 

fiscal year 2008. The report must 

indicate the projects for which loans are 

provided under this section and 

recommend whether the Congress 

should authorize the Secretary to 

continue loans under this section 

beyond fiscal year 2008. Receiving this 

information from the qualifying 

hospitals is necessary for the Secretary 

to make a fully informed 

recommendation to the Congress. 

Under § 505.17, we proposed that the 

qualifying hospital must submit annual 

progress reports to CMS describing its 

progress in achieving its plan or any 

changes to the initial plan and a final 

annual report at least 6 months before 

the end of the 60-month loan deferment 

period. 

Further, we proposed under § 505.19 

that, if a qualifying hospital meets the 

conditions, plan criteria, and reporting 

requirements for loan forgiveness 

specified in § 505.13, § 505.15, and 

§ 505.17, the loan would be forgiven. 

We proposed that if the loan is forgiven, 

we would send written notification for 

the loan forgiveness approval to the loan 

recipient at least 90 days before the end 

of the loan deferment period. If the loan 

recipient does not meet the conditions, 

plan criteria, or reporting requirements 


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for the loan forgiveness specified in 

§ 505.13, § 505.15, and § 505.17, we 

proposed that we would send written 

notification for the denial of the loan 

forgiveness. 

3. Public Comments Received on the 

Proposed Rule and Our Responses 

We received one public comment on 

the September 30, 2005 proposed rule. 

Comment: One commenter suggested 

that the proposed loan deferment period 

of 60 months, during which the 

qualifying hospital is to establish 

outreach programs and unique research 

resources in accordance with the 

statutory conditions for loan 

forgiveness, is unnecessarily and 

excessively protracted. The commenter 

noted that the statute does not dictate 

the duration of the loan deferment 

period and that the statutory conditions 

for loan forgiveness can and should be 

accomplished with appropriate speed. 

The commenter urged CMS to shorten 

the deferment period, suggesting that 36 

months is sufficient time for qualifying 

hospitals to satisfy the statutory 

conditions for loan forgiveness. In fact, 

the commenter believed that the most 

meaningful steps toward satisfaction of 

the conditions for loan forgiveness 

should be accomplished within the first 

twelve months of the program. The 

commenter noted that the shortened 

time period would spur qualifying 

hospitals to establish the outreach 

programs and unique research resources 

more quickly thereby maximizing the 

benefit to the community and making 

the most out of the funding. 

Response: The proposed loan 

deferment period of 60 months was 

intended to ensure that qualifying 

hospitals had sufficient time to establish 

the outreach programs and unique 

research resources to achieve loan 

forgiveness. In the proposed rule, we 

specifically requested comments from 

the public regarding the timeframe in 

order to assess whether the proposed 

period was appropriate. We appreciate 

the commenter’s input that it is possible 

to establish the outreach programs and 

unique research resources as specified 

in the proposed rule within 36 months 

and possibly as early as 12 months, the 

shortest timeframe for which the 

commenter suggested the most 

meaningful steps could be 

accomplished. While the commenter 

suggested that 36 months is sufficient 

time for qualifying hospitals to satisfy 

the statutory conditions for loan 

forgiveness, we find that the 

commenter’s additional argument that 

delaying loan forgiveness could 

inadvertently and unnecessarily delay 

providing intended benefits to the 

public to be compelling. Therefore, 

considering that a qualifying hospital 

may be well on the way to satisfying the 

conditions for loan forgiveness within 

12 months, and in order to motivate 

loan recipients intending to strive for 

loan forgiveness to provide this benefit 

to the public as soon as feasible, we are 

changing the time period in which a 

qualifying hospital may be assessed and 

approved for loan forgiveness to as early 

as 12 months from the date that CMS 

notifies the qualifying hospital of the 

award of the loan. We note that, while 

60 months was likely an overestimate of 

the time needed to satisfy the terms for 

loan forgiveness, we are reluctant to 

limit all qualifying hospitals to 12 

months to accomplish the initiatives 

required for loan forgiveness based on 

the submission of one comment. 

Therefore, we believe it is more 

appropriate to provide for consideration 

of loan forgiveness as early as 12 

months from the date CMS notifies the 

qualifying hospital of the awarding of 

the loan and require that all evaluations 

for loan forgiveness must conclude no 

later than 60 months from the date CMS 

notifies the qualifying hospital of the 

awarding of the loan. 

4. Provisions of the Final Rule 

We are adopting as final the proposed 

changes to § 505.3 and the addition of 

§§ 505.13 and 505.15, with only minor 

editorial changes. To accommodate the 

option in which qualifying hospitals 

may establish the outreach programs 

and unique research resources to 

achieve loan forgiveness as early as 12 

months after loan notification, we are 

modifying § 505.17(b) as proposed to 

specify that CMS will use the annual 

report to assess the qualifying hospital’s 

loan forgiveness status and if the annual 

report shows that the qualifying hospital 

has fulfilled the conditions, plan 

criteria, and reporting requirements for 

loan forgiveness specified in §§ 505.13, 

505.15, and § 505.17, CMS will notify 

the qualifying hospital in writing that 

the loan is forgiven. We note that at 

§ 505.17(c), we specify that the 

qualifying hospital’s final annual report 

is due to CMS at least 6 months before 

the end of the loan deferment period 

specified in § 505.7(b). We are also 

modifying § 505.19 to specify that CMS 

will send a written notification of 

approval for loan forgiveness to the 

qualifying hospital by the earlier of (1) 

30 days from the date of receipt of the 

annual report that shows the qualifying 

hospital has satisfied the requirements 

for loan forgiveness; or (2) 90 days 

before the end of the loan deferment 

period defined in § 505.7(b). 

E. Statutory Requirements for Issuance 

of Regulations 

Section 902 of Pub. L. 108–173 

(MMA) amended section 1871(a) of the 

Act and requires the Secretary, in 

consultation with the Director of the 

Office of Management and Budget, to 

establish and publish timelines for the 

publication of Medicare final 

regulations based on the previous 

publication of a Medicare proposed or 

interim final regulation. Section 902 of 

the MMA also states that the timelines 

for these regulations may vary but shall 

not exceed 3 years after publication of 

the preceding proposed or interim final 

regulation except under exceptional 

circumstances. 

This final rule finalizes provisions set 

forth in the September 30, 2005 interim 

final rule with comment (70 FR 57368) 

and the September 30, 2005 proposed 

rule (70 FR 57376). In addition, this 

final rule is being published within the 

3-year time limit imposed by section 

902 of the MMA. Therefore, we believe 

that the final rule is in accordance with 

the Congress’ intent to ensure timely 

publication of final regulations. 

XII. Exclusion of Vendor Purchases 

Made Under the Competitive 

Acquisition Program (CAP) for 

Outpatient Drugs and Biologicals Under 

Part B for the Purpose of Calculating 

the Average Sales Price (ASP) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Exclusion of CAP from the ASP 

Calculation’’ at the beginning of your 

comments.] 

A. Background 

1. Average Sales Price (ASP) 

Section 303(c) of Pub. L. 108–173 (the 

MMA) revised the drug payment 

methodology by creating a new pricing 

system based on the ASP of a drug or 

biological. Effective January 2005, 

Medicare pays for the vast majority of 

Part B covered drugs and biologicals 

using a drug payment methodology 

based on the ASP. (Please note that 

information on covered outpatient drugs 

and biologicals can be found at: 

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

McrPartBDrugAvgSalesPrice/.) In 

accordance with sections 1847A and 

1927(b)(3)(A) of the Act, manufacturers 

submit the ASP data for their products 

to us on a quarterly basis, at the 11-digit 

National Drug Code (NDC) level. 

These data include each 

manufacturer’s total sales (in dollars) 

and number of units of a drug to all 

purchasers in the United States in a 

calendar quarter (excluding certain sales 

exempted by statute), with limited 


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exceptions, and other data elements 

pertaining to the NDC. The sales price 

is net of discounts such as volume 

discounts, prompt pay discounts, cash 

discounts, free goods that are contingent 

on any purchase requirement, 

chargebacks, and rebates (other than 

rebates under section 1927 of the Act). 

The Medicare payment rate is based on 

106 percent of the ASP, less applicable 

deductible and coinsurance amounts, 

and is updated quarterly. 

2. Competitive Acquisition Program 

(CAP) 

Section 303(d) of Pub. L. 108–173 

added a new section 1847B to the Act. 

This section provides for an alternative 

payment methodology to the ASP for 

certain Part B covered drugs and 

biologicals that are not paid on a cost or 

prospective payment basis by 

establishing a CAP for the acquisition of 

and payment for competitively-biddable 

Part B covered drugs and biologicals. 

This program began on July 1, 2006. 

Physicians now have a choice 

between—(1) obtaining these drugs from 

approved CAP vendors; and (2) 

acquiring and billing for Part B covered 

drugs under the ASP system. In the 

March 4, 2005 Federal Register (70 FR 

10746), we proposed regulations to 

establish provisions for acquiring and 

billing for drugs and biologicals through 

the CAP . (Please note that information 

on the CAP can be found at: http:// 

www.cms.hhs.gov/ 

CompetitiveAcquisforBios/.) 

3. Regulatory History 

In response to the March 4, 2005 

proposed rule, many commenters 

requested clarification about whether 

the prices determined under the CAP 

are taken into account in computing the 

ASP under section 1847A of the Act. 

Most commenters recommended that 

purchases made under the CAP be 

excluded from the ASP calculation. 

However, one commenter suggested 

that, because the CAP was not included 

in the list of sales that are exempt from 

the ASP calculation set forth in section 

1847A(c)(2) of the Act, prices under the 

CAP could not be excluded. In our July 

6, 2005 interim final rule with comment 

period (70 FR 39022), we responded 

that because the CAP was not included 

in the section 1847A(c)(2) of the Act list 

of sales that are exempt from the ASP 

calculation, we believed that sales to 

vendors made under the CAP must be 

included in the ASP. 

Commenters on the July 6, 2005 

interim final rule with comment period 

reiterated their objections to including 

purchases made by vendors under the 

CAP in the ASP calculations. These 

commenters requested that we change 

our interpretation of our statutory 

authority. Several commenters provided 

detailed legal arguments supporting the 

exclusion of purchases by vendors made 

under the CAP from the calculation of 

ASP. 

Some commenters stated that we 

could use our demonstration authority 

to exclude CAP prices from ASP. Other 

commenters took the position that we 

could use our authority to establish CAP 

drug categories to establish a category of 

drugs and biologicals that would be 

excluded from the ASP calculation. 

Several commenters stated that sales to 

approved CAP vendors should be 

considered excluded from the 

determination of ‘‘best price’’ under 

section 1927(c)(1)(C) of the Act. These 

commenters maintained that by virtue 

of this exclusion, prices of CAP drugs 

and biologicals could be excluded from 

the calculation of ASP. One commenter 

contended that sales to CAP vendors are 

excluded from best price because CAP 

vendors do not fit squarely into the list 

of entities contained in the definition of 

‘‘best price’’ in section 1927(c)(1)(C)(i) 

of the Act. Another commenter 

suggested that approved CAP vendors, 

as Medicare contractors, should be 

considered Federal purchasers exempt 

from the determination of best price 

under sections 1927(c)(1)(C)(i)(I) 

through (II) of the Act. 

Finally, several commenters stated 

that the intent of Congress was to create 

two different and separate structures, 

with separate pricing, in order to 

provide physicians with a choice of 

programs. These commenters referenced 

the language contained in sections 

1847A(a)(2) and 1847B(a)(1)(A) of the 

Act in support of their contentions. 

Section 1847A(a)(2) of the Act states 

that section 1847A ‘‘shall not apply in 

the case of a physician who elects under 

subsection (a)(1)(A)(ii) of section 1847B 

for that section to apply instead of this 

section for the payment for drugs and 

biologicals.’’ Section 1847B(a)(1)(A) of 

the Act states that ‘‘this section shall not 

apply in the case of a physician who 

elects section 1847A to apply.’’ These 

commenters stated that this language, 

which is contained in both the ASP and 

CAP statutory provisions, clearly 

indicates that Congress intended the 

two programs to operate independently. 

These commenters asserted that as 

independent programs, the pricing 

methodologies under ASP and the CAP 

should not be linked. These commenters 

further believed that including CAP 

prices in the calculation of ASP would 

undermine the CAP program by 

virtually eliminating any incentive that 

a manufacturer might have to offer 

discounts to CAP vendors. 

In response to the comments that we 

received on this issue, we revisited our 

analysis of our statutory authority. In 

the November 21, 2005 Federal Register 

(70 FR 70477), we published an interim 

final rule with comment in which we 

stated that we did not find entirely 

persuasive the commenters’ arguments 

regarding demonstration authority, best 

price, or the definition of categories as 

a legal basis for revising our 

interpretation. However, we recognized 

the commenters’ concerns about the 

effect of including CAP prices in the 

calculation of ASP and agreed that the 

best outcome for both the ASP 

methodology and the CAP programs 

would be one in which prices under 

CAP did not affect payment amounts 

under the ASP methodology. In 

addition, we found compelling the 

commenters’ statements about the 

separation of the ASP and CAP 

programs and that the two programs are 

intended to be alternatives to each 

other. We acknowledged the possibility 

that Congress intended the programs to 

be completely independent of each 

other. 

Therefore, as a result of our 

reassessment, and in accordance with 

our statutory authority, including our 

authority under section 1847A(b)(2)(B) 

of the Act to establish methods for 

counting units, we decided to exclude, 

for the initial 3-year contract period 

under the CAP, units of CAP drugs that 

are administered to beneficiaries by 

participating CAP physicians. We 

revised § 414.802 (definition of unit) to 

reflect the exclusion of units of CAP 

drugs administered to beneficiaries by 

participating CAP physicians. We 

further stated that we intend to examine 

the effect of this exclusion and, if 

necessary, revisit our decision at the 

end of the initial 3-year period of the 

CAP. We also clarified that 

manufacturers must exclude rebates and 

lagged price concessions attributable to 

units of CAP drugs administered to a 

beneficiary by a participating CAP 

physician when using the estimation 

methodology specified in § 414.804. 

On April 21, 2006, we announced the 

selection of the approved CAP vendor 

for the initial phase of the CAP. The 

approved CAP vendor is required to 

provide manufacturers, upon request, 

with information necessary to determine 

which sales to the approved CAP 

vendor are sales of CAP drugs that are 

excluded from the ASP calculation. 

We did not receive any timely 

comments on the November 21, 2005 

interim final rule with comment period. 

In a March 3, 2006 Federal Register 


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notice (71 FR 10975), we published a 

PRA notice soliciting comment on our 

proposed modification of the OMBapproved ASP information collection 

requirements, regarding the collection of 

the number of CAP units excluded from 

the ASP calculation. In response to this 

notice, a commenter stated that, in 

certifying the accuracy of the submitted 

ASP data, manufacturers must rely on 

approved CAP vendors to provide the 

number of units of CAP drugs that are 

administered to beneficiaries by 

participating CAP physicians. The 

commenter noted that CAP vendors are 

the only entities with direct information 

on CAP units sold. Because of this 

circumstance, the commenter believed 

that the requirement to exclude units of 

CAP drugs administered to beneficiaries 

by participating CAP physicians places 

the manufacturer in the untenable 

position of reporting ASP and certifying 

reports of ASP based on second-hand 

information. Further, the commenter 

noted that manufacturers may not have 

timely access to this information and 

they cannot independently confirm its 

accuracy. The commenter suggested that 

we consider an alternative approach. 

B. Regulation Change 

Existing § 414.802 requires that, 

during the first 3 years of the CAP, the 

method for counting units excludes 

units of CAP drugs (as defined in 

§ 414.902) administered to a beneficiary 

by a participating CAP physician (as 

defined in § 414.902). As a result of 

comments received on our March 3, 

2006 PRA notice and our ongoing work 

with manufacturers, we learned that 

manufacturers were concerned that they 

would have difficulty obtaining the 

information necessary to accurately 

exclude CAP units (as currently defined 

in § 414.802) from the ASP calculation. 

We have reexamined our current 

definition of unit based on the 

manufacturers concerns. 

After reexamination of the issues, we 

have determined that we did not fully 

consider that the current definition of 

unit may have unintended results. For 

example, an unintended result occurs 

when, as permitted by the statute in 

certain emergency situations under the 

CAP, the participating CAP physician 

administers a drug from his or her stock 

and orders a replacement from the 

approved CAP vendor. Our existing 

regulations specify a unit qualifies as a 

CAP unit when it is administered to a 

beneficiary by a participating CAP 

physician. However, in this instance, 

the drug that was administered was 

obtained outside the CAP, and the drug 

supplied by the approved CAP vendor 

was not administered to the beneficiary. 

Therefore, under our current definition 

of ‘‘unit,’’ under the CAP, the 

manufacturer could not exclude the 

units of CAP drugs that participating 

CAP physicians obtain from approved 

CAP vendors in accordance with the 

resupply provisions of § 414.906(e). 

This result would have the effect of 

inappropriately including the sales of 

units of CAP drugs in the ASP 

calculation. Moreover, this result is 

inconsistent with our intended policy. 

In addition, requiring manufacturers to 

track administration of units of CAP 

drugs that approved CAP vendors 

supply to participating CAP physicians 

to resupply the physician’s stock (in 

order to determine whether such drugs 

are ever administered to a Medicare 

beneficiary for purposes of excluding 

them from the calculation of ASP) 

would be burdensome for manufacturers 

and participating CAP physicians. 

These burdens are caused by the fact 

that manufacturers would have to rely 

on data from the participating CAP 

physicians to identify such units. 

However, our regulations and CAP 

participation agreement do not require 

participating CAP physicians to track 

the administration of drugs from their 

private stock. 

Our decision to exclude CAP units 

from the ASP was based on our 

concerns about the effect of including 

CAP prices in the calculation of ASP. 

The decision also was based on our 

belief that the best outcome for both the 

ASP methodology and the CAP 

programs would be one in which prices 

under CAP did not affect payment 

amounts under the ASP methodology. 

To remedy this unintended result and to 

better effectuate our intent in excluding 

CAP units, we are revising the 

definition of ‘‘unit’’ at § 414.802 for ASP 

purposes during the first 3 years of the 

CAP. We are persuaded by the 

commenters and by our review of the 

current regulation that: (1) the current 

definition of unit does not achieve the 

policy goal of establishing methods of 

counting units so that the payment 

amounts under the ASP methodology 

are not affected by the CAP; and (2) an 

alternative definition of unit will be 

significantly less burdensome on 

manufacturer, CAP vendors, and 

participating CAP physicians. 

Therefore, as a result of our 

reexamination, and in accordance with 

our authority under section 

1847A(b)(2)(B) of the Act to establish 

methods for counting units, we have 

decided to revise our definition of 

‘‘unit’’ in our regulations to exclude, for 

the initial 3-year contract period under 

the CAP, units of CAP drugs sold to an 

approved CAP vendor for use under the 

CAP. We note that the revised definition 

is consistent with suggestions made by 

commenters in response to the March 4, 

2005 proposed rule. Many commenters 

suggested that ‘‘sales to’’ or ‘‘purchases 

by’’ approved CAP vendors be excluded 

from the calculation of ASP. However, 

we are clarifying, that only those units 

of CAP drugs sold to an approved CAP 

vendor for use under the CAP are 

excluded from the calculation of ASP. 

In implementing this revised 

definition of unit, it is our intent to 

facilitate the start up of the CAP and 

reduce complexities and burdens 

associated with identifying units of CAP 

drugs excluded from the calculation of 

ASP. We believe the revised definition 

of unit establishes a method for 

counting units so that the payment 

amounts under the ASP methodology 

are not affected by the CAP. Further, we 

believe that manufacturers can more 

readily verify excluded units of CAP 

drugs in accordance with the revised 

definition. 

Manufacturers must continue to 

exclude rebates and lagged price 

concessions attributable to units of CAP 

drugs sold to approved CAP vendors for 

use under the CAP. 

We welcome comments on the 

exclusion of CAP drug units from the 

calculation of the ASP. We also seek 

comments on accounting for this 

exclusion when estimating lagged price 

concessions. We will address comments 

received in a subsequent Federal 

Register document. 

After the initial 3-year period of the 

CAP, we will evaluate the impact on 

approved CAP vendors, manufacturers, 

and others of excluding units sold to 

approved CAP vendors for use under 

the CAP from the calculation of ASP. If 

there appears to be a reason not to 

continue to exclude units of CAP drugs 

sold to approved CAP vendors for use 

under the CAP from the calculation of 

ASP, we will undertake rulemaking to 

describe our findings and conclusions 

and to seek public comment. 

XIII. 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 available in computer tape or 

cartridge format; however, some files are 

available on diskette as well as on the 

Internet at: http://www.cms.hhs.gov/ 

providers/hipps. In the FY 2007 IPPS 

proposed rule (71 FR 24137 through 

24139), we published a list of data files 


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that are available for purchase from 

CMS or that may be downloaded from 

the Internet without charge. 

B. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995 (PRA), 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 PRA 

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. 

The following information collection 

requirements are included in this final 

rule and their associated burdens are 

subject to the PRA: 

Section 412.64 Federal Rates for 

Inpatient Operating Costs for Federal 

Fiscal Year 2005 and Subsequent Fiscal 

Years (Reporting of Hospital Quality 

Data for Annual Hospital Payment 

Update) 

In the FY 2007 IPPS proposed rule (71 

FR 23996), we outlined the 

requirements for this section and we are 

restating those requirements and burden 

estimates as part of this final rule. 

Section 412.64(d)(2) requires hospitals, 

in order to qualify for the full annual 

market basket update, to submit quality 

data on a quarterly basis to CMS, as 

specified by CMS. 

As discussed in the section IV.A. of 

this preamble, section 5001(a) of Pub. L. 

109–171 sets forth new requirements for 

the Reporting of Hospital Quality Data 

for Annual Payment Update 

(RHQDAPU) program. New sections 

1886(b)(3)(B)(viii)(III) and (IV) of the Act 

require that we expand the ‘‘starter’’ set 

of 10 measures that we currently use. In 

accordance with section 238(b) of Pub. 

L. 108–173, effective for all payments 

beginning with FY 2007, the set of 

measures will expand from 10 to 21 

measures, as we adopt the baseline set 

of performance measures set forth in a 

2005 report issued by the Institute of 

Medicine (IOM) of the National 

Academy of Sciences. 

The burden estimate has been 

updated based on increased number of 

collected measures and the anticipated 

levels of participation by hospitals. We 

estimate that there will be 

approximately 3,700 respondents per 

year. Of this number, approximately 

3,100 hospitals are JCAHO accredited 

and are currently collected measures 

and submitting data to the JCAHO on a 

quarterly basis. Of the JCAHO 

accredited hospitals, approximately 

1,080 are collecting the same measures 

CMS will be collecting for public 

reporting and there is no additional 

burden for these hospitals. 

Approximately 1,940 of the JCAHOaccredited hospitals will need to collect 

SCIP in addition to the data already 

collected for maintaining JCAHO 

accreditation. Approximately 60 

accredited hospitals do not submit for 

the three starter set topics and must 

begin collecting and submitting data on 

all four topics. In addition, there are 

approximately 600 hospitals that do not 

participate in the JCAHO accreditation 

process. These non-JCAHO hospitals 

will have the additional burden of 

collecting data on all four topics. 

For JCAHO hospitals, we estimate it 

will take 25 hours per quarter per topic 

for collection. We expect the burden for 

hospitals to total 238,560 hours per 

year, including time allotted for 

overhead. For non-JCAHO accredited 

hospitals, we estimate the burden to be 

246,000 hours per year including 

overhead. The total number of burden 

hours for all hospitals is 485,560 hours. 

The number of respondents will vary 

according to the level of voluntary 

participation. One hundred percent of 

the data may be collected electronically. 

There will be no additional burden 

placed on hospitals that submit this data 

in response to section 5001(b) of Pub. L. 

109–171. 

We are revising this collection to 

include the burden associated with the 

collection of the additional quality 

measures. However, the burden 

associated with the requirements under 

§ 412.64(d) is currently approved under 

OMB Number 0938–0918, with an 

expiration date of December 31, 2008. 

Section 412.92 Special Treatment: 

Sole Community Hospitals 

In the FY 2007 proposed rule (71 FR 

23996), we outlined the requirements 

for § 412.92. We are restating those 

requirements and burden estimates as 

part of this final rule. Section 

412.92(b)(3) requires an approved sole 

community hospital (SCH) to notify the 

appropriate fiscal intermediary of any 

change which would affect its 

classification as an SCH. 

The burden associated with this 

requirement is the time and effort it 

would take for the SCH to provide such 

notification to the fiscal intermediary. 

We estimate that on an annual basis it 

would take an SCH 1 hour to provide 

notification. While this requirement is 

subject to the PRA, we believe the 

requirement is exempt because it 

impacts less than 10 SCHs. 

Section 412.108 Special Treatment: 

Medicare-Dependent, Small Rural 

Hospitals 

In the FY 2007 IPPS proposed rule (71 

FR 23996), we outlined the 

requirements for this section. We are 

restating those requirements and burden 

estimates as part of this final rule. 

Section 412.108(b)(4) requires an 

approved MDH to notify the appropriate 

fiscal intermediary of any change which 

would affect its status as an MDH. 

The burden associated with this 

requirement is the time and effort it 

would take for the MDH to provide such 

notification to the fiscal intermediary. 

We estimate that on an annual basis it 

would take an MDH 1 hour to provide 

notification. While this requirement is 

subject to the PRA, we believe the 

requirement is exempt because it 

impacts less than 10 MDHs. 

Section 412.525 Adjustments to the 

Federal Prospective Payment 

In the RY 2007 LTCH PPS proposed 

rule (71 FR 4648), we outlined the 

collection of information requirements 

associated with § 412.525 and we are 

restating those requirements and burden 

estimates as part of this final rule. 

Section 412.525(a)(4)(iv)(A) states that 

CMS may specify an alternative to the 

cost-to-charge ratio otherwise applicable 

under paragraph (a)(4)(iv)(B) of this 

section. In addition, a hospital may also 

request that its fiscal intermediary use a 

different (higher or lower) CCR based on 

substantial evidence provided by the 

hospital. 

The burden associated with this 

requirement is the time and effort 

necessary for a hospital to gather, 

process, and submit the necessary 

documentation to its fiscal intermediary 

to substantiate its request for the use of 

a different CCR by its fiscal 

intermediary. For example, necessary 

documentation, as stipulated by CMS 

and the fiscal intermediary, may include 

but not be limited to financial records 

documenting the hospital’s cost and 

charges. 

The estimated burden for this 

requirement is 8 hours per hospital. 

Therefore, we estimate that it would 

require 80 annual hours (8 hours x 10 


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facilities), to comply with this 

requirement. 

We initiated the OMB approval 

process by publishing a 60-day Federal 

Register notice on July 21, 2006 (71 FR 

41448). 

Section 412.529 Special Payment 

Provision for Short-Stay Outliers 

In the RY 2007 LTCH PPS proposed 

rule (71 FR 4648), we also outlined the 

collection of information requirements 

associated with § 412.529 and we are 

restating these requirements and burden 

estimates as part of this final rule. 

Section 412.529(c)(4)(iv)(A) states that 

CMS may specify an alternative to the 

CCR otherwise applicable under 

paragraph (c)(4)(iv)(B) of this section. In 

addition, a hospital may also request 

that its FI use a different (higher or 

lower) CCR based on substantial 

evidence provided by the hospital. 

The burden associated with this 

requirement is the time and effort 

necessary for a hospital to gather, 

process, and submit the necessary 

documentation to its fiscal intermediary 

to substantiate its request for the use of 

a different CCR by its fiscal 

intermediary. For example, necessary 

documentation, as stipulated by CMS 

and the fiscal itnermediary, may include 

but not be limited to financial records 

documenting the hospital’s cost and 

charges. 

The estimated burden for this 

requirement is 8 hours per hospital. 

Therefore, we estimate that it would 

require 80 annual hours (8 hours x 10 

facilities), to comply with this 

requirement. 

We initiated the OMB approval 

process by publishing a 60-day Federal 

Register notice on July 21, 2006 (71 FR 

41448). 

Section 505.13 Conditions for Loan 

Forgiveness 

In the September 30, 2005 Federal 

Register (70 FR 57376), we published a 

proposed rule that outlined the 

requirements for § 505.13 and we are 

restating those requirements and 

evaluation of the burden as part of this 

final rule. Section 505.13(d) requires a 

hospital seeking loan forgiveness to 

submit to CMS, within the timeframe 

specified by the Secretary, a written 

request for loan forgiveness and a loan 

forgiveness plan that meets the criteria 

specified in § 505.15. 

The burden associated with this 

requirement is the time and effort 

needed to draft and submit the written 

request of forgiveness and the time and 

effort to develop and submit a loan 

forgiveness plan. While these 

requirements are subject to the PRA, we 

believe they are exempt as defined in 5 

CFR 1320.3(c)(4). These requirements 

will impact less than 10 hospitals. 

This final rule imposes collection of 

information requirements as outlined in 

the regulation text and specified above. 

However, this final rule also makes 

reference to several associated 

information collections that are not 

discussed in the regulation text. The 

following is a discussion of these 

collections, which have received the 

Office of Management and Budget’s 

(OMB) approval: 

Occupational Mix Adjustment to the FY 

2007 Index (Hospital Wage Index 

Occupational Mix Survey) 

As stated in section III.C. and III.G. of 

this preamble, for FY 2007 in order to 

comply with the Bellevue decision, 

CMS will base the occupational mix 

adjustment on data collected from the 

2006 survey. CMS submitted a revised 

information collection request to the 

Office of Management and Budget 

(OMB) that contained the existing 

burden and the additional burden 

associated with collecting new 

occupational mix data from hospitals to 

determine the occupational mix 

adjustment by September 30, 2006. 

The burden associated with this 

information collection request is the 

time and effort required to collect and 

submit the data in the Hospital Wage 

Index Occupational Mix Survey to CMS. 

While this burden is subject to the PRA, 

it is already approved under OMB 

control number 0938–0907, with an 

expiration date of May 31, 2009. 

Revisions to the Wage Index Based on 

Hospital Redesignations (Medicare 

Geographic Classification Review 

Board) 

As noted in section III.H of this 

preamble, section 1886(d)(10) of the Act 

established the MGCRB, an entity that 

has the authority to accept IPPS hospital 

applications requesting geographic 

reclassification for wage index or 

standardized payment amounts and to 

issue decisions on these requests. It is 

important for CMS to ensure the 

accuracy of the MGCRB decisions and 

remain apprised of potential payment 

impacts. Our regulations at § 412.256 

require a hospital to submit a copy of its 

MGCRB application to CMS. 

The burden associated with this 

requirement is the time and effort 

associated with a hospital compiling 

and submitting a copy of its MGCRB 

application to CMS. While this 

requirement is subject to the PRA, it is 

currently approved under OMB control 

number 0938–0573, with an expiration 

date of November 30, 2008. 

Exclusion of Vendor Purchases Made 

Under the Competitive Acquisition 

Program (CAP) for Outpatient Drugs and 

Biologicals Under Part B for the Purpose 

of Calculating the Average Sales Price 

(ASP) 

Section XII.A.1 of this preamble 

provides background information 

pertaining to the use of the average sales 

price (ASP) as the basis for our drug 

payment methodology. In accordance 

with section 1847A of the Act, most 

Medicare Part B covered drugs and 

biologicals not paid on a cost or 

prospective payment basis are paid 

based on the average sales price of the 

drug or biological, beginning in CY 

2005. The ASP data reporting 

requirements are specified in Section 

1927 of the Act. The reported ASP data 

are used to establish the Medicare 

payment amounts. 

Section XII.A.2 and XII.A.3 of this 

preamble discuss the ASP payment 

methodology, the CAP for certain Part B 

covered drugs, and the regulatory 

history of ASP and CAP. The CAP 

program began on July 1, 2006. The 

program provides physicians with a 

choice between obtaining Part B covered 

drugs from approved CAP vendors, or 

acquiring and billing for Part B drugs 

under the ASP system. 

As discussed in a November 21, 2005 

(70 FR 70478) interim final rule with 

comment period and a March 3, 2006 

(71 FR 10975) 30-day PRA Federal 

Register notice, the collection of ASP 

data imposes information collection 

requirements on the public. The burden 

associated with ASP information 

collection requirements is the time and 

effort required by manufacturers of 

Medicare Part B drugs and biologicals to 

prepare and submit the required data to 

CMS. While these requirements are 

subject to the PRA, they are currently 

approved under OMB control number 

0938–0921, with an expiration date of 

May 31, 2009. 

As required by section 3504(h) of the 

Paperwork Reduction Act of 1995, we 

have submitted a copy of this document 

to the Office of Management and Budget 

(OMB) for its review of these 

information collection requirements. 

C. Waiver of Proposed Rulemaking and 

Delay in the Effective Date 

We ordinarily publish a notice of 

proposed rulemaking in the Federal 

Register and invite public comment on 

the proposed rule. The notice of 

proposed rulemaking includes a 

reference to the legal authority under 

which the rule is proposed, and the 

terms and substances of the proposed 

rule or a description of the subjects and 


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issues involved. This procedure can be 

waived, however, if an agency finds 

good cause that a notice-and-comment 

procedure is impracticable, 

unnecessary, or contrary to the public 

interest and incorporates a statement of 

the finding and its reasons in the rule 

issued. 

We find good cause to waive the 

requirement for publication of a notice 

of proposed rulemaking and public 

comment for the provisions of section 

XII. of this preamble on the grounds that 

it is necessary to implement this change 

immediately in order to ensure that a 

more accurate, and less burdensome, 

implementation of our policy is in place 

in time for it to be effective for the next 

ASP reporting period. We believe that 

revising the definition of ‘‘unit’’ as 

described in this rule will best ensure 

that the payment amounts under the 

ASP methodology are not affected by 

the CAP, consistent with our stated 

policy. Without an immediate revision 

to the definition of ‘‘unit,’’ the 

regulation requires a level of complexity 

in determining how to exclude CAP 

prices that we did not intend and places 

unintended burdens on participating 

CAP physicians. Further, unless the 

revised definition of ‘‘unit’’ is 

implemented immediately, it would not 

be effective in time for manufacturers to 

accurately exclude units of CAP drugs 

sold to approved CAP vendors for use 

under the CAP during the third calendar 

quarter of 2006 and certify their reports. 

We also ordinarily provide a 60-day 

delay in the effective date of the 

provisions of a rule in accordance with 

the Administrative Procedure Act, 

which normally requires a 30-day delay 

in the effective date of a final rule, and 

the Congressional Review Act, which 

requires a 60-day delay in the effective 

date of a major rule. However, we can 

waive the delay in effective date if the 

Secretary finds, for good cause, that the 

delay is impracticable, unnecessary or 

contrary to the public interest, and 

incorporates a statement of the finding 

and the reasons in the rule issued (5 

U.S.C. 553(d)(3); 5 U.S.C. 808(2)). 

We find that good cause exists to 

waive the 60-day delay in effectiveness 

for the provisions of section XII. of this 

preamble and § 414.802 so that these 

portions of this rule take effect 

immediately upon publication in the 

Federal Register. Unless the revised 

definition of ‘‘unit’’ is implemented 

immediately, it would not be effective 

in time for manufacturers to accurately 

exclude units of CAP drugs sold to 

approved CAP vendors for use under 

the CAP during the third calendar 

quarter of 2006. As noted above, a delay 

in implementation of this refinement 

would impose costs burdens on 

manufacturers and participating CAP 

physicians that we did not intend. 

Further, without this refinement, 

manufacturers may be unable to certify 

the accuracy of their ASPs. Because 

manufactures must certify their ASPs, 

this refinement must be in place before 

the beginning of the next ASP reporting 

period. For these reasons, we find good 

cause to waive the 60-day delay in the 

effective date and these regulations will 

be effective on August 18, 2006. 

Moreover, in section II.c.iv. of the 

Addendum to this final rule, we discuss 

a technical correction that we are 

making to remove the second sentence 

from § 412.116(e) of our regulations. We 

find it unnecessary to undertake noticeand-comment rulemaking with respect 

to removing this sentence because this 

correction merely removes a sentence 

that previously was struck from our 

regulations, but was inadvertently 

reinstated. We note that this change to 

the regulations underwent notice-andcomment rulemaking when it was 

initially removed from the regulations 

(68 FR 34515). Thus, because the public 

already had opportunity to comment on 

this policy, additional comment would 

be unnecessary. 

D. Response to Comments 

Because of the large number of 

comments we normally receive on 

Federal Register documents, we are not 

able to acknowledge or respond to them 

individually. We will consider all 

comments on the CAP ASP provisions 

we receive by the date and time 

specified in the ‘‘DATES’’ section of this 

preamble, and, when we proceed with 

a subsequent document, we will 

respond to the comments in the 

preamble to that document. 

List of Subjects 

42 CFR Part 409 

Health Facilities, Medicare. 

42 CFR Part 410 

Health facilities, Health professions, 

Kidney diseases, Laboratories, 

Medicare, Rural areas, X-rays. 

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 414 

Administrative practice and 

procedure, Health facilities, Health 

professions, Kidney diseases, Medicare, 

Reporting and recordkeeping 

requirements. 

42 CFR Part 424 

Emergency medical services, Health 

facilities, Health professions, Medicare. 

42 CFR Part 485 

Grant programs—health, Health 

facilities, Medicaid, Medicare, 

Reporting and recordkeeping 

requirements. 

42 CFR Part 489 

Health facilities, Medicare, Reporting 

and recordkeeping requirements. 

42 CFR Part 505 

Administrative practice and 

procedure, Health facilities, Loan 

programs, Infrastructure improvement 

program, Reporting and recordkeeping, 

and Rural areas. 

■ For the reasons stated in the preamble 

of this final rule, the Centers for 

Medicare & Medicaid Services is 

amending 42 CFR Chapter IV as follows: 

PART 409—HOSPITAL INSURANCE 

BENEFITS 

■ 1. The authority citation for part 409 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

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

1395hh). 

■ 2. Section 409.3 is amended by 

revising paragraph (e) under the 

definition of ‘‘Qualified hospital’’ to 

read as follows: 

§ 409.3 Definitions. 

* * * * * 

Qualified hospital means a facility 

that—* * * 

(e) If it is a foreign hospital, is 

licensed, or approved as meeting the 

standard for licensing, by the 

appropriate foreign licensing agency, 

and for purposes of furnishing 

nonemergency services to U.S. 

residents, is accredited by the Joint 

Commission on Accreditation of 

Healthcare Organizations (JCAHO), or 

by a foreign program under standards 

that CMS finds to be equivalent to those 

of JCAHO. 

■ 3. Section 409.5 is revised to read as 

follows: 

§ 409.5 General description of benefits. 

Hospital insurance (Part A of 

Medicare) helps pay for inpatient 

hospital or inpatient CAH services and 

posthospital SNF care. It also pays for 


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home health services and hospice care. 

There are limitations on the number of 

days of care that Medicare can pay for 

and there are deductible and 

coinsurance amounts for which the 

beneficiary is responsible. For each type 

of service, certain conditions must be 

met as specified in the pertinent 

sections of this subpart and in part 418 

of this chapter regarding hospice care. 

Conditions for payment of emergency 

inpatient services furnished by a 

nonparticipating U.S. hospital and for 

services furnished in a foreign country 

are set forth in subparts G and H of part 

424 of this chapter. 

PART 410—SUPPLEMENTARY 

MEDICAL INSURANCE (SMI) 

BENEFITS 

■ 4. The authority citation for part 410 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

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

1395hh). 

■ 5. Section 410.66 is revised to read as 

follows: 

§ 410.66 Emergency outpatient services 

furnished by a nonparticipating hospital 

and services furnished in a foreign country. 

Conditions for payment of emergency 

inpatient services furnished by a 

nonparticipating U.S. hospital and for 

services furnished in a foreign country 

are set forth in subparts G and H of part 

424 of this chapter. 

PART 412—PROSPECTIVE PAYMENT 

SYSTEMS FOR INPATIENT HOSPITAL 

SERVICES 

■ 6. The authority citation for part 412 

is revised 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 Pub. L. 106–113 

(113 Stat. 1501A–332). 

■ 7. Section 412.8 is amended by—

■ a. Revising paragraph (b)(2). 

■ b. Adding a new paragraph (c). 

The revision and addition read as 

follows: 

§ 412.8 Publication of schedules for 

determining prospective payment rates. 

* * * * * 

(b) * * * 

(2) Except as provided in paragraph 

(c) of this section, CMS publishes a 

Federal Register document setting forth 

final methods, amounts, and factors for 

determining inpatient prospective 

payment rates not later than the August 

1 before the Federal fiscal year in which 

the rates would apply. 

(c) Publication schedule for FY 2007. 

For FY 2007, not later than August 1, 

2006, CMS publishes a Federal Register 

document setting forth a description of 

the methodology and data used in 

computing the inpatient prospective 

payment rates for that year. 

■ 8. Section 412.22 is amended by—

■ a. Revising the introductory text of 

paragraph (f). 

■ b. Adding a new paragraph (f)(3). 

■ c. Revising paragraph (h)(1). 

■ d. In paragraph (h)(2), removing the 

phrase ‘‘(h)(3), (h)(6), and (h)(7) of this 

section’’ and adding the phrase ‘‘(h)(3), 

(h)(4), (h)(5), (h)(7), and (h)(8) of this 

section’’ in its place. 

■ e. Redesignating paragraphs (h)(5), 

(h)(6), and (h)(7) as paragraphs (h)(6), 

(h)(7), and (h)(8), respectively. 

■ f. Revising paragraph (h)(3). 

■ g. Revising paragraph (h)(4). 

■ h. Adding a new paragraph (h)(5). 

■ i. In newly redesignated paragraph 

(h)(6), removing the phrase ‘‘(h)(1) 

through (h)(4) of this section’’ and 

adding the phrase ‘‘(h)(1) through (h)(5) 

of this section’’ in its place. 

The revisions and addition read as 

follows: 

§ 412.22 Excluded hospitals and hospital 

units: General rules. 

* * * * * 

(f) Application for certain hospitals. 

Except as provided in paragraph (f)(3) of 

this section, if a hospital was excluded 

from the prospective payment systems 

under the provisions of this section on 

or before September 30, 1995, and at 

that time occupied space in a building 

also used by another hospital, or in one 

or more buildings located on the same 

campus as buildings used by another 

hospital, the criteria in paragraph (e) of 

this section do not apply to the hospital 

as long as the hospital—

* * * * * 

(3) For cost reporting periods 

beginning on or after October 1, 2006, in 

applying the provisions of paragraph 

(f)(1) or (f)(2) of this section, any 

hospital that was excluded from the 

prospective payment systems under the 

provisions of this section on or before 

September 30, 1995, and at that time 

occupied space in a building also used 

by another hospital, or in one or more 

buildings located on the same campus 

as buildings used by another hospital 

may increase or decrease the square 

footage or decrease the number of beds 

considered to be part of the hospital at 

any time without affecting the 

provisions of paragraph (f)(1) or (f)(2) of 

this section. 

(i) If a hospital to which the 

provisions of paragraph (f)(1) of this 

section applies decreases its number of 

beds below the number of beds 

considered to be part of the hospital on 

September 30, 1995, it may 

subsequently increase the number of 

beds at any time as long as the resulting 

total number of beds considered to be 

part of the hospital does not exceed the 

number of beds at the hospital on 

September 30, 1995. 

(ii) If a hospital to which the 

provisions of paragraph (f)(2) of this 

section applies decreases its number of 

beds below the number of beds 

considered to be part of the hospital on 

September 30, 2003, it may 

subsequently increase the number of 

beds at any time as long as the resulting 

total number of beds considered to be 

part of the hospital does not exceed the 

number of beds at the hospital on 

September 30, 2003. 

* * * * * 

(h) Satellite facilities. (1) For purposes 

of paragraphs (h)(2) through (h)(5) of 

this section, a satellite facility is a part 

of a hospital that provides inpatient 

services in a building also used by 

another hospital, or in one or more 

entire buildings located on the same 

campus as buildings used by another 

hospital. 

* * * * * 

(3) Except as provided in paragraphs 

(h)(4) and (h)(5) of this section, the 

provisions of paragraph (h)(2) of this 

section do not apply to—

* * * * * 

(4) For cost reporting periods 

beginning before October 1, 2006, in 

applying the provisions of paragraph 

(h)(3) of this section, any hospital 

structured as a satellite facility on 

September 30, 1999, may increase or 

decrease the square footage of the 

satellite facility or may decrease the 

number of beds in the satellite facility 

if these changes are made necessary by 

relocation of a facility—

(i) To permit construction or 

renovation necessary for compliance 

with changes in Federal, State, or local 

law; or 

(ii) Because of catastrophic events 

such as fires, floods, earthquakes, or 

tornadoes. 

(5) For cost reporting periods 

beginning on or after October 1, 2006, in 

applying the provisions of paragraph 

(h)(3) of this section—

(i) Any hospital structured as a 

satellite facility on September 30, 1999, 

may increase or decrease the square 

footage or decrease the number of beds 

considered to be part of the satellite 

facility at any time without affecting the 

provisions of paragraph (h)(3) of this 

section; and 

(ii) If the satellite facility decreases its 

number of beds below the number of 

beds considered to be part of the 

satellite facility on September 30, 1999, 


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it may subsequently increase the 

number of beds at any time as long as 

the resulting total number of beds 

considered to be part of the satellite 

facility does not exceed the number of 

beds at the satellite facility on 

September 30, 1999. 

* * * * * 

■ 9. Section 412.25 is amended by—

■ a. In paragraph (e) introductory text, 

remove the cross-reference ‘‘paragraph 

(e)(2) and (e)(4)’’ and add the crossreference ‘‘paragraph (e)(2) and (e)(5)’’

in its place. 

■ b. In paragraph (e)(2) introductory 

text, remove the cross-reference 

‘‘paragraph (e)(3) and (e)(5)’’ and add 

the cross-reference ‘‘paragraph (e)(3) 

and (e)(6)’’ in its place. 

■ c. Revising paragraph (e)(3). 

■ d. Revising paragraph (e)(4) 

introductory text. 

■ e. Redesignating paragraph (e)(5) as 

(e)(6). 

■ f. Adding a new paragraph (e)(5). 

The revisions and addition read as 

follows: 

§ 412.25 Excluded hospital units: Common 

requirements. 

* * * * * 

(e) * * * 

(3) Except as specified in paragraphs 

(e)(4) and (e)(5) of this section, the 

provisions of paragraph (e)(2) of this 

section do not apply to any unit 

structured as a satellite facility on 

September 30, 1999, and excluded from 

the prospective payment systems on 

that date, to the extent the unit 

continues operating under the same 

terms and conditions, including the 

number of beds and square footage 

considered to be part of the unit at the 

satellite facility on September 30, 1999. 

(4) In applying the provisions of 

paragraph (e)(3) of this section, any unit 

structured as a satellite facility on 

September 30, 1999, may increase or 

decrease the square footage of the 

satellite facility or may decrease the 

number of beds in the satellite facility 

considered to be part of the satellite 

facility at any time, if these changes are 

made by the relocation of a facility—

* * * * * 

(5) For cost reporting periods 

beginning on or after October 1, 2006, in 

applying the provisions of paragraph 

(e)(3) of this section—

(i) Any unit structured as a satellite 

facility on September 30, 1999, may 

increase the square footage of the unit 

only at the beginning of a cost reporting 

period or decrease the square footage or 

number of beds considered to be part of 

the satellite facility subject to the 

provisions of paragraph (b)(2) of this 

section, without affecting the provisions 

of paragraph (e)(3) of this section; and 

(ii) If the unit structured as a satellite 

facility decreases its number of beds 

below the number of beds considered to 

be part of the satellite facility on 

September 30, 1999, subject to the 

provisions of paragraph (b)(2) of this 

section, it may subsequently increase 

the number of beds at the beginning or 

a cost reporting period as long as the 

resulting total number of beds 

considered to be part of the satellite 

facility does not exceed the number of 

beds at the satellite facility on 

September 30, 1999. 

* * * * * 

§ 412.42 [Amended] 

■ 10. In paragraph (d) of § 412.42, the 

cross-reference ‘‘§ 405.310(k)’’ is 

removed, and the cross-reference 

‘‘§ 411.15(k)’’ is added in its place. 

§ 412.48 [Amended] 

■ 11. In paragraph (b) of § 412.48, the 

cross-reference ‘‘§§ 405.330 through 

405.332’’ is removed and the crossreference ‘‘§ 411.400 and § 411.402’’ is 

added in its place. 

■ 12. Section 412.64 is amended by—

■ a. Revising paragraph (d)(2). 

■ b. Adding a new paragraph (h)(6). 

The revision and addition read as 

follows: 

§ 412.64 Federal rates for inpatient 

operating costs for Federal fiscal year 2005 

and subsequent fiscal years. 

* * * * * 

(d) * * * 

(2)(i) In the case of a ‘‘subsection (d) 

hospital,’’ as defined under section 

1886(d)(1)(B) of the Act, that does not 

submit quality data on a quarterly basis 

to CMS, in the form and manner 

specified by CMS, the applicable 

percentage change specified in 

paragraph (d)(1) of this section is 

reduced—

(A) For fiscal years 2005 and 2006, by 

0.4 percentage points; and 

(B) For fiscal year 2007 and 

subsequent fiscal years, by 2.0 

percentage points. 

(ii) Any reduction of the percentage 

change will apply only to the fiscal year 

involved and will not be taken into 

account in computing the applicable 

percentage change for a subsequent 

fiscal year. 

* * * * * 

(h) * * * 

(6) If a new rural hospital that is 

subject to the hospital inpatient 

prospective payment system opens in a 

State that has an imputed rural floor and 

has rural areas, CMS uses the imputed 

floor as the hospital’s wage index until 

the hospital’s first cost report as an 

inpatient prospective payment system 

provider is contemporaneous with the 

cost reporting period being used to 

develop a given fiscal year’s wage index. 

* * * * * 

■ 13. A new § 412.79 is added to 

Subpart E to read as follows: 

§ 412.79 Determination of the hospitalspecific rate for inpatient operating costs 

for Medicare-dependent, small rural 

hospitals based on a Federal fiscal year 

2002 base period. 

(a) Base-period costs—(1) General 

rule. Except as provided in paragraph 

(a)(2) of this section, for each MDH, the 

intermediary determines the MDH’s 

Medicare Part A allowable inpatient 

operating costs, as described in 

§ 412.2(c), for the 12-month or longer 

cost reporting period beginning on or 

after October 1, 2001, and before 

October 1, 2002. 

(2) Exceptions. (i) If the MDH’s last 

cost reporting period beginning before 

October 1, 2002, is for less than 12 

months, the base period is the MDH’s 

most recent 12-month or longer cost 

reporting period beginning before that 

short cost reporting period. 

(ii) If the MDH does not have a cost 

reporting period beginning on or after 

October 1, 2001, and before October 1, 

2002, and does have a cost reporting 

period beginning on or after October 1, 

2000, and before October 1, 2001, that 

cost reporting period is the base period 

unless the cost reporting is for less than 

12 months. In that case, the base period 

is the MDH’s most recent 12-month or 

longer cost reporting period beginning 

before that short cost reporting period. 

(b) Costs on a per discharge basis. The 

intermediary determines the MDH’s 

average base-period operating cost per 

discharge by dividing the total operating 

costs by the number of discharges in the 

base period. For purposes of this 

section, a transfer as described in 

§ 412.4(b) is considered to be a 

discharge. 

(c) Case-mix adjustment. The 

intermediary divides the average baseperiod cost per discharge by the MDH’s 

case-mix index for the base period. 

(d) Updating base period costs. For 

purposes of determining the updated 

base-period costs for cost reporting 

periods beginning in Federal fiscal year 

2002, the update factor is determined 

using the methodology set forth in 

§ 412.73(c)(14) and (c)(15). 

(e) DRG adjustment. The applicable 

hospital-specific cost per discharge is 

multiplied by the appropriate DRG 

weighting factor to determine the 

hospital-specific base payment amount 


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(target amount) for a particular covered 

discharge. 

(f) Notice of hospital-specific rate. The 

intermediary furnishes the MDH a 

notice of its hospital-specific rate which 

contains a statement of the hospital’s 

Medicare Part A allowable inpatient 

operating costs, number of Medicare 

discharges, and case-mix index 

adjustment factor used to determine the 

hospital’s cost per discharge for the 

Federal fiscal year 2002 base period. 

(g) Right to administrative and 

judicial review. An intermediary’s 

determination of the hospital-specific 

rate for a hospital is subject to 

administrative and judicial review. 

Review is available to an MDH upon 

receipt of the notice of the hospitalspecific rate. The notice is treated as a 

final intermediary determination of the 

amount of program reimbursement for 

purposes of subpart R of Part 405 of this 

chapter, governing provider 

reimbursement determinations and 

appeals. 

(h) Modification of hospital-specific 

rate. (1) The intermediary recalculates 

the hospital-specific rate to reflect the 

following: 

(i) Any modifications that are 

determined as a result of administrative 

or judicial review of the hospitalspecific rate determinations; or 

(ii) Any additional costs that are 

recognized as allowable costs for the 

MDH’s base period as a result of 

administrative or judicial review of the 

base-period notice of amount of program 

reimbursement. 

(2) With respect to either the hospitalspecific rate determination or the 

amount of program reimbursement 

determination, the actions taken on 

administrative or judicial review that 

provide a basis for recalculations of the 

hospital-specific rate include the 

following: 

(i) A reopening and revision of the 

MDH’s base-period notice of amount of 

program reimbursement under 

§§ 405.1885 through 405.1889 of this 

chapter. 

(ii) A prehearing order or finding 

issued during the provider payment 

appeals process by the appropriate 

reviewing authority under § 405.1821 or 

§ 405.1853 of this chapter that resolved 

a matter at issue in the MDH’s baseperiod notice of amount of program 

reimbursement. 

(iii) An affirmation, modification, or 

reversal of a Provider Reimbursement 

Review Board decision by the 

Administrator of CMS under § 405.1875 

of this chapter that resolved a matter at 

issue in the hospital’s base-period 

notice of amount of program 

reimbursement. 

(iv) An administrative or judicial 

review decision under §§ 405.1831, 

405.1871, or 405.1877 of this chapter 

that is final and no longer subject to 

review under applicable law or 

regulations by a higher reviewing 

authority, and that resolved a matter at 

issue in the hospital’s base-period 

notice of amount of program 

reimbursement. 

(v) A final, nonappealable court 

judgment relating to the base-period 

costs. 

(3) The adjustments to the hospitalspecific rate made under paragraphs 

(h)(1) and (2) of this section are effective 

retroactively to the time of the 

intermediary’s initial determination of 

the rate. 

(i) Maintaining budget neutrality. 

CMS makes an adjustment to the 

hospital-specific rate to ensure that 

changes to the DRG classifications and 

recalibrations of the DRG relative 

weights are made in a manner so that 

aggregate payments to section 1886(d) 

hospitals are not affected. 

§ 412.84 [Amended] 

■ 14. In paragraph (m) of § 412.84, the 

cross-reference ‘‘paragraph (h)(3)’’ is 

removed and the cross-reference 

‘‘paragraph (i)(4)’’ is added in its place. 

■ 15. Section 412.90 is amended by 

revising paragraph (j) to read as follows: 

§ 412.90 General rules. 

* * * * * 

(j) Medicare-dependent, small rural 

hospitals. For cost reporting periods 

beginning on or after April 1, 1990, and 

before October 1, 1994, and for 

discharges occurring on or after October 

1, 1997, and before October 1, 2011, 

CMS adjusts the prospective payment 

rates for inpatient operating costs 

determined under subparts D and E of 

this part if a hospital is classified as a 

Medicare-dependent, small rural 

hospital. 

* * * * * 

■ 16. Section 412.92 is amended by—

■ a. In paragraph (b)(2)(iv) of § 412.92, 

the word ‘‘djustment’’ is removed and 

the word ‘‘adjustment’’ is added in its 

place. 

■ b. Revising paragraph (b)(3) to read as 

follows: 

§ 412.92 Special treatment: Sole 

community hospitals. 

* * * * * 

(b) * * * 

(3) Duration of classification. 

(i) An approved classification as a 

sole community hospital remains in 

effect without need for reapproval 

unless there is a change in the 

circumstances under which the 

classification was approved. An 

approved sole community hospital must 

notify the fiscal intermediary if any 

change that is specified in paragraph 

(b)(3)(ii) of this section occurs. If CMS 

determines that a sole community 

hospital failed to comply with this 

requirement, CMS will cancel the 

hospital’s classification as a sole 

community hospital effective with the 

date that the hospital no longer met the 

criteria for such classification, 

consistent with the provisions of 

§ 405.1885 of this chapter. 

(ii) A sole community hospital must 

report the following to the fiscal 

intermediary within 30 days of the 

event: 

(A) The opening of a new hospital in 

its service area. 

(B) The opening of a new road 

between itself and a like provider 

within 35 miles. 

(C) An increase in the number of beds 

to more than 50 if the hospital qualifies 

as a sole community hospital under 

paragraph (a)(1)(ii) of this section. 

(D) Its geographic classification 

changes. 

(E) Any changes to the driving 

conditions that result in a decrease in 

the amount of travel time between itself 

and a like provider if the hospital 

qualifies as a sole community hospital 

under paragraph (a)(3) of this section. 

(iii) A sole community hospital must 

report to the fiscal intermediary if it 

becomes aware of any change that 

would affect its classification as a sole 

community hospital beyond the events 

listed in paragraph (b)(3)(ii) of this 

section within 30 days of the event. If 

CMS determines that a sole community 

hospital has failed to comply with this 

requirement, CMS will cancel the 

hospital’s classification as a sole 

community hospital effective with the 

date the hospital became aware of the 

event that resulted in the sole 

community hospital no longer meeting 

the criteria for such classification, 

consistent with the provisions of 

§ 405.1885 of this chapter. 

* * * * * 

■ 17. Section 412.96 is amended by—

■ a. Revising paragraph (c)(2)(i) 

introductory text. 

■ b. Revising paragraph (c)(2)(ii). 

■ c. Revising paragraph (i)(3). 

The revisions read as follows: 

§ 412.96 Special Treatment: Referral 

centers. 

* * * * * 

(c) * * * 

(2) Number of discharges. (i) CMS sets 

forth the national and regional number 

of discharges in each year’s annual 

notice of prospective payment rates 


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published under § 412.8(b). The 

methodology CMS uses to calculate 

these criteria is described in paragraph 

(i) of this section. Except as provided in 

paragraph (c)(2)(ii) of this section for an 

osteopathic hospital, for the hospital’s 

cost reporting period that began during 

the same fiscal year as the cost reporting 

periods used to compute the regional 

median discharges under paragraph (i) 

of this section, its number of discharges 

(not including discharges from units 

excluded from the prospective 

payments system under subpart B of 

this part or from newborn units) is at 

least equal to—

* * * * * 

(ii) For cost reporting periods 

beginning on or after January 1, 1986, an 

osteopathic hospital, recognized by the 

American Osteopathic Healthcare 

Association (or any successor 

organization), that is located in a rural 

area must have at least 3,000 discharges 

during its cost reporting period that 

began during the same fiscal year as the 

cost reporting periods used to compute 

the regional median discharges under 

paragraph (i) of this section to meet the 

number of discharges criterion. 

* * * * * 

(i) * * * 

(3) Annual notice. CMS sets forth the 

national and regional criteria in the 

annual notice of prospective payment 

rates published under § 412.8(b). These 

criteria are compared to an applying 

hospital’s number of discharges for the 

same cost reporting period used to 

develop the regional criteria in this 

section in determining if the hospital 

qualifies for referral center status for 

cost reporting periods beginning on or 

after October 1 of the Federal fiscal year 

to which the notice applies. 

■ 18. Section 412.105 is amended by—

■ a. Revising paragraph (f)(1)(ii)(C). 

■ b. Adding a new paragraph 

(f)(1)(iii)(C). 

The addition reads as follows: 

§ 412.105 Special treatment: Hospitals that 

incur indirect costs for graduate medical 

education programs. 

* * * * * 

(f) * * * 

(1) * * * 

(ii) * * * 

(C) Effective for discharges occurring 

on or after October 1, 1997, the time 

spent by a resident in a nonhospital 

setting in patient care activities, as 

defined in § 413.75(b) of this 

subchapter, under an approved medical 

residency training program is counted 

towards the determination of full-time 

equivalency if the criteria set forth in 

§ 413.78(c), § 413.78(d), or § 413.78(e) of 

this subchapter, as applicable, are met. 

(iii) * * * 

(C) In order to be counted, a resident 

must be spending time in patient care 

activities, as defined in § 413.75(b) of 

this subchapter. 

* * * * * 

■ 19. Section 412.106 is amended by—

■ a. Revising paragraph (a)(1)(iii). 

■ b. Republishing the introductory text 

of paragraph (d)(2)(iv). 

■ c. Revising paragraph (d)(2)(iv)(C)(3). 

■ d. Adding a new paragraph 

(d)(2)(iv)(D). 

■ e. Adding a new paragraph (d)(2)(v). 

The revision and additions read as 

follows: 

§ 412.106 Special treatment: Hospitals that 

serve a disproportionate share of lowincome patients. 

(a) * * * 

(1) * * * 

(iii) The hospital’s location, in an 

urban or rural area, is determined in 

accordance with the definitions in 

§ 412.64, except that a reclassification 

that results from an urban hospital 

reclassified as rural as set forth in 

§ 412.103 is classified as rural. 

* * * * * 

(d) * * * 

(2) * * * 

(iv) If the hospital meets the criteria 

of paragraph (c)(1)(iv) of this section—

* * * * * 

(C) * * * 

(3) Except as provided in paragraph 

(d)(2)(iv)(D) of this section, the 

maximum payment adjustment factor is 

12 percent. 

(D) Effective for discharges occurring 

on or after October 1, 2006, for a 

hospital that is classified as a Medicaredependent, small rural hospital under 

§ 412.108, the payment adjustment 

factor limitation specified in paragraph 

(d)(2)(iv)(C)(3) does not apply. 

(v) If the hospital meets the criteria of 

paragraph (c)(2) of this section, the 

payment adjustment factor is as follows: 

(A) 30 percent for discharges 

occurring on or after April 1, 1990, and 

before October 1, 1991. 

(B) 35 percent for discharges 

occurring on or after October 1, 1991. 

* * * * * 

■ 20. Section 412.108 is amended by—

■ a. Revising paragraph (a)(1) 

introductory text. 

■ b. Revising paragraph (b)(4). 

■ c. Adding a new paragraph (c)(2)(iii). 

The revisions and addition read as 

follows: 

§ 412.108 Special Treatment: Medicaredependent, small rural hospitals. 

(a) Criteria for classification as a 

Medicare-dependent, small rural 

hospital. (1) General considerations. For 

cost reporting periods beginning on or 

after April 1, 1990, and ending before 

October 1, 1994, or for discharges 

occurring on or after October 1, 1997, 

and before October 1, 2011, a hospital 

is classified as a Medicare-dependent, 

small rural hospital if it is located in a 

rural area (as defined in subpart D of 

this part) and meets all of the following 

conditions: 

* * * * * 

(b) * * * 

(4) A determination of MDH status 

made by the fiscal intermediary is 

effective 30 days after the date the fiscal 

intermediary provides written 

notification to the hospital. An 

approved MDH status determination 

remains in effect unless there is a 

change in the circumstances under 

which the status was approved. 

(i) An approved MDH must notify the 

fiscal intermediary if any change occurs 

that is specified in paragraph (b)(4)(ii) of 

this section occurs. If CMS determines 

that an MDH failed to comply with this 

requirement, CMS will cancel the 

hospital’s classification as an MDH 

effective with the date that the hospital 

no longer met the criteria for such 

status, consistent with the provisions of 

§ 405.1885 of this chapter. 

(ii) An MDH must report the 

following to the fiscal intermediary 

within 30 days of the event: 

(A) The number of beds increases to 

more than 100. 

(B) Its geographic classification 

changes. 

(iii) An MDH must report to the fiscal 

intermediary if it becomes aware of any 

change that would affect its 

classification as an MDH beyond the 

events listed in paragraph (b)(4)(ii) of 

this section within 30 days of the event. 

If CMS determines that an MDH has 

failed to comply with this requirement, 

CMS will cancel the hospital’s 

classification as an MDH effective with 

the date the hospital became aware of 

the event that resulted in the MDH no 

longer meeting the criteria for such 

classification, consistent with the 

provisions of § 405.1885 of this chapter. 

* * * * * 

(c) * * * 

(2) * * * 

(iii) For discharges occurring during 

cost reporting periods (or portions 

thereof) beginning on or after October 1, 

2006, and before October 1, 2011, 75 

percent of the amount that the Federal 

rate determined under paragraph (c)(1) 

of this section is exceeded by the 

highest of the following: 

(A) The hospital-specific rate as 

determined under § 412.73. 


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(B) The hospital-specific rate as 

determined under § 412.75. 

(C) The hospital-specific rate as 

determined under § 412.79. 

* * * * * 

§ 412.116 [Amended] 

■ 21. In § 412.116(e), the second 

sentence is removed. 

■ 22. Section 412.234 is amended by—

■ a. In paragraph (a)(3)(ii), removing the 

term ‘‘fiscal year’’ and adding the term 

‘‘Federal fiscal year’’ in its place. 

■ b. Revising paragraph (a)(3)(iii). 

■ c. Adding a new paragraph (a)(3)(iv). 

The revisions and addition read as 

follows: 

§ 412.234 Criteria for all hospitals in an 

urban county seeking redesignation to 

another urban area. 

(a) * * * 

(3) * * * 

(iii) For Federal fiscal year 2007, 

hospitals located in counties that are in 

the same Combined Statistical Area 

(CSA) (under the MSA definitions 

announced by the OMB on June 6, 2003) 

as the urban area to which they seek 

redesignation qualify as meeting the 

proximity requirement for 

reclassification to the urban area to 

which they seek redesignation. 

(iv) For Federal fiscal year 2008 and 

thereafter, hospitals located in counties 

that are in the same Combined 

Statistical Area (CSA) or Core-Based 

Statistical Area (CBSA) (under the MSA 

definitions announced by the OMB on 

June 6, 2003) 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. 

* * * * * 

■ 23. Section 412.316 is amended by—

■ a. Revising paragraph (a). 

■ b. Revising paragraph (b)(2). 

■ c. Adding a new paragraph (b)(3). 

■ d. Revising paragraph (c). 

The revisions and addition read as 

follows: 

§ 412.316 Geographic adjustment factors. 

(a) Local cost variation. CMS adjusts 

for local cost variation based on the 

hospital wage index value that is 

applicable to the hospital under subpart 

D of this part. The adjustment factor 

equals the hospital wage index value 

applicable to the hospital raised to the 

.6848 power and is applied to 100 

percent of the Federal rate. 

(b) * * * 

(2) For discharges occurring on or 

after October 1, 2004, the definition of 

large urban area under § 412.63(c)(6) 

continues to be in effect for purposes of 

the payment adjustment under this 

section, based on the geographic 

classification under § 412.64, except as 

provided for in paragraph (b)(3) of this 

section. 

(3) For purposes of this section, the 

geographic classifications specified 

under § 412.64 apply, except that, 

effective for discharges occurring on or 

after October 1, 2006, for an urban 

hospital that is reclassified as rural as 

set forth in § 412.103, the geographic 

classification is rural. 

(c) Cost-of-living adjustment. CMS 

provides an additional payment to a 

hospital located in Alaska and Hawaii 

equal to [0.3152 x (the cost-of-living 

adjustment factor used to determine 

payments under subpart D of this part—

1)] percent. 

24. Section 412.320 is amended by—

■ a. Revising paragraph (a)(1)(ii). 

■ b. Adding a new paragraph (a)(1)(iii). 

The revision and addition read as 

follows: 

§ 412.320 Disproportionate share 

adjustment factor. 

(a) * * * 

(1) * * * 

(ii) For discharges occurring on or 

after October 1, 2004, the payment 

adjustment under this section is based 

on the geographic classifications 

specified under § 412.64, except as 

provided for in paragraph (a)(1)(iii) of 

this section. 

(iii) For purposes of this section, the 

geographic classifications specified 

under § 412.64 apply, except that, 

effective for discharges occurring on or 

after October 1, 2006, for an urban 

hospital that is reclassified as rural as 

set forth in § 412.103, the geographic 

classification is rural. 

* * * * * 

■ 25. Section 412.505 is amended by 

revising paragraph (b)(1) to read as 

follows: 

§ 412.505 Conditions for payment under 

the prospective payment system for longterm care hospitals. 

* * * * * 

(b) General requirements. (1) Effective 

for cost reporting periods beginning on 

or after October 1, 2002, a long-term 

care hospital must meet the conditions 

for payment of this section, 

§ 412.22(e)(3) and (h)(6), if applicable, 

and § 412.507 through § 412.511 to 

receive payment under the prospective 

payment system described in this 

subpart for inpatient hospital services 

furnished to Medicare beneficiaries. 

* * * * * 

§ 412.508 [Amended] 

■ 26. In paragraph (c)(3) of § 412.508, 

the cross-reference ‘‘§ 1001.301’’ is 

removed and the cross-reference 

‘‘1001.201’’ is added in its place. 

■ 27. Section 412.511 is revised to read 

as follows: 

§ 412.511 Reporting and recordkeeping 

requirements. 

A long-term care hospital 

participating in the prospective 

payment system under this subpart 

must meet the requirement of 

§§ 412.22(e)(3) and 412.22(h)(6) to 

report co-located status, if applicable, 

and the recordkeeping and cost 

reporting requirements of §§ 413.20 and 

413.24 of this subchapter. 

■ 28. Section 412.525 is amended by—

■ a. Revising paragraph (a)(3). 

■ b. Revising paragraph (a)(4)(ii). 

■ c. Revising paragraph (a)(4)(iii). 

■ d. Adding a new paragraph (a)(4)(iv). 

■ e. Adding a new paragraph (d)(3). 

■ f. Adding a new paragraph (d)(4). 

The revisions and additions read as 

follows: 

§ 412.525 Adjustments to the Federal 

prospective payment. 

(a) * * * 

(3) The additional payment equals 80 

percent of the difference between the 

estimated cost of the patient’s care 

(determined by multiplying the 

hospital-specific cost-to-charge ratio by 

the Medicare allowable covered charge) 

and the sum of the adjusted LTCH PPS 

Federal prospective payment and the 

fixed-loss amount. 

(4) * * * 

(ii) For discharges occurring on or 

after August 8, 2003, and before October 

1, 2006, high-cost outlier payments are 

subject to the provisions of 

§ 412.84(i)(1), (i)(3), and (i)(4) and (m) 

for adjustments of cost-to-charge ratios. 

(iii) For discharges occurring on or 

after October 1, 2003, and before 

October 1, 2006, high-cost outlier 

payments are subject to the provisions 

of § 412.84(i)(2) for adjustments to costto-charge ratios. 

(iv) For discharges occurring on or 

after October 1, 2006, high-cost outlier 

payments are subject to the following 

provisions: 

(A) CMS may specify an alternative to 

the cost-to-charge ratio otherwise 

applicable under paragraph (a)(4)(iv)(B) 

of this section. A hospital may also 

request that its fiscal intermediary use a 

different (higher or lower) cost-to-charge 

ratio based on substantial evidence 

presented by the hospital. A request 

must be approved by the CMS Regional 

Office. 

(B) The cost-to-charge ratio applied at 

the time a claim is processed is based 


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on either the most recent settled cost 

report or the most recent tentatively 

settled cost report, whichever is from 

the latest cost reporting period. 

(C) The fiscal intermediary may use a 

statewide average cost-to-charge ratio, 

which CMS establishes annually, if it is 

unable to determine an accurate cost-tocharge ratio for a hospital in one of the 

following circumstances: 

(1) A new hospital that has not yet 

submitted its first Medicare cost report. 

(For this purpose, a new hospital is 

defined as an entity that has not 

accepted assignment of an existing 

hospital’s provider agreement in 

accordance with § 489.18 of this 

chapter.) 

(2) A hospital whose cost-to-charge 

ratio is in excess of 3 standard 

deviations above the corresponding 

national geometric mean cost-to-charge 

ratio. CMS establishes and publishes 

this mean annually. 

(3) Any other hospital for which data 

to calculate a cost-to-charge ratio are not 

available. 

(D) Any reconciliation of outlier 

payments is based on the cost-to-charge 

ratio calculated based on a ratio of costs 

to charges computed from the relevant 

cost report and charge data determined 

at the time the cost report coinciding 

with the discharge is settled. 

(E) At the time of any reconciliation 

under paragraph (a)(4)(iv)(D) of this 

section, outlier payments may be 

adjusted to account for the time value of 

any underpayments or overpayments. 

Any adjustment is based upon a widely 

available index to be established in 

advance by the Secretary, and is applied 

from the midpoint of the cost reporting 

period to the date of reconciliation. 

* * * * * 

(d) * * * 

(3) Patients who are transferred to 

onsite providers and readmitted to a 

long-term care hospital, as provided for 

in § 412.532. 

(4) Long-term care hospitals-withinhospitals and satellites of long-term care 

hospitals as provided in § 412.534. 

■ 29. Section 412.529 is amended by 

revising paragraph (c)(3) to read as 

follows: 

§ 412.529 Special payment provision for 

short-stay outliers. 

* * * * * 

(c) * * * 

(3)(i) For discharges occurring on or 

after October 1, 2002, and before August 

8, 2003, no reconciliations are made to 

short-stay outlier payments upon cost 

report settlement to account for 

differences between cost-to-charge ratio 

and the actual cost-to-charge ratio of the 

case. 

(ii) For discharges occurring on or 

after August 8, 2003, and before October 

1, 2006, short-stay outlier payments are 

subject to the provisions of 

§ 412.84(i)(1), (i)(3), and (i)(4) and (m) 

for adjustments of cost-to-charge ratios. 

(iii) For discharges occurring on or 

after October 1, 2003, and before 

October 1, 2006, short-stay outlier 

payments are subject to the provisions 

of § 412.84(i)(2) for adjustments to costto-charge ratios. 

(iv) For discharges occurring on or 

after October 1, 2006, short-stay outlier 

payments are subject to the following 

provisions: 

(A) CMS may specify an alternative to 

the cost-to-charge ratio otherwise 

applicable under paragraph (c)(3)(iv)(B) 

of this section. A hospital may also 

request that its fiscal intermediary use a 

different (higher or lower) cost-to-charge 

ratio based on substantial evidence 

presented by the hospital. This request 

must be approved by the CMS Regional 

Office. 

(B) The cost-to-charge ratio applied at 

the time a claim is processed is based 

on either the most recent settled cost 

report or the most recent tentatively 

settled cost report, whichever is from 

the latest cost reporting period. 

(C) The fiscal intermediary may use a 

statewide average cost-to-charge ratio, 

which CMS establishes annually, if it is 

unable to determine an accurate cost-tocharge ratio for a hospital in one of the 

following circumstances: 

(1) A new hospital that has not yet 

submitted its first Medicare cost report. 

(For this purpose, a new hospital is 

defined as an entity that has not 

accepted assignment of an existing 

hospital’s provider agreement in 

accordance with § 489.18 of this 

chapter.) 

(2) A hospital whose cost-to-charge 

ratio is in excess of 3 standard 

deviations above the corresponding 

national geometric mean. CMS 

establishes and publishes this mean 

annually. 

(3) Any other hospital for which data 

to calculate a cost-to-charge ratio are not 

available. 

(D) Any reconciliation of outlier 

payments is based on the cost-to-charge 

ratio calculated based on a ratio of costs 

to charges computed from the relevant 

cost report and charge data determined 

at the time the cost report coinciding 

with the discharge is settled. 

(E) At the time of any reconciliation 

under paragraph (c)(3)(iv)(D) of this 

section, outlier payments may be 

adjusted to account for the time value of 

any underpayments or overpayments. 

Any adjustment is based upon a widely 

available index to be established in 

advance by the Secretary, and is applied 

from the midpoint of the cost reporting 

period to the date of reconciliation. 

■ 30. Section 412.532 is amended by—

■ a. Revising paragraph (a)(2). 

■ b. Revising paragraph (b). 

The revisions read as follows: 

§ 412.532 Special payment provisions for 

patients who are transferred to onsite 

providers and readmitted to a long-term 

care hospital. 

(a) * * * 

(2) A satellite facility, as defined in 

§ 412.22(h), that is co-located with the 

long-term care hospital. 

* * * * * 

(b) As used in this section, ‘‘colocated’’ or ‘‘onsite’’ facility means a 

hospital, satellite facility, unit, or SNF 

that occupies space in a building also 

used by another hospital or unit or in 

one or more buildings on the same 

campus, as defined in § 413.65(a)(2) of 

this subchapter, as buildings used by 

another hospital or unit. 

* * * * * 

§ 412.541 [Amended] 

■ 31. In § 412.541, paragraph (b)(2)(i), 

remove the cross-reference 

‘‘§ 412.533(b)’’ and add in its place 

‘‘§ 412.533(a)(5) and § 412.533(c)’’. 

PART 413—PRINCIPLES OF 

REASONABLE COST 

REIMBURSEMENT; PAYMENT FOR 

END-STAGE RENAL DISEASE 

SERVICES; PROSPECTIVELY 

DETERMINED PAYMENT RATES FOR 

SKILLED NURSING FACILITIES 

■ 32. The authority citation for part 413 

is revised to read as follows: 

Authority: Secs. 1102, 1812(d), 1814(b), 

1815, 1833(a), (i), and (n), 1861(v), 1871, 

1881, 1883, and 1886 of the Social Security 

Act (42 U.S.C. 1302, 1395d(d), 1395f(b), 

1395g, 1395l(a), (i), and (n), 1395x(v), 

1395hh, 1395rr, 1395tt, and 1395ww); and 

sec. 124 of Pub. L. 106–133 (113 Stat. 1501A–

332). 

■ 33. Section 413.74 is amended by 

revising paragraph (a) to read as follows: 

§ 413.74 Payment to a foreign hospital. 

(a) Principle. Section 1814(f) of the 

Act provides for the payment of 

emergency and nonemergency inpatient 

hospitals services furnished by foreign 

hospitals to Medicare beneficiaries. 

Subpart H of part 424 of this chapter, 

together with this section, specifies the 

conditions for payment. 

* * * * * 

■ 34. Section 413.75 is amended by—

■ a. In paragraph (b), revising paragraph 

(1) under the definition of ‘‘Medicare 

GME affiliated group’’. 


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■ b. In paragraph (b), removing the 

cross-reference ‘‘§ 413.79(g)(2)’’ under 

paragraph (2) of the definition of 

‘‘Medicare GME affiliated group’’ and 

adding the cross-reference 

‘‘§ 413.79(f)(2)’’ in its place. 

■ c. In paragraph (b), removing the 

cross-reference ‘‘§ 413.79(g)(2)’’ under 

paragraph (3) of the definition of 

‘‘Medicare GME affiliated group’’ and 

adding the cross-reference 

‘‘§ 413.79(f)(2)’’ in its place. 

■ d. In paragraph (b), adding in 

alphabetical order the definition of 

‘‘Patient care activities’’. 

The addition and revision read as 

follows: 

§ 413.75 Direct GME payments: General 

requirements. 

* * * * * 

(b) * * * 

Medicare GME affiliated group 

means—

(1) Two or more hospitals that are 

located in the same urban or rural area 

(as those terms are defined in subpart D 

of Part 412 of this subchapter) or in a 

contiguous area and meet the rotation 

requirements in § 413.79(f)(2). 

* * * * * 

Patient care activities means the care 

and treatment of particular patients, 

including services for which a physician 

or other practitioner may bill. 

* * * * * 

■ 35. Section 413.77 is amended by—

■ a. Revising paragraph (e)(1) 

introductory text. 

■ b. Revising paragraph (e)(1)(i). 

■ c. Adding a new paragraph (h). 

The revisions and addition read as 

follows: 

§ 413.77 Direct GME payments: 

Determination of per resident amounts. 

* * * * * 

(e) Exceptions—(1) Base period for 

certain hospitals. If a hospital did not 

have any approved medical residency 

training programs or did not participate 

in Medicare during the base period, but 

either condition changes in a cost 

reporting period beginning on or after 

July 1, 1985, the fiscal intermediary 

establishes a per resident amount for the 

hospital using the information from the 

first cost reporting period during which 

the hospital participates in Medicare 

and the residents are on duty during the 

first month of that period. Effective for 

cost reporting periods beginning on or 

after October 1, 2006, if a hospital did 

not have any approved medical 

residency training programs or did not 

participate in Medicare during the base 

period, but either condition changes in 

a cost reporting period beginning on or 

after October 1, 2006, and the residents 

are not on duty during the first month 

of that period, the fiscal intermediary 

establishes a per resident amount for the 

hospital using the information from the 

first cost reporting period immediately 

following the cost reporting period 

during which the hospital participates 

in Medicare and residents began 

training at the hospital. The per resident 

amount is based on the lower of the 

amount specified in paragraph (e)(1)(i) 

or paragraph (e)(1)(ii) of this section, 

subject to the provisions of paragraph 

(e)(1)(iii) of this section. Any GME costs 

incurred by the hospital during the cost 

reporting period prior to the base period 

used for calculating the PRA are 

reimbursed on a reasonable cost basis. 

(i) The hospital’s actual cost per 

resident incurred in connection with the 

GME program(s) based on the cost and 

resident data from the hospital’s base 

year cost reporting period as established 

in paragraph (e)(1) of this section. 

* * * * * 

(h) Hospital mergers. Effective for cost 

reporting periods beginning on or after 

October 1, 2006, when multiple 

hospitals merge, a primary care and 

obstetrics and gynecology weighted 

average per resident amount and a 

nonprimary care weighted average per 

resident amount is calculated, if 

applicable, for the surviving hospital, 

using FTE resident data and per resident 

amount data from the most recently 

settled cost reports of the respective 

hospitals prior to the merger. 

■ 36. Section 413.78 is amended by—

■ a. Revising paragraph (c)(1). 

■ b. Revising paragraph (d)(1). 

■ c. Revising paragraph (e)(1). 

The revisions read as follows: 

§ 413.78 Direct GME payments: 

Determinations of the total number of FTE 

residents. 

* * * * * 

(c) * * * 

(1) The resident spends his or her 

time in patient care activities, as defined 

in § 413.75(b). 

* * * * * 

(d) * * * 

(1) The resident spends his or her 

time in patient care activities, as defined 

in § 413.75(b). 

(e) * * * 

(1) The resident spends his or her 

time in patient care activities, as defined 

in § 413.75(b). 

* * * * * 

■ 37. Section 413.79 is amended by—

■ a. Revising paragraph (e)(1)(iv). 

■ b. In the introductory text of 

paragraph (f), removing the crossreference ‘‘paragraph (e)(3) of this 

section’’ and adding the cross-reference 

‘‘paragraph (d) of this section’’ in its 

place. 

The revision reads as follows: 

§ 413.79 Direct GME payments: 

Determination of the weighted number of 

FTE residents. 

* * * * * 

(e) * * * 

(1) * * * 

(iv) Effective for affiliation agreements 

entered into on or after October 1, 2005, 

an urban hospital that qualifies for an 

adjustment to its FTE cap under 

paragraph (e)(1) of this section is 

permitted to be part of a Medicare GME 

affiliated group for purposes of 

establishing an aggregate FTE cap only 

if the adjustment that results from the 

affiliation is an increase to the urban 

hospital’s FTE cap. 

* * * * * 

■ 38. Section 413.85 is amended by 

revising paragraph (h)(3) to read as 

follows: 

§ 413.85 Costs of approved nursing and 

allied health education activities. 

* * * * * 

(h) * * * 

(3) Educational seminars, workshops, 

and continuing education programs in 

which the employees or trainees 

participate that enhance the quality of 

medical care or operating efficiency of 

the provider and, effective October 1, 

2003, do not lead to the ability to 

practice and begin employment in a 

nursing or allied health specialty. 

* * * * * 

■ 39. Section 413.89 is amended by—

■ a. Revising paragraph (a). 

■ b. Revising paragraph (h). 

The revisions read as follows: 

§ 413.89 Bad debts, charity, and courtesy 

allowances. 

(a) Principle. Bad debts, charity, and 

courtesy allowances are deductions 

from revenue and are not to be included 

in allowable cost. However, subject to 

the limitations described under 

paragraph (h) of this section and the 

exception for anesthetists’ services 

described under paragraph (i) of this 

section, bad debts attributable to the 

deductibles and coinsurance amounts 

are reimbursable under the program. 

* * * * * 

(h) Limitations on bad debts. (1) 

Hospitals. In determining reasonable 

costs for hospitals, the amount of bad 

debt otherwise treated as allowable 

costs (as defined in paragraph (e) of this 

section) is reduced—

(i) For cost reporting periods 

beginning during fiscal year 1998, by 25 

percent; 


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(ii) For cost reporting periods 

beginning during fiscal year 1999, by 40 

percent; 

(iii) For cost reporting periods 

beginning during fiscal year 2000, by 45 

percent; and 

(iv) For cost reporting periods 

beginning during a subsequent fiscal 

year, by 30 percent. 

(2) Skilled nursing facilities. For cost 

reporting periods beginning during 

fiscal year 2006 or during a subsequent 

fiscal year, the amount of skilled 

nursing facility bad debts for 

coinsurance otherwise treated as 

allowable costs (as defined in paragraph 

(e) of this section) for services furnished 

to a patient who is not a dual eligible 

individual is reduced by 30 percent. A 

dual eligible individual is defined for 

this section as an individual that is 

entitled to benefits under Part A of 

Medicare and is determined eligible by 

the State for medical assistance under 

Title XIX of the Act as described under 

paragraph (2) of the definition of a ‘‘fullbenefit dual eligible individual’’ at 

§ 423.772 of this chapter. 

* * * * * 

PART 414—PAYMENT FOR PART B 

MEDICAL AND OTHER HEALTH 

SERVICES 

■ 40. The authority citation for part 414 

continues to read as follows: 

Authority: Secs. 1102, 1871, and 1881(b)(1) 

of the Social Security Act (42 U.S.C. 1302, 

1395hh, and 1395rr(b)(1)). 

■ 41. Section 414.802 is amended by 

revising the definition of ‘‘unit’’ to read 

as follows: 

§ 414.802 Definitions. 

* * * * * 

Unit means the product represented 

by the 11-digit National Drug Code. 

During the first 3 years of the CAP (as 

defined in § 414.902), the method of 

counting units excludes units of CAP 

drugs (as defined in § 414.902) sold to 

an approved CAP vendor (as defined in 

§ 414.902) for use under the CAP (as 

defined in § 414.902). 

PART 424—CONDITIONS FOR 

MEDICARE PAYMENT 

■ 42. The authority citation for part 424 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

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

1395hh). 

§ 424.32 [Amended] 

■ 43. In § 424.32, in paragraph (b), the 

phrase ‘‘CMS–1490U—Request for 

Medicare Payment by Organization. (For 

use by an organization requesting 

payment for medical services.)’’ is 

removed and the phrase ‘‘CMS–1491—

Request for Medicare Payment—

Ambulance. (For use by an organization 

requesting payment for ambulance 

services.)’’ is removed. 

§ 424.121 [Amended] 

■ 44. In § 424.121, paragraph (c) is 

amended by removing the crossreference ‘‘§ 405.313’’ and adding the 

cross-reference ‘‘§ 411.9’’ in its place. 

■ 45. Section 424.123 is amended by 

revising paragraph (c)(2) to read as 

follows: 

§ 424.123 Conditions for payment for 

nonemergency inpatient hospital services 

furnished by a hospital closer to the 

individual’s residence. 

* * * * * 

(c) * * * 

(2) Accredited by the Joint 

Commission on Accreditation of 

Healthcare Organizations (JCAHO) or 

accredited or approved by a program of 

the country where it is located under 

standards the CMS finds to be 

essentially equivalent to those of the 

JCAHO. 

* * * * * 

PART 485—CONDITIONS OF 

PARTICIPATION: SPECIALIZED 

PROVIDERS 

■ 46. The authority citation for part 485 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

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

1395hh). 

§ 485.610 [Amended] 

■ 47. In paragraph (c) of § 485.610, the 

phrase ‘‘as of October 1, 2006’’ is 

removed and the phrase ‘‘on or before 

December 31, 2005’’ is added in its 

place. 

PART 489—PROVIDER AGREEMENTS 

AND SUPPLIER APPROVAL 

■ 48. The authority citation for part 489 

continues to read as follows: 

Authority: Secs. 1102, 1819, 1861, 

1864(m), 1866, 1869, and 1871 of the Social 

Security Act (42 U.S.C. 1302, 1395i–3, 1395x, 

1395aa(m), 1395cc, 1395ff, and 1395hh). 

■ 49. Section 489.24 is amended by—

■ a. Revising the definition of ‘‘Labor’’

under paragraph (b). 

■ b. Revising paragraph (f). 

The revisions read as follows: 

§ 489.24 Special responsibilities of 

Medicare hospitals in emergency cases. 

* * * * * 

(b) * * * 

Labor means the process of childbirth 

beginning with the latent or early phase 

of labor and continuing through the 

delivery of the placenta. A woman 

experiencing contractions is in true 

labor unless a physician, certified nursemidwife, or other qualified medical 

person acting within his or her scope of 

practice as defined in hospital medical 

staff bylaws and State law, certifies that, 

after a reasonable time of observation, 

the woman is in false labor. 

* * * * * 

(f) Recipient hospital responsibilities. 

A participating hospital that has 

specialized capabilities or facilities 

(including, but not limited to, facilities 

such as burn units, shock-trauma units, 

neonatal intensive care units, or (with 

respect to rural areas) regional referral 

centers, which, for purposes of this 

subpart, means hospitals meeting the 

requirements of referral centers found at 

§ 412.96 of this chapter) may not refuse 

to accept from a referring hospital 

within the boundaries of the United 

States an appropriate transfer of an 

individual who requires such 

specialized capabilities or facilities if 

the receiving hospital has the capacity 

to treat the individual. This requirement 

applies to any participating hospital 

with specialized capabilities, regardless 

of whether the hospital has a dedicated 

emergency department. 

* * * * * 

SUBCHAPTER H—HEALTH CARE 

INFRASTRUCTURE IMPROVEMENT 

PROGRAM 

PART 505—ESTABLISHMENT OF THE 

HEALTH CARE INFRASTRUCTURE 

IMPROVEMENT PROGRAM 

■ 50. The authority citation for part 505 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

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

1395hh). 

■ 51. In § 505.3, the introductory text is 

republished and definitions of 

‘‘Outreach programs’’ and ‘‘Unique 

research resources’’ are added in 

alphabetical order to read as follows: 

§ 505.3 Definitions. 

For purposes of this subpart, the 

following definitions apply: 

* * * * * 

Outreach programs mean formal 

cancer programs for teaching, diagnostic 

screening, therapy or treatment, 

prevention, or interventions to enhance 

the health and knowledge of their 

designated population(s). 

* * * * * 

Unique research resources means 

resources that are used for the purpose 

of discovering or testing options related 


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48144 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

to the causes, prevention, and treatment 

of cancer. 

■ 52. A new Subpart B, containing 

§§ 505.13, 505.15, 505.17, and 505.19, is 

added to Part 505 to read as follows: 

Subpart B—Forgiveness of Indebtedness 

Secs. 

505.13 Conditions for loan forgiveness. 

505.15 Plan criteria for meeting the 

conditions for loan forgiveness. 

505.17 Reporting requirements for meeting 

the conditions for loan forgiveness. 

505.19 Approval or denial of loan 

forgiveness. 

Subpart B—Forgiveness of 

Indebtedness 

§ 505.13 Conditions for loan forgiveness. 

The Secretary may forgive a loan 

provided under this part if the 

qualifying hospital—

(a) Has been selected to participate in 

the loan program specified in § 505.5(c). 

(b) Has established the following in 

accordance with a plan that meets the 

criteria specified in § 505.15: 

(1) An outreach program for cancer 

prevention, early diagnosis, and 

treatment that provides services to a 

substantial majority of the residents of 

a State or region, including residents of 

rural areas; 

(2) An outreach program for cancer 

prevention, early diagnosis, and 

treatment that provides services to 

multiple Indian tribes; and 

(3) Unique research resources (such as 

population databases) or an affiliation 

with an entity that has unique research 

resources. 

(c) Submits to CMS, within the 

timeframe specified by the Secretary, 

a—

(1) Written request for loan 

forgiveness; and 

(2) Loan forgiveness plan that meets 

the criteria specified in § 505.15 of this 

subpart. 

§ 505.15 Plan criteria for meeting the 

conditions for loan forgiveness. 

The qualifying hospital requesting 

loan forgiveness must submit to CMS a 

plan specifying how it will develop, 

implement, or maintain an existing 

outreach program for cancer prevention, 

early diagnosis, and treatment for a 

substantial majority of the residents of 

a State or region, including residents of 

rural areas and for multiple Indian 

tribes and specifying how the qualifying 

hospital will establish or maintain 

existing unique research resources or an 

affiliation with an entity that has unique 

research resources. 

(a) Outreach programs. The initial 

plan must specify how the hospital will 

establish or develop, implement, or 

maintain existing outreach programs. 

The plan must—

(1) Address cancer prevention for 

cancers that are prevalent in the 

designated populations or cancers that 

are targeted by the qualifying hospital, 

interventions, and goals for decreasing 

the targeted cancer rates during the loan 

deferment program; and 

(2) Address early diagnosis of cancers 

that are prevalent in the designated 

populations or cancers that are targeted 

by the qualifying hospital, 

interventions, and goals for improving 

early diagnosis rates for the targeted 

cancer(s) during the loan deferment 

period; 

(3) Address cancer treatment for 

cancers that are prevalent in the 

designated populations or cancers that 

are targeted by the qualifying hospital, 

interventions, and goals for improving 

cancer treatment rates for the targeted 

cancer(s) during the loan deferment; and 

(4) Identify the measures that will be 

used to determine the qualifying 

hospital’s annual progress in meeting 

the initial goals specified in paragraphs 

(a)(1) through (a)(3) of this section. 

(b) Unique research resources. The 

plan must specify how the qualifying 

hospital will establish or maintain 

existing unique research resources or an 

affiliation with an entity that has unique 

research resources. 

§ 505.17 Reporting requirements for 

meeting the conditions for loan 

forgiveness. 

(a) Annual reporting requirements. On 

an annual basis, beginning one year 

from the date that CMS notified the 

qualifying hospital of the loan award, 

the qualifying hospital must submit a 

report to CMS that updates the plan 

specified in § 505.15 by—

(1) Describing the qualifying 

hospital’s progress in meeting its initial 

plan goals; 

(2) Describing any changes to the 

qualifying hospital’s initial plan goals; 

and 

(3) Including at least one measure 

used to track the qualifying hospital’s 

progress in meeting its plan goals. 

(b) Review of annual reports. CMS 

will review each qualifying hospital’s 

annual report to provide the hospital 

with feedback regarding its loan 

forgiveness status. If CMS determines 

that the annual report shows that the 

qualifying hospital has fulfilled the 

conditions, plan criteria, and reporting 

requirements for loan forgiveness 

specified in §§ 505.13, 505.15, and 

§ 505.17, CMS will notify the qualifying 

hospital in writing that the loan is 

forgiven. 

(c) Final annual reporting 

requirements. A qualifying hospital 

must submit its final report to CMS at 

least 6 months before the end of the loan 

deferment period specified in § 505.7(b). 

§ 505.19 Approval or denial of loan 

forgiveness. 

(a) Approval of loan forgiveness. If 

CMS determines that a qualifying 

hospital has met the conditions, plan 

criteria, and reporting requirements for 

loan forgiveness specified in § 505.13, 

§ 505.15, and § 505.17, CMS will send a 

written notification of approval for loan 

forgiveness to the qualifying hospital by 

the earlier of—

(1) 30 days from the date of receipt of 

the annual report that shows the 

qualifying hospital has satisfied the 

requirements for loan forgiveness; or 

(2) 90 days before the end of the loan 

deferment period defined in § 505.7(b). 

(b) Denial of loan forgiveness. If CMS 

determines that a qualifying hospital 

has not met the conditions, plan criteria, 

or reporting requirements for loan 

forgiveness specified in § 505.13, 

§ 505.15, or § 505.17 of this part, CMS 

will send a written notification of denial 

of loan forgiveness to the qualifying 

hospital at least 30 days before the end 

of the loan deferment period defined in 

§ 505.7(b). 

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare—Hospital 

Insurance; and Program No. 93.774, 

Medicare—Supplementary Medical 

Insurance Program) 

Dated: July 27, 2006. 

Mark B. McClellan, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Dated: July 31, 2006. 

Michael O. Leavitt, 

Secretary. 

[Editorial Note: The following Addendum 

and appendixes will not appear in the Code 

of Federal Regulations.] 

Addendum—Schedule of Tentative 

Standardized Amounts, Tentative 

Update Factors and Rate-of-Increase 

Percentages Effective With Cost 

Reporting Periods Beginning On or 

After October 1, 2006 

I. Summary and Background 

Due to the unusual circumstances 

imposed by the order of the Court of 

Appeals for the Second Circuit in the 

decision in Bellevue Hospital Center v. 

Leavitt, discussed in detail in section 

III.C. of the preamble of this final rule, 

we are not able to provide the final FY 

2007 occupational mix adjusted wage 

index tables, payment rates, or impacts 

in this final rule. Because the wage data 

affect the calculation of the outlier 

threshold as well as the outlier offset 

and budget neutrality factors that are 


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Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48145 

applied to the standardized amounts, 

we are only able to provide tentative 

figures at this time. These tentative 

amounts will be revised once the 

occupational mix adjusted wage index 

is finalized. Subsequent to this final 

rule, we will publish a Federal Register 

document listing the final standardized 

amounts, outlier offsets, and budget 

neutrality factors that are effective 

October 1, 2006 for FY 2007. The final 

data also will be published on the CMS 

Web site. 

In this Addendum, we are setting 

forth a final description of the methods 

and data we are using to determine the 

prospective payment rates for Medicare 

hospital inpatient operating costs and 

Medicare hospital inpatient capitalrelated costs. We are also setting forth 

the final rate-of-increase percentages for 

updating the target amounts for 

hospitals and hospital units excluded 

from the IPPS. We note that, because 

hospitals excluded from the IPPS are 

paid on a cost basis (and not by the 

IPPS), these hospitals are not affected by 

the tentative figures for standardized 

amounts, offsets, and budget neutrality 

factors. Therefore, in this final rule, we 

are finalizing the rate-of-increase 

percentages for updating the target 

amounts for hospitals and hospital units 

excluded from the IPPS that are 

effective October 1, 2006. 

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, which is 

based on the national adjusted 

standardized amount. This amount 

reflects the national average hospital 

cost per case from a base year, updated 

for inflation. 

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; or the 

updated hospital-specific rate based on 

FY 1996 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 is higher. (MDHs did not 

have the option to use their FY 1996 

hospital-specific rate.) Section 

5003(a)(1) of Pub. L. 109–171 extended 

and modified the MDH special payment 

provision which was previously set to 

expire on October 1, 2006, to discharges 

occurring on or after October 1, 2006, 

but before October 1, 2011. Under 

section 5003(b) of Pub. L. 109–171, if 

the change results in an increase to its 

target amount, an MDH must rebase its 

hospital-specific rates to its FY 2002 

cost report. In addition, under section 

5003(c) of Pub. L. 109–171, MDHs will 

now 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 upon section 

5003(d) of Pub. L. 109–171, MDHs will 

no longer be subject to the 12-percent 

cap on their DSH payment adjustment 

factor. 

For hospitals in Puerto Rico, the 

payment per discharge is based on the 

sum of 25 percent of a Puerto Rico rate 

that reflects base year average costs per 

case of Puerto Rico hospitals and 75 

percent of the Federal national rate. (See 

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 FY 2007. In section 

III. of this Addendum, we discuss our 

changes for determining the prospective 

payment rates for Medicare inpatient 

capital-related costs for FY 2007. 

Section IV. of this Addendum sets forth 

our final changes for determining the 

rate-of-increase limits for hospitals 

excluded from the IPPS for FY 2007. 

Section V. of this Addendum sets forth 

policies on payment for blood clotting 

factors administered to hemophilia 

inpatients. The tables to which we refer 

in the preamble of this final rule are 

presented in section VI. of this 

Addendum of this final rule. Some of 

these tables are based upon tentative 

data, and the final tables will be 

presented in a separate document that 

will be published on the CMS Web site, 

as well as in the Federal Register after 

publication of this final rule but prior to 

October 1, 2006. 

II. Changes To Prospective Payment 

Rates for Hospital Inpatient Operating 

Costs 

The basic methodology for 

determining prospective payment rates 

for hospital inpatient operating costs for 

FY 2005 and subsequent fiscal years is 

set forth at § 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 

§§ 412.211 and 412.212. Below we 

discuss the factors used for determining 

the prospective payment rates. 

In summary, the tentative 

standardized amounts set forth in 

Tables 1A, 1B, 1C, and 1D of section VI. 

of this Addendum 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) of the Act, updated by 

the applicable percentage increase 

required under sections 

1886(b)(3)(B)(i)(XX) and 

1886(b)(3)(B)(viii) of the Act. 

• The labor-related share that is 

applied to the tentative standardized 

amounts and tentative Puerto Ricospecific 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. 

• Final updates of 3.4 percent for all 

areas (that is, the full market basket 

percentage increase of 3.4 percent), as 

required by section 1886(b)(3)(B)(i)(XX) 

of the Act, as amended by section 

5001(a)(1) of Pub. L. 109–171, and 

reflecting the requirements of section 

1886(b)(3)(B)(viii) of the Act, as added 

by section 5001(a)(3) of Pub. L. 109–171, 

to reduce the applicable percentage 

increase by 2.0 percentage points for a 

hospital that fails to submit data, in a 

form and manner specified by the 

Secretary, relating to the quality of 

inpatient care furnished by the hospital. 

• An adjustment to ensure the DRG 

recalibration, as provided for under 

section 1886(d)(4)(C)(iii) of the Act, by 

applying a final budget neutrality 

adjustment factor to the standardized 

amount. 

• An adjustment to ensure the wage 

index update and changes are budget 

neutral, as provided for under section 

1886(d)(3)(E) of the Act. 

• An adjustment to ensure the effects 

of the special transition measures 

adopted in relation to the 

implementation of new labor market 

areas are budget neutral. 

• 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 2006 budget neutrality factor and 

applying a revised factor. 

• An adjustment to remove the FY 

2006 outlier offset and apply an offset 

for FY 2007. 

• An adjustment to ensure the effects 

of the rural community hospital 

demonstration required under section 

410A of Pub. L. 108–173 are budget 

neutral, as required under section 

410A(c)(2) of Pub. L. 108–173. 


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A. Calculation of the Tentative 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) or, for Puerto Rico, 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) 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 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 (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-ofliving adjustments for Alaska and 

Hawaii, indirect medical education 

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 the labor-related 

amount is adjusted by the wage index. 

Section 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 2007, we are not changing the 

national and Puerto Rico-specific laborrelated and nonlabor-related shares from 

the percentages established for FY 2006. 

Therefore, the labor-related share will 

continue to be 69.7 percent for the 

national standardized amounts and 58.7 

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 laborrelated share of 62 percent for all nonPuerto Rico hospitals whose wage 

indexes are less than or equal to 1.0000. 

For all non-Puerto Rico hospitals whose 

wage indices are greater than 1.0000, we 

are applying the wage index to a labor 

share of 69.7 percent of the national 

standardized amount. For a Puerto Rico 

hospital, we will apply a labor share of 

58.7 percent if its Puerto Rico-specific 

wage index is less than or equal to 

1.0000. For Puerto Rico hospitals whose 

Puerto Rico-specific wage index values 

are greater than 1.0000, we will apply a 

labor share of 62 percent. 

The tentative standardized amounts 

appear in Table 1A, 1B, and 1C of the 

Addendum to this final rule. 

Comment: Several commenters 

recommended that CMS raise the labor 

share from 69.7 percent to the previous 

level of 71.1 percent for hospitals with 

a wage index greater than one. The 

commenters explained that a reduced 

labor share has a negative impact and 

severe financial strain on their 

hospitals. 

Response: We thank the commenters 

for their comments. We refer the 

commenters to the FY 2006 final rule 

(70 FR 47392–47396) where a full 

discussion (including comments and 

responses) on the labor share percentage 

can be found. As we indicated, our 

analysis in last year’s rule showed that 

the labor-related share should equal 

69.7 percent nationally based on the 

latest available data. 

2. Computing the Tentative Average 

Standardized Amount 

Section 1886(d)(3)(A)(iv) of the Act 

requires that, beginning with FY 2004 

and thereafter, an equal standardized 

amount is to 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) of the Act 

equalizes the Puerto Rico-specific urban 

and rural area rates. Accordingly, we 

will calculate FY 2007 national and 

Puerto Rico standardized amounts, 

irrespective of whether a hospital is 

located in an urban or rural location. 

3. Updating the Tentative Average 

Standardized Amount 

In accordance with section 

1886(d)(3)(A)(iv)(II) of the Act, we are 

updating the equalized standardized 

amount for FY 2007 by the full 

estimated market basket percentage 

increase for hospitals in all areas, as 

specified in section 1886(b)(3)(B)(i)(XX) 

of the Act, as amended by section 

5001(a)(1) of Pub. L. 109–171. The 

percentage change in the market basket 

reflects the average change in the price 

of goods and services purchased by 

hospitals to furnish inpatient care. The 

most recent forecast of the hospital 

market basket increase for FY 2007 is 

3.4 percent. Thus, for FY 2007, the 

update to the average standardized 

amount is 3.4 percent for hospitals in all 

areas. 

Section 1886(b)(3)(B) of the Act 

specifies the mechanism used to update 

the standardized amount for payment 

for inpatient hospital operating costs. 

Section 1886(b)(3)(B)(viii) of the Act, as 

added by section 5001(a)(3) of Pub. L. 

109–171, provides for a reduction of 2.0 

percentage points to the update 

percentage increase (also known as the 

market basket update) for FY 2007 and 

each subsequent fiscal year for any 

‘‘subsection (d) hospital’’ that does not 

submit quality data as discussed in 

section IV.A. of the preamble of this 

final rule. The tentative standardized 

amounts in Tables 1A through 1C of 

section VI. of this Addendum reflect 

these differential amounts. 

Although the update factors for FY 

2007 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 2007 

for both IPPS hospitals and hospitals 

and hospital units excluded from the 

IPPS. Our recommendation on the 

update factors (which is required by 

sections 1886(e)(4)(A) and (e)(5)(A) of 

the Act) is set forth in Appendix B of 

this final rule. 

We note that the occupational mix 

wage index data will have no affect on 

the market basket increase factor of 3.4 

percent. Therefore, the update factors of 

3.4 and 1.4 percent are final and not 

tentative. These update factors (3.4 and 

1.4 percent) are one element that will be 

used to determine the FY 2007 

standardized amounts. Other factors, 

such as the outlier offset and budget 

neutrality adjustments for wage index 

and reclassification that are applied to 

the standardized amounts, are yet to be 

determined pending the calculation of 

the occupational mix adjustment. The 

market basket increase of 3.4 percent is 

based on the second quarter forecast of 

the hospital market basket increase by 

the Office of the Actuary (as discussed 

in Appendix B of this final rule). 

4. Other Adjustments to the Average 

Standardized Amount 

As in the past, we are adjusting the 

FY 2007 standardized amount to remove 

the effects of the FY 2006 geographic 

reclassifications and outlier payments 

before applying the FY 2007 updates. 

We then apply budget neutrality offsets 


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for outliers and geographic 

reclassifications to the standardized 

amount based on FY 2007 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 the changes in the DRG relative 

weights and wage index should equal 

estimated aggregate payments prior to 

the changes. If we removed the prior 

year adjustment, we would not satisfy 

these conditions. 

Budget neutrality is determined by 

comparing aggregate IPPS payments 

before and after making the changes that 

are required to be budget neutral (for 

example, reclassifying and recalibrating 

the DRGs, updating the wage data, and 

geographic reclassifications). We 

include outlier payments in the 

simulations because they may be 

affected by changes in these parameters. 

We are also adjusting the 

standardized amount this year by an 

estimated amount to ensure that 

aggregate IPPS payments do not exceed 

the amount of payments that would 

have been made in the absence of the 

rural community hospital 

demonstration required under section 

410A of Pub. L. 108–173. This 

demonstration is required to be budget 

neutral under section 410A(c)(2) of Pub. 

L. 108–173. 

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. 

As noted above, due to the decision 

of the Bellevue court, we are unable to 

finalize the wage data used in 

establishing the FY 2007 IPPS payment 

factors at this time. We use the wage 

data to standardize the charges when 

recalibrating the DRG weights, and 

therefore, we will recalculate the final 

DRG weights when the occupational 

mix adjusted wage data become 

available. Since the DRG relative 

weights are not yet final, at this time we 

are only able to provide the tentative 

DRG reclassification and recalibration 

budget neutrality adjustment. 

Subsequent to this final rule and prior 

to October 1, 2006, the recalculated DRG 

weights and the final DRG 

reclassification and recalibration budget 

neutrality adjustment will be published 

in a Federal Register notice. 

Section 1886(d)(3)(E) 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. For FY 

2007, 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 to this final rule. However, the 

data to compute the 100 percent 

occupational mix adjustment are not 

available to us at this time. Although 

section 1886(d)(3)(E) of the Act requires 

us to update the wage index on a budget 

neutral basis, we cannot include the 

effects of the occupational mix 

adjustment on the wage index in our 

budget neutrality calculations at this 

time. Therefore, the budget neutrality 

adjustment to the standardized amounts 

that we calculated below is tentative 

pending the calculation of the 

occupational mix adjusted wage indices 

that will be provided on the CMS Web 

site and in a Federal Register notice 

prior to October 1. 

In FY 2005, those urban hospitals that 

became rural under the new labor 

market area definitions were assigned 

the wage index of the urban area in 

which they were located under the 

previous labor market definitions for a 

3-year period of FY 2005, FY 2006, and 

FY 2007. Because we are in the third 

year of this 3-year transition, we are 

adjusting the standardized amounts for 

FY 2007 to ensure budget neutrality for 

this policy. We discuss this adjustment 

in section III.B. of the preamble to this 

final rule. Again, the adjustment for this 

factor will be affected by the 

occupational mix adjusted wage indices 

that will be recalculated prior to 

October 1. For this reason, the 

adjustment for previously urban 

hospitals that become rural under the 

new labor market area definitions is 

tentative pending final calculation of 

the occupational mix adjusted wage 

indices. 

Section 4410 of Pub. L. 105–33 

provides that, for discharges on or after 

October 1, 1997, the area wage index 

applicable to any hospital that is not 

located in a rural area may not be less 

than the area wage index applicable to 

hospitals located in rural areas in that 

State. This provision is required by 

section 4410(b) of Pub. L. 105–33 to be 

budget neutral. Therefore, we include 

the effects of this provision in our 

calculation of the wage update budget 

neutrality factor. As discussed in the FY 

2006 IPPS final rule (70 FR 47493), FY 

2007 is the third and final year of the 

3-year provision that uses an imputed 

wage index floor for States that have no 

rural areas and States that have 

geographic rural areas, but that have no 

hospitals actually classified as rural. We 

are also adjusting for the effects of this 

provision in our calculation of the wage 

update budget neutrality factor. This 

figure will also be updated pending 

calculation of the occupational mix 

adjusted wage indices. 

To comply with the requirement that 

DRG reclassification and recalibration of 

the relative weights and the updated 

wage index be budget neutral, we used 

FY 2005 discharge data to simulate 

payments and compared aggregate 

payments using the FY 2006 relative 

weights and wage indexes to aggregate 

payments using the FY 2007 relative 

weights and wage indexes. The same 

methodology was used for the FY 2006 

budget neutrality adjustment. 

Based on this comparison, we 

computed a tentative budget neutrality 

adjustment factor equal to 0.997030. We 

also are adjusting the Puerto Ricospecific standardized amount for the 

effect of DRG reclassification and 

recalibration. We computed a tentative 

budget neutrality adjustment factor for 

the Puerto Rico-specific standardized 

amount equal to 0.997968. These budget 

neutrality adjustment factors are applied 

to the standardized amounts without 

removing the effects of the FY 2006 

budget neutrality adjustments. In 

addition, as discussed in section IV.E. of 

the preamble to this final rule, we are 

applying the same tentative DRG 

reclassification and recalibration budget 

neutrality factor of 0.997968 to the 

hospital-specific rates that are to be 

effective for cost reporting periods 

beginning on or after October 1, 2006. 

Using the same data, we calculated a 

tentative transition budget neutrality 


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adjustment to account for the ‘‘hold 

harmless’’ policy under which urban 

hospitals that became rural under the 

new labor market area definitions were 

assigned the wage index of the urban 

area in which they were located under 

the previous labor market area 

definitions for a 3-year period of FY 

2005, FY 2006, and FY 2007. Using the 

pre-reclassified wage index, we 

simulated payments under the new 

labor market area definitions and 

compared them to simulated payments 

under the ‘‘hold harmless’’ policy. 

Based on this comparison, we computed 

a tentative transition budget neutrality 

adjustment of 0.999605. 

Comment: Several commenters 

addressed CMS’’ policy of excluding 

data from CAHs when computing the 

wage index. The commenters believed 

that the artificial increase in the 

national average hourly wage has 

lowered the budget neutrality 

adjustment by an estimated $1.52 

billion over 5 years (2003 through 2007). 

The commenters stated that CMS should 

apply a one-time positive budget 

neutrality adjustment in FY 2007 to 

compensate for the prior 

underpayments. They did not believe 

similar future adjustments would be 

necessary since very few hospitals are 

expected ‘‘to convert to CAH status now 

that the necessary provider designation 

is no longer an option.’’

Response: We do not believe that the 

elimination of these data has resulted in 

an overstated national average hourly 

wage, nor has the budget neutrality 

adjustment been inappropriately 

reduced. Section 1886(d)(3)(E) of the 

Act requires that wage index 

adjustments be made in a manner that 

assures that aggregate payments in a 

fiscal year are not greater or less than 

those that would have been made 

without the wage index adjustment. We 

calculate the budget neutrality 

adjustment for the wage index by 

comparing simulated payments under 

our current wage index adjustment 

policies with simulated payments with 

no wage index adjustment. Our current 

policy is to exclude CAH data from our 

calculation of the IPPS wage index, so 

we believe this policy should be taken 

into account when we calculate the 

budget neutrality adjustment for the 

wage index. Consequently, we will not 

apply a one-time positive budget 

neutrality adjustment in FY 2007. We 

note that a full discussion on the wage 

index can be found in section III. of the 

preamble to this final rule. 

b. Reclassified Hospitals—Tentative 

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 neither the 

wage index reclassifications provided 

under section 508 of Pub. L. 108–173 

nor the wage index adjustments 

provided under section 1886(d)(13) of 

the Act are budget neutral. Section 

508(b) of Pub. L. 108–173 provides that 

the wage index reclassifications 

approved under section 508(a) of Pub. L. 

108–173 ‘‘shall not be effected in a 

budget neutral manner.’’ Section 

1886(d)(13)(H) of the Act similarly 

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 tentative budget neutrality factor, we 

used FY 2005 discharge data to simulate 

payments, and compared total IPPS 

payments prior to any reclassifications 

under sections 1886(d)(8)(B) and (C) and 

1886(d)(10) of the Act to total IPPS 

payments after such reclassifications. 

Based on these simulations, we 

calculated a tentative adjustment factor 

of 0.991850 to ensure that the effects of 

this reclassification are budget neutral. 

The tentative adjustment factor is 

applied to the standardized amount 

after removing the effects of the FY 2006 

budget neutrality adjustment factor. We 

note that the FY 2007 tentative 

adjustment reflects FY 2007 wage index 

reclassifications approved by the 

MGCRB or the Administrator, and the 

effects of MGCRB reclassifications 

approved in FY 2005 and FY 2006 

(section 1886(d)(10)(D)(v) of the Act 

makes wage index reclassifications 

effective for 3 years). As we note earlier 

in this final rule, CMS will make a FY 

2007 reclassification determination for a 

hospital based on what we believe will 

be most advantageous to the hospital 

using the fully occupational mix 

adjusted wage index. We will calculate 

the final budget neutrality adjustments 

for geographic reclassification 

subsequent to this final rule, but prior 

to October 1, and will make this 

information available with the 

occupational mix adjusted wage indices 

and final IPPS rates. 

c. Outliers 

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 costs. Payments for 

eligible cases are then made based on a 

marginal cost factor, which is a 

percentage of the costs above the fixedloss cost threshold. The marginal cost 

factor for FY 2007 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. 

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 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. 

i. FY 2007 tentative outlier fixed-loss 

cost threshold. 

As stated above, the wage index 

tables, rates, and impacts will not be 

final in this final rule because we are yet 


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to determine occupational mix adjusted 

wage indices. Therefore, we are only 

able to provide tentative standardized 

amounts, relative weights, offsets, and 

budget neutrality factors in this final 

rule. Once we have the final 

occupational mix data, we will 

recalculate these amounts to reflect the 

final occupational mix adjusted wage 

indices. The same circumstances apply 

to the outlier threshold. Without final 

wage index data, final standardized 

amounts, final offsets and final budget 

neutrality factors, we are only able to 

provide a tentative fixed loss outlier 

threshold in this final rule. Subsequent 

to this final rule, we will publish a final 

fixed loss outlier threshold that will be 

effective for discharges on and after 

October 1, 2006 for FY 2007. However, 

in this final rule, we are adopting as 

final the methodology we will use to 

calculate the final outlier fixed-loss cost 

threshold. 

For FY 2007, we proposed to use the 

same methodology used for FY 2006 (70 

FR 47493) to calculate the outlier 

threshold. As we have done in the past, 

to calculate the proposed FY 2007 

outlier threshold, we simulated 

payments by applying FY 2007 rates 

and policies using cases from the FY 

2005 MedPAR files. Therefore, in order 

to determine the FY 2007 outlier 

threshold, we inflate the charges on the 

MedPAR claims by 2 years, from FY 

2005 to FY 2007. 

In certain years in the past, we have 

inflated MedPAR claims by calculating 

a 2-year average annual rate-of-change 

in charges-per-case using the charge 

data for the two most recent years for 

which we had relatively complete 

MedPAR data. As discussed in the FY 

2006 IPPS final rule (70 FR 47494), 

however, we believe that charge data 

from FY 2003 may be distorted due to 

the atypically high rate of hospital 

charge inflation during FY 2003. 

Therefore, we are not inflating charges 

using a 2-year average annual rate-ofchange from FY 2003 to FY 2004 and FY 

2004 to FY 2005. 

Instead, we proposed to continue 

using a refined methodology that takes 

into account the lower inflation in 

hospital charges that is 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 and accurate CCRs. Our 

refined methodology uses more recent 

data that reflects the rate-of-change in 

hospital charges under the new outlier 

policy. Specifically, we proposed to 

establish the FY 2007 outlier threshold 

as follows: Using the latest data 

available, we would calculate the 1-year 

average annualized rate-of-change in 

charges-per-case from the last quarter of 

FY 2004 in combination with the first 

quarter of FY 2005 (July 1, 2004 through 

December 31, 2004) to the last quarter 

of FY 2005 in combination with the first 

quarter of FY 2006 (July 1, 2005 through 

December 31, 2005). This rate of change 

was 7.57 percent (1.0757) or 15.15 

percent (1.1515) over 2 years. 

As we have done in the past, we 

proposed to establish the FY 2007 

outlier threshold using hospital CCRs 

from the March 2006 update to the 

Provider-Specific File—the most recent 

available at the time of this final rule. 

This file includes CCRs that reflect 

implementation of the changes to the 

policy for determining the applicable 

CCRs that became effective August 8, 

2003 (68 FR 34494). 

Using this methodology, we proposed 

to establish an outlier fixed-loss cost 

threshold for FY 2007 equal to the 

prospective payment rate for the DRG, 

plus any IME and DSH payments, and 

any add-on payments for new 

technology, plus $25,530. 

We noted that the case-weighted 

national average CCR declined by 

approximately 1 percent from the March 

2005 to the March 2006 update of the 

Provider-Specific File. Hospital charges 

continue to increase at a steady rate of 

growth between 7 and 8 percent over 

each of the last 2 years, resulting in a 

decline to the CCRs that are used to 

compute the outlier threshold. Using 

lower CCRs from the March 2006 

Provider-Specific File, in combination 

with the FY 2005 MedPAR claims and 

inflated charges, contributes to a higher 

outlier threshold for FY 2007 compared 

to FY 2006. 

As we did in establishing the FY 2006 

outlier threshold (70 FR 47494), in our 

projection of FY 2007 outlier payments, 

we proposed not to make an adjustment 

for the possibility that hospitals’ CCRs 

and outlier payments may be reconciled 

upon cost report settlement. We stated 

that we continue to believe that, due to 

the policy implemented in the June 9, 

2003 outlier final rule, 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 which specific 

hospitals will have CCRs and outlier 

payments reconciled in their cost 

reports 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 and, 

therefore, are more indicative of postreconciliation than pre-reconciliation 

outlier payments. As a result, we 

proposed to continue to omit any 

assumptions about the effects of 

reconciliation from the outlier threshold 

calculation. 

Comment: Many commenters, 

including two major hospital 

associations, were concerned that the 

proposed outlier threshold for FY 2007 

remains too high and CMS will have 

removed over $300 million from the 

IPPS rates that were not paid back as 

outliers. The commenters noted that 

total estimated outlier payments in FY 

2004 and FY 2005 were well under the 

5.1 percent target. As a result, the 

commenters recommended further 

refining the outlier methodology so that, 

in their view, it will be more likely that 

CMS projects a threshold that meets the 

5.1 target. The commenters explained 

that aside from inflating the claim 

charges, CMS should also use an 

adjustment factor to project CCRs. The 

commenters believed that the use of 

more than one indicator will make the 

threshold calculation more reliable and 

accurate. 

The commenters used data from the 

March 31, 2006 HCRIS update to 

determine hospitals’ CCRs (instead of 

using CCRs from the PSF per CMS’s 

methodology). The commenters 

accounted for a nine month time lag 

from the end of a cost reporting period 

until the fiscal intermediary is able to 

update the CCR to project the CCRs 

expected to be used for outlier 

calculations in FY 2007. The 

commenters then calculated a cost 

inflation factor of 5.69 percent by 

determining the 2002–2004 aggregate 

annual rate of increase in cost per 

discharge. The commenters used this 

cost inflation factor along with CMS’

charge inflation factor of 7.57 percent to 

project CCRs. These projected CCRs 

were applied to projected FY 2007 

charges to simulate the determination of 

costs for FY 2007 outlier payments. 

Using this methodology, the 

commenters determined and 

recommended an outlier threshold of 

$24,000 that they assert would result in 

5.1 percent outlier payments. The 

commenters also indicated that CMS 

would have paid 5.1 percent of total 

IPPS payments as outliers in FY 2006 

using a threshold of $21,275 instead of 

$23,600. In addition, the commenters 

asserted that CMS removed a total of $3 

billion more from the IPPS rates than it 

spent on outlier payments over FY 2004, 

2005, and 2006. Therefore, the 

commenters urged CMS to adopt a 

better methodology of projecting the 


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CCRs, regardless of the DRG refinements 

being adopted for FY 2007. 

One commenter argued that using 

CMS’ previous methodology with costs 

instead of charges resulted in an outlier 

threshold of $23,055 for FY 2007 that 

would be more likely to result in 5.1 

percent of total IPPS payments being 

paid as outliers. Using a methodology 

with costs and data from HCRIS (to 

determine hospital CCRs), the 

commenter computed a threshold of 

$22,645. The commenter asserted that 

projections using a cost threshold for FY 

2004–2006 would have been much 

closer to the ultimate threshold needed 

to achieve the 5.1 percent target. 

Because the commenter believed there 

is now 3 years of data demonstrating 

that a cost methodology is a better 

predictor of the threshold, the 

commenter recommended that CMS 

adopt a threshold of $22,645. 

MedPAC also commented that CMS 

should adjust the outlier methodology 

and apply an adjustment to project 

CCRs. MedPAC explained that using 

CCRs that are too high will overstate 

costs resulting in a fixed loss threshold 

that is too high. Therefore, MedPAC 

recommended that CMS project the 

average costs and charge per case to 

project hospitals’ CCRs using the charge 

inflation factor already determined by 

CMS and the cost inflation factor using 

the market basket when projecting the 

CCRs. 

Another commenter stated that it is 

inappropriate to use a methodology that 

ignores cost inflation. The commenter 

argued that the threshold is a ‘‘cost 

outlier threshold’’ and therefore an 

adjustment for cost should be 

incorporated into the outlier threshold 

methodology. 

One commenter asked CMS to 

strongly reconsider the increase to the 

outlier threshold and implement a 

reduction that is consistent with the 

trends for FY 2005 and FY 2006 in 

outlier payments. Another commenter 

recommended that CMS calculate what 

the outlier threshold would need to be 

for the current fiscal year (2006) to 

enable outlier payments to meet the 5.1 

percent target and apply that threshold 

for FY 2007. 

Response: As the commenters noted, 

the outlier thresholds we have projected 

in the last several years have resulted in 

payments below the 5.1 percent target. 

However, we have been hesitant to 

change our model because, in the early 

years of this decade, outlier payments 

were significantly higher than the 5.1 

percent target we projected because the 

charging practices of some hospitals 

resulted in overestimation of hospitals’

cost-per-case. However, now that data 

for later years in which charging 

practices were stabilized are available, 

after careful consideration, we agree that 

a refinement to the proposed 

methodology to account for the rate of 

change in the relationship between costs 

and charges would likely increase the 

precision of our model and we believe 

this would be an appropriate refinement 

to adopt in determining the FY 2007 

outlier threshold. 

For FY 2007, we are using the same 

methodology we proposed, except that 

we are using more recent data to 

determine the charge inflation factor (as 

explained below). In addition, we are 

applying an adjustment factor to the 

CCRs to account for cost and charge 

inflation (as explained below). As we 

proposed, for this final rule, we 

simulated payments by applying FY 

2007 rates and policies using cases from 

the FY 2005 MedPAR files. Therefore, as 

stated above, in order to determine the 

FY 2007 outlier threshold, we inflated 

the charges on the MedPAR claims by 

2 years, from FY 2005 to FY 2007. 

As noted above, the commenters 

supported our charge inflation 

methodology. Therefore, using the most 

recent data available (updated from the 

proposed rule), we calculated the 1-year 

average annualized rate-of-change in 

charges-per-case from the first quarter of 

FY 2005 in combination with the 

second quarter of FY 2005 (October 1, 

2004 through March 31, 2005) to the 

first quarter of FY 2006 in combination 

with the second quarter of FY 2006 

(October 1, 2005 through March 31, 

2006). This rate of change was 7.9 

percent (1.079) or 16.42 percent (1.1642) 

over 2 years. 

As we have done in the past, we are 

establishing the FY 2007 outlier 

threshold using hospital CCRs from the 

March 2006 update to the ProviderSpecific File—the most recent data 

available at the time of this final rule. 

However, as noted above, many 

commenters believe an adjustment to 

the CCRs would be appropriate in 

projecting a threshold that meets the 5.1 

percent target. The commenters 

referenced above used cost report data 

from HCRIS and applied a cost inflation 

factor based on the annual rate of 

increase in the cost per discharge from 

2002 through 2004. However, we still 

believe the best source of hospital’s 

operating and capital CCRs are those 

that come from the Provider-Specific 

File. As noted in the FY 2006 final rule 

(70 FR 47495), fiscal intermediaries will 

determine actual outlier payment 

amounts using some of the same CCRs 

that are in the March 2006 PSF. Fiscal 

intermediaries will begin using an 

updated CCR to calculate the outlier 

payments for a hospital only after a 

more recent cost report of the hospital 

has been tentatively settled. 

Nevertheless, we now agree with the 

commenters that it is appropriate to 

apply an adjustment factor to the CCRs 

so that the CCRs we are using in our 

simulation more closely reflect the CCRs 

that will be used in FY 2007. 

We worked with our actuarial office 

in deriving the methodology described 

below to develop the CCR adjustment 

factor. Specifically, we used the 

operating cost per discharge increase in 

combination with the final updated 

market basket increase determined by 

Global Insight, Inc., as well as the 

charge inflation factor described above 

to estimate the adjustment to the CCRs. 

By using the market basket rate-ofincrease and the increase in the average 

cost per discharge from hospital cost 

reports, we are using two different 

measures of cost inflation. For FY 2007, 

we determined the adjustment by taking 

the percentage increase in the operating 

costs per discharge from FY 2003 to FY 

2004 (1.0645) from the cost report and 

dividing it by the final market basket 

increase from FY 2004 (1.039) We 

repeated this calculation for 2 prior 

years to determine the 3-year average of 

the rate of adjusted change in costs 

between the market basket rate-ofincrease and the increase in cost per 

case from the cost report (FY 2001 to FY 

2002 percentage increase of operating 

costs per discharge of 1.0836 divided by 

FY 2002 final market basket increase of 

1.04, FY 2002 to FY 2003 percentage 

increase of operating costs per discharge 

of 1.0698 divided by FY 2003 final 

market basket increase of 1.04). For FY 

2007, we averaged the differentials 

calculated for FY 2002, FY 2003, and FY 

2004 which resulted in a mean ratio of 

1.0327. We multiplied the 3-year 

average of 1.0327 by the 2005 market 

basket percentage increase of 1.0420, 

which resulted in an operating cost 

inflation factor of 7.61 percent or 

1.0761. We then divided the operating 

cost inflation factor by the 1-year 

average change in charges (1.079) and 

applied an adjustment factor of 0.9973 

to the operating CCRs from the ProviderSpecific File. 

We believe it is appropriate to apply 

only a one year adjustment factor to the 

CCRs. On average, it takes 

approximately 9 months for fiscal 

intermediaries 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 inserts 

the CCR in the PSF until the beginning 

of FY 2007 is approximately 1 year. 

Therefore, as stated above, we believe a 


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one year adjustment to the CCRs is 

appropriate. 

We used the same methodology for 

the capital CCRs and applied an 

adjustment factor of 0.9574 (cost 

inflation factor of 1.0303 divided by a 

charge inflation factor of 1.0761) to the 

capital CCRs. 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 and 

therefore we believe it is appropriate to 

apply the charge factor to both the 

operating and capital CCRs. 

We believe this calculation of an 

adjustment to the CCRs is more accurate 

and stable than the commenters’

methodology because it takes into 

account the costs per discharge and the 

market basket percentage increase when 

determining a cost adjustment factor. 

Using this methodology, we are 

establishing a tentative outlier fixed-loss 

cost threshold for FY 2007 equal to the 

prospective payment rate for the DRG, 

plus any IME and DSH payments, and 

any add-on payments for new 

technology, plus $24,475. The tentative 

outlier threshold that we calculated for 

this final rule is $1,055 lower than the 

$25,530 threshold from the proposed 

rule. We anticipate that a threshold 

based on the methodology above will 

reach the target of 5.1 percent. We note 

that, in this final rule, we are adopting 

this methodology to compute the final 

outlier fixed-loss cost threshold for FY 

2007, although the final dollar amount 

of the outlier threshold will be 

published in a subsequent Federal 

Register document. 

We also note, that the case-weighted 

national average CCR declined by 

approximately an additional 1 percent 

from the December 2005 to the March 

2006 update of the Provider-Specific 

File. We further reduced the CCRs by 

applying an adjustment to reflect the 

differential increase between costs and 

charges. As noted above, using lower 

CCRs from the March 2006 ProviderSpecific File, in combination with the 

FY 2005 MedPAR claims and inflated 

charges, contributes to a lower outlier 

threshold for FY 2007 in this final rule 

compared to the proposed rule. 

Finally, charges are a key influence 

over outlier payments. Therefore, we 

continue to believe it is appropriate to 

use a methodology based on charges 

instead of costs. Please refer to our 

response to a similar comment in the FY 

2006 final rule (70 FR 47495) for a more 

detailed discussion of this issue. 

Comment: One commenter suggested 

that CMS consider making mid-year 

adjustments to the outlier threshold if it 

appears that outlier payments are going 

to be significantly above or below the 

5.1 percent target. The commenter 

believed that a mid-year adjustment 

would aid CMS in reaching the 5.1 

percent target irrespective of the 

methodology CMS uses to determine the 

threshold. However, the commenter did 

note that a mid-year correction will be 

of less need if CMS were to adopt a 

methodology based on cost or the CMS 

model that projects CCRs. Another 

commenter recommended that CMS 

evaluate the practicality and effects of a 

correction error similar to the update 

forecast error adjustment used in 

recommending an update for the market 

basket rate of increase. 

One commenter urged CMS to 

publicly account for the amount of 

unspent outlier payments over the last 

3 years and to establish a policy 

whereby the unspent money is returned 

to the base rate for inpatient spending. 

Response: We appreciate the 

commenters suggestions for improving 

payment accuracy for outliers. However, 

we have already responded to similar 

comments in the FY 2006 final rule (70 

FR 47495). 

Furthermore, we believe that a policy 

whereby the standardized amounts 

would be adjusted to reflect differences 

between the 5.1 percent removed from 

the rates and the amounts actually paid 

as outliers would be inconsistent with 

the purpose of the statute relating to 

outlier payments and the prospective 

payment system. Section 1886(d)(3)(B) 

of the Act requires that we reduce the 

standardized amounts by a factor equal 

to the proportion of outlier payments 

‘‘as estimated by the Secretary.’’

Therefore, we believe that the statute 

does not contemplate adjustments to the 

standardized amounts in an upcoming 

year because actual outlier payments in 

past years were more or less than we 

had estimated. 

Comment: One commenter was 

concerned that CMS has not met the 5.1 

percent target in previous years and 

suggested that CMS project the outlier 

threshold at 5.5 percent of total 

payments to ensure it meets the 5.1 

percent target. 

Another commenter was concerned 

about the impact that the DRG 

refinement will have on outlier 

payments. The commenter 

recommended that CMS maintain the 

threshold at $23,600 for FY 2007 while 

hospitals adjust to the other PPS 

payment changes that will occur. 

One commenter supported 

eliminating outlier payments in its 

entirety and recommended a more 

equitable approach by simply increasing 

the standardized amounts by 5.1 

percent. The commenter explained that 

this method would remove the ability to 

game the system and would be more 

desirable to deserving providers that do 

not abuse the system. 

Response: As noted above, section 

1886(d)(5)(A)(iv) of the Act requires 

outlier payments to be not less than 5 

percent nor more than 6 percent of total 

estimated or projected payments. 

Therefore, we cannot eliminate outlier 

payments as suggested by one 

commenter or set a threshold that is 

based on the current fiscal year for the 

coming fiscal year. Although we are 

refining the DRGs, the statute requires 

us to set an outlier threshold so that 

estimated total outlier payments are 

between 5 and 6 percent of total IPPS 

payments. If we failed to project a new 

outlier threshold for FY 2007, but rather 

simply continued to use the outlier 

threshold for FY 2006, we would not 

meet the mandate of the statute. 

We also note that we project outlier 

payments at 5.1 percent to ensure that 

we offset the minimum amount 

necessary from the standardized 

amounts to meet our statutory 

obligation. Although CMS could legally 

project an outlier threshold so that 5.5 

percent of total IPPS payments are paid 

as outliers, the law would also require 

us to remove 5.5 percent from the 

standardized amounts to finance the 

outlier pool, which would reduce funds 

available for typical cases. As a result, 

we believe setting the outlier threshold 

so that 5.1 percent of total IPPS 

payments are paid as outliers is more 

equitable to all hospitals, as less money 

is withdrawn from the standardized 

amounts due to the outlier offset and it 

allows proportionally greater payment 

for typical cases. Therefore, we are 

adopting as final our proposal to set the 

outlier threshold so that 5.1 percent of 

estimated total IPPS payments are paid 

as outliers. 

ii. Other changes concerning outliers. 

As stated in the FY 1994 IPPS final 

rule (58 FR 46348, September 1, 1993), 

we establish outlier thresholds that are 

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 set of thresholds resulted in a 

lower percentage of outlier payments for 

capital-related costs than for operating 

costs. We project that the thresholds for 

FY 2007 will result in outlier payments 

equal to 5.1 percent of operating DRG 

payments and 4.87 percent of capital 

payments based on the Federal rate. 

In accordance with section 

1886(d)(3)(B) of the Act, we are 

reducing the FY 2007 standardized 

amount by the same percentage to 


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31These figures represent 3.0 standard deviations 

from the mean of the log distribution of CCRs for 

all hospitals. 

account for the projected proportion of 

payments paid to outliers. 

The tentative outlier adjustment 

factors that will be applied to the 

standardized amount for FY 2007 are as 

follows: 

Operating 

standardized 

amounts 

Capital 

federal 

rate 

National ..... 0.948966 0.956763 

Puerto Rico 0.967415 0.967670 

We are applying the tentative outlier 

adjustment factors to the tentative FY 

2007 rates after removing the effects of 

the FY 2006 outlier adjustment factors 

on the standardized amount. 

To determine whether a case qualifies 

for outlier payments, we apply hospitalspecific CCRs to the total covered 

charges for the case. 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. 

The outlier final rule (68 FR 34494) 

eliminated the application of the 

statewide average CCRs for hospitals 

whose CCRs fall below 3 standard 

deviations from the national mean CCR. 

However, for those hospitals for which 

the fiscal intermediary computes 

operating CCRs greater than 1.26 or 

capital CCRs greater than 0.154, or 

hospitals for whom the fiscal 

intermediary is unable to calculate a 

CCR (as described at § 412.84(i)(3) of our 

regulations), we are still using statewide 

average CCRs to determine whether a 

hospital qualifies for outlier 

payments.31 Table 8A in section VI. of 

this Addendum contains the statewide 

average operating CCRs for urban 

hospitals and for rural hospitals for 

which the fiscal intermediary is unable 

to compute a hospital-specific CCR 

within the above range. Effective for 

discharges occurring on or after October 

1, 2006, these statewide average ratios 

will replace the ratios published in the 

IPPS final rule for FY 2006 (70 FR 

47672). Table 8B in section VI. of this 

Addendum contains the comparable 

statewide average capital CCRs. Again, 

the CCRs in Tables 8A and 8B will be 

used during FY 2007 when hospitalspecific CCRs based on the latest settled 

cost report are either not available or are 

outside the range noted above. For an 

explanation of Table 8C, please see 

section VI. of this Addendum. 

We finally note that we published a 

manual update (Change Request 3966) 

to outliers on October 12, 2005. The 

manual update covered an array of 

topics, including CCRs, reconciliation, 

and the time value of money. To 

download and view the manual update, 

please visit http://www.cms.hhs.gov/ 

transmittals/downloads/R707CP.pdf. 

iii. FY 2005 and FY 2006 outlier 

payments. 

In the FY 2006 IPPS final rule (70 FR 

47496), we stated that, based on 

available data, we estimated that actual 

FY 2005 outlier payments would be 

approximately 4.1 percent of actual total 

DRG payments. This estimate was 

computed based on simulations using 

the FY 2004 MedPAR file (discharge 

data for FY 2004 bills). That is, the 

estimate of actual outlier payments did 

not reflect actual FY 2005 bills, but 

instead reflected the application of FY 

2005 rates and policies to available FY 

2004 bills. 

Our current estimate, using available 

FY 2005 bills, is that actual outlier 

payments for FY 2005 were 

approximately 3.96 percent of actual 

total DRG payments. Thus, the data 

indicate that, for FY 2005, the 

percentage of actual outlier payments 

relative to actual total payments is lower 

than we projected before FY 2005 (and, 

thus, is less than the percentage by 

which we reduced the standardized 

amounts for FY 2005). We note that, for 

FY 2006, the outlier threshold was 

lowered to $23,600 compared to $25,800 

for FY 2005. The outlier threshold was 

lower in FY 2006 than FY 2005 as a 

result of slower growth in hospital 

charge inflation following 

implementation of the outlier final rule 

that went into effect on August 9, 2003. 

Nevertheless, 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 

2005 are equal to 5.1 percent of total 

DRG payments. 

We currently estimate that actual 

outlier payments for FY 2006 will be 

approximately 4.62 percent of actual 

total DRG payments, 0.48 percentage 

points lower than the 5.1 percent we 

projected in setting the outlier policies 

for FY 2006. This estimate is based on 

simulations using the FY 2005 MedPAR 

file (discharge data for FY 2005 bills). 

We used these data to calculate an 

estimate of the actual outlier percentage 

for FY 2006 by applying FY 2006 rates 

and policies, including an outlier 

threshold of $23,600 to available FY 

2005 bills. Even though we are 

estimating payments below the 5.1 

percent threshold for FY 2006, our 

simulations using FY 2005 Medicare 

data show consistent levels of charge 

inflation and a need to increase the 

threshold for FY 2007 to ensure that 5.1 

percent of total IPPS payments are paid 

as outliers. 

iv. Technical changes. 

Subpart F of Part 412 of the existing 

regulations discusses payment for 

outlier cases and special payment for 

new technology. We have become aware 

of an inadvertent mistake in 

§ 412.84(m). Currently, § 412.84(m) 

discusses the application of the time 

value of money when a hospital’s 

outlier payments are reconciled. When 

referencing reconciliation, the section 

mistakenly references paragraph (h)(3) 

instead of paragraph (i)(4). We received 

no comments on this change and 

therefore are finalizing our proposal to 

revise § 412.84(m) to reference the 

current policy under paragraph (i)(4). 

In addition, in the June 9, 2003 outlier 

final rule, we amended § 412.116(e) to 

remove the second sentence, which 

stated that payments for outliers ‘‘are 

made based on submitted bills and 

represent final payment.’’ It was 

necessary to remove this sentence, as we 

added a provision to the regulations that 

provides that outlier payments are 

subject to reconciliation when hospitals’

cost reports are settled. In the FY 2004 

IPPS final rule (68 FR 45393), we again 

amended § 412.116(e) to provide that 

new technology add-on payments are 

made on a case-by-case basis, rather 

than on an interim basis. However, it 

has come to our attention that, in the FY 

2004 IPPS final rule, we inadvertently 

reinserted the sentence that we had 

struck in the June 9, 2003 outlier final 

rule. We never intended to reinsert this 

sentence, and our policy since the 

implementation of the outlier final rule 

has always been the same (that outlier 

payments are subject to reconciliation 

when hospitals’ cost reports are settled). 

Therefore, in order to correct the 

regulations to reflect our current policy, 

we are removing the second sentence 

from § 412.116(e). Although we did not 

propose this technical correction, as 

further discussed in section XIII.C. of 

this final rule, we find it unnecessary to 

undertake notice and comment 

rulemaking with respect to this 

technical correction. 

d. Tentative Rural Community Hospital 

Demonstration Program Adjustment 

(Section 410A of Pub. L. 108–173) 

Section 410A of Pub. L. 108–173 

requires the Secretary to establish a 

demonstration that will modify 

reimbursement for inpatient services for 

up to 15 small rural hospitals. Section 

410A(c)(2) of Pub. L. 108–173 requires 

that ‘‘in conducting the demonstration 


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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.M. of the preamble to this final rule, 

we are satisfying this requirement by 

adjusting national IPPS rates by a factor 

that is sufficient to account for the 

added costs of this demonstration. We 

estimate that the average additional 

annual payment that will be made to 

each participating hospital under the 

demonstration will be approximately 

$1,021,985. We based this estimate on 

the recent historical experience of the 

difference between inpatient cost and 

payment for hospitals that are 

participating in the demonstration. For 

9 participating hospitals, the total 

annual impact of the demonstration 

program is estimated to be $9,197,870. 

The required tentative adjustment to the 

Federal rate used in calculating 

Medicare inpatient prospective 

payments as a result of the 

demonstration is 0.999905. 

In order to achieve budget neutrality, 

we are adjusting the tentative national 

IPPS rates by a tentative 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. 

5. Tentative FY 2007 Standardized 

Amount 

The tentative adjusted standardized 

amount is divided into labor-related and 

nonlabor-related portions. Tables 1A 

and 1B in section VI. of this Addendum 

contain the tentative national 

standardized amount that we are 

applying to all hospitals, except 

hospitals in Puerto Rico. The tentative 

Puerto Rico-specific amounts are shown 

in Table 1C. The tentative amounts 

shown in Tables 1A and 1B differ only 

in that the labor-related share applied to 

the tentative standardized amounts in 

Table 1A is 69.7 percent, and the laborrelated share applied to the tentative 

standardized amounts in 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 the laborrelated share of 62 percent, unless the 

application of that percentage would 

result in lower payments to a hospital 

than would otherwise be made. The 

effect of this application is that the 

labor-related share of the tentative 

standardized amount is 62 percent for 

all hospitals (other than those in Puerto 

Rico) whose wage indexes are less than 

or equal to 1.0000. 

In addition, Tables 1A and 1B include 

tentative standardized amounts 

reflecting the full 3.4 percent update for 

FY 2007, and tentative standardized 

amounts reflecting the 2.0 percentage 

point reduction to the update (a 1.4 

percent update) applicable for hospitals 

that fail to submit quality data 

consistent with section 

1886(b)(3)(B)(viii) of the Act. 

We note that in this final rule we are 

not supplying a table that illustrates the 

changes from the FY 2006 national 

average standardized amount. Because 

we are only setting the standardized 

amounts tentatively, we do not believe 

it is appropriate to include this table in 

this final rule. However, we will publish 

a table in the subsequent notice to this 

final rule that details the calculation of 

the final standardized amounts. 

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 tentative amount is set 

forth in Table 1A). The tentative laborrelated and nonlabor-related portions of 

the national average standardized 

amounts for Puerto Rico hospitals for 

FY 2007 are set forth in Table 1C of 

section VI. of this Addendum. This table 

also includes the tentative Puerto Rico 

standardized amounts. The labor-related 

share applied to the tentative Puerto 

Rico specific standardized amount is 

58.7 percent, or 62 percent, depending 

on which is more advantageous to the 

hospital. (Section 1886(d)(9)(C)(iv) of 

the Act, as amended by section 403(b) 

of Pub. L. 108–173, provides that the 

labor-related share for hospitals in 

Puerto Rico will be 62 percent, unless 

the application of that percentage would 

result in lower payments to the 

hospital.) 

B. Tentative Adjustments for Area Wage 

Levels and Cost-of-Living 

Tables 1A through 1C, as set forth in 

section VI. of this Addendum, contain 

the tentative labor-related and tentative 

nonlabor-related shares of the 

standardized amount that we are using 

to calculate the prospective payment 

rates for hospitals located in the 50 

States, the District of Columbia, and 

Puerto Rico for FY 2007. This section 

addresses two types of adjustments to 

the tentative standardized amounts that 

are made in determining the prospective 

payment rates as described in this 

Addendum. 

1. Tentative 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 laborrelated 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 to this final rule, we 

discuss the data and methodology for 

the FY 2007 wage index. We note that 

because the occupational mix adjusted 

wage index data will not be finalized 

until after this final rule, we will not be 

publishing Tables 4A–1, 4A–2, 4B, 4C–

1, 4C–2, and 4F in this final rule. 

However, we will publish these tables 

in the Federal Register and on the CMS 

Web site once all the data is finalized 

and prior to October 1, 2006. 

2. Final Adjustment for Cost-of-Living 

in Alaska and Hawaii 

Section 1886(d)(5)(H) of the Act 

authorizes an adjustment to take into 

account the unique circumstances of 

hospitals 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 

2007, we are adjusting the payments for 

hospitals in Alaska and Hawaii by 

multiplying the nonlabor-related 

portion of the standardized amount by 

the appropriate adjustment factor 

contained in the table below. 

TABLE OF COST-OF-LIVING ADJUSTMENT FACTORS: ALASKA AND HAWAII

HOSPITALS

Area 

Cost of living 

adjustment factor 

Alaska—All areas ............... 1 .25 

Hawaii: 

County of Honolulu ......... 1 .25 

County of Hawaii ............. 1 .165 

County of Kauai .............. 1 .2325 

County of Maui ................ 1 .2375 

County of Kalawao .......... 1 .2375 

(The above factors are based on data obtained from the U.S. Office of Personnel 

Management.) 


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C. DRG Relative Weights 

As discussed in section II. of the 

preamble of this final rule, we have 

developed a classification system for all 

hospital discharges, assigning them into 

DRGs, and have developed relative 

weights for each DRG that reflect the 

resource utilization of cases in each 

DRG relative to Medicare cases in other 

DRGs. Table 5 of section VI. of this 

Addendum contains the relative weights 

that we are using for discharges 

occurring in FY 2007. 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 

Prospective Payment Rates for FY 2007 

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 

2007 equals the Federal rate. 

The prospective payment rate for 

SCHs for FY 2007 equals the higher of 

the applicable Federal rate or the 

hospital-specific rate as described 

below. The prospective payment rate for 

MDHs for FY 2007 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. The prospective 

payment rate for Puerto Rico for FY 

2007 equals 25 percent of the Puerto 

Rico rate plus 75 percent of the 

applicable national rate. 

As noted above, we are not able to 

provide the final FY 2007 occupational 

mix adjusted wage index tables. 

Although Tables 4A–1, 4A–2, 4B, 4C–1, 

and 4C–2 will be published on the CMS 

Web site and in a subsequent Federal 

Register document to this final rule, any 

reference to these tables below refers to 

these future tables. 

1. Federal Rate 

The Federal rate is determined as 

follows: 

Step 1—Select the appropriate 

average standardized amount 

considering the applicable wage index 

and whether the hospital has submitted 

qualifying quality data (full update for 

qualifying hospitals, update minus 2.0 

percentage points for nonqualifying 

hospitals). 

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 appropriate cost-of-living 

adjustment factor. 

Step 4—Add the amount from Step 2 

and the nonlabor-related portion of the 

standardized amount (adjusted, if 

appropriate, under Step 3). 

Step 5—Multiply the final amount 

from Step 4 by the relative weight 

corresponding to the appropriate DRG 

(see Table 5 of section VI. of this 

Addendum). 

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, the payment in 

Step 5 would be increased by 25 

percent. 

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 SCHs are paid based on 

whichever of the following rates yields 

the greatest aggregate payment: the 

Federal rate; the updated hospitalspecific rate based on FY 1982 costs per 

discharge; the updated hospital-specific 

rate based on FY 1987 costs per 

discharge; or the updated hospitalspecific rate based on FY 1996 costs per 

discharge. 

As discussed previously, MDHs are 

required to rebase their hospital-specific 

rates to their FY 2002 cost reports if 

doing so results in higher payments. In 

addition, effective for discharges 

occurring on or after October 1, 2006, 

MDHs are to be paid based on the 

Federal national rate or, if higher, the 

Federal national rate plus 75 percent 

(changed from 50 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. Further, MDHs will no longer 

be subject to the 12-percent cap on their 

DSH payment adjustment factor. 

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 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 (55 FR 15150); 

the FY 1991 IPPS final rule (55 FR 

35994); and the FY 2001 IPPS final rule 

(65 FR 47082). In addition, for both 

SCHs and MDHs, the hospital-specific 

rate is adjusted by the budget neutrality 

adjustment factor as discussed in 

section IV.C. of the preamble to this 

final rule. The resulting rate will be 

used in determining the payment rate an 

SCH or MDH will receive for its 

discharges beginning on or after October 

1, 2006. 

b. Updating the FY 1982, FY 1987, FY 

1996, and FY 2002 Hospital-Specific 

Rates for FY 2007 

We are increasing the hospitalspecific rates by 3.4 percent (the 

hospital market basket percentage 

increase) for SCHs and MDHs for FY 

2007. Section 1886(b)(3)(C)(iv) of the 

Act provides that the update factor 

applicable to the hospital-specific rates 

for SCHs is equal to the update factor 

provided under section 1886(b)(3)(B)(iv) 

of the Act, which, for SCHs in FY 2007, 

is the market basket rate-of-increase. 

Section 1886(b)(3)(D) of the Act 

provides that the update factor 

applicable to the hospital-specific rates 

for MDHs also equals the update factor 

provided under section 1886(b)(3)(B)(iv) 

of the Act, which, for FY 2007, is the 

market basket rate-of-increase. 

3. General Formula for Calculation of 

Prospective Payment Rates for Hospitals 

Located in Puerto Rico Beginning On or 

After October 1, 2006, and Before 

October 1, 2007 

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 appropriate 

average standardized amount 

considering the applicable wage index 

(see Table 1C). 

Step 2—Multiply the labor-related 

portion of the standardized amount by 

the appropriate 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 appropriate DRG relative 

weight (see Table 5 of section IV. of the 

Addendum). 

Step 5—Multiply the result in Step 4 

by 25 percent. 


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b. National Rate 

The national prospective payment 

rate is determined as follows: 

Step 1—Select the appropriate 

average standardized amount 

considering the applicable wage index. 

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 appropriate DRG relative 

weight (see Table 5 of section VI. of the 

Addendum). 

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 may then be 

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 2007 

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 capitalrelated costs from a reasonable costbased methodology to a prospective 

methodology (based fully on the Federal 

rate). 

The basic methodology for 

determining Federal capital prospective 

rates is set forth in regulations at 

§§ 412.308 through 412.352. Below we 

discuss the factors that we are using to 

determine the tentative capital Federal 

rate for FY 2007, which will be effective 

for discharges occurring on or after 

October 1, 2006. As discussed in section 

I. of the Addendum of this final rule, we 

are not able to provide the final FY 2007 

capital Federal prospective rates in this 

rule due to requirements imposed by the 

Second Circuit Court’s order regarding 

wage index information as collected for 

the inpatient Federal rates. This affects 

the Federal capital payment rates, as 

well, because wage index information is 

used to determine the GAF/DRG budget 

neutrality factor, the GAF, and outlier 

adjustment factor that are used in 

arriving at the capital Federal rates. We 

are providing tentative amounts, where 

applicable, as proxies for these rates and 

factors until the occupational mix 

adjusted wage index is finalized. 

Subsequent to this final rule, we will 

publish in a Federal Register document 

a listing the capital Federal rates, offsets 

and budget neutrality factors that are 

effective October 1, 2006 for FY 2007. 

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 

§ 412.304(c)(2)) are paid based on 100 

percent of 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 

costs per case. Each year after FY 1992, 

we update the capital standard Federal 

rate, as provided at § 412.308(c)(1), to 

account for capital input price increases 

and other factors. The regulations at 

§ 412.308(c)(2) provide that the capital 

Federal rate is 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, § 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 § 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 are budget neutral. 

For FYs 1992 through 1995, § 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 fiscal year. That 

provision expired in FY 1996. Section 

412.308(b)(2) describes the 7.4 percent 

reduction to the capital rate that was 

made in FY 1994, and § 412.308(b)(3) 

describes the 0.28 percent reduction to 

the capital rate made in FY 1996 as a 

result of the revised policy of paying for 

transfers. In FY 1998, we implemented 

section 4402 of Pub. L. 105-33, which 

required that, for discharges occurring 

on or after October 1, 1997, and before 

October 1, 2002, the unadjusted capital 

standard Federal rate is reduced by 

17.78 percent. As we discussed in the 

FY 2003 IPPS final rule (67 FR 50102) 

and implemented in § 412.308(b)(6), a 

small part of that reduction was restored 

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 (see 

§ 412.348(b)). Because payments are no 

longer being made under the regular 

exception policy effective with cost 

reporting periods beginning in FY 2002, 

we no longer use 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 the use 

of a blended payment system for 

payments to Puerto Rico hospitals under 

the PPS for acute care hospital inpatient 

capital-related costs. Accordingly, under 

the capital PPS, 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 

accordance with section 1886(d)(9)(A) 

of the Act, under the PPS 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 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 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 Pub. L. 105–33, 

operating payments to hospitals in 

Puerto Rico were revised to be based on 

a blend of 50 percent of the applicable 

standardized amount specific to Puerto 


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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 

in Puerto Rico to be based on a blend 

of 50 percent of the Puerto Rico capital 

rate and 50 percent of the capital 

Federal rate. 

As we discussed in the FY 2005 IPPS 

final rule (69 FR 49185), section 504 of 

Pub. L. 108–173 increased the national 

portion of the operating IPPS payments 

for Puerto Rico hospitals 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 (see the March 26, 2004 OneTime Notification (Change Request 

3158)). In addition, section 504 of Pub. 

L. 108-173 provided that the national 

portion of operating IPPS payments for 

Puerto Rico hospitals is equal to 75 

percent and the Puerto Rico 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 in Puerto Rico, for FY 2005 

(as we discussed in the FY 2005 IPPS 

final rule), 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 capital rate and 75 percent 

of the capital Federal rate for discharges 

occurring on or after October 1, 2004. 

A. Determination of Federal Hospital 

Inpatient Capital-Related Prospective 

Payment Rate Update 

In the FY 2006 IPPS final rule (70 FR 

47503), we established a capital Federal 

rate of $420.65 for FY 2006. In the 

discussion that follows, we explain the 

factors that we are using to determine 

the tentative FY 2007 capital Federal 

rate. In particular, we explain why the 

tentative FY 2007 capital Federal rate 

will increase approximately 1.60 

percent compared to the FY 2006 capital 

Federal rate. However, we estimate 

aggregate capital payments will decrease 

by 0.2 percent during this same period. 

This decrease is due to a decrease in the 

estimated total number of Medicare feefor-service discharges for FY 2007 as 

compared to the estimated total number 

of Medicare fee-for-service discharges in 

FY 2006. We are estimating a decrease 

in Medicare fee-for-service discharges in 

FY 2007 as compared to FY 2006, in 

part because we are projecting an 

increase in beneficiary Medicare 

managed care enrollment as a result of 

the implementation of several 

provisions of Pub. L. 108–173. 

Therefore, although we are projecting 

that capital PPS payments per discharge 

will increase slightly from FY 2006 to 

FY 2007, we project that aggregate 

capital PPS payments will decrease for 

the same period. 

Total payments to hospitals under the 

IPPS are relatively unaffected by 

changes in the capital prospective 

payments. Because capital payments 

constitute about 10 percent of hospital 

payments, a 1-percent change in the 

capital Federal rate yields only about 

0.1 percent change in actual payments 

to hospitals. As noted above, aggregate 

payments under the capital IPPS are 

estimated to decrease slightly in FY 

2007 compared to FY 2006. 

1. Projected Capital Standard Federal 

Rate Update 

a. Description of the Update Framework 

Under § 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 have adjusted 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 2007 under that 

framework is 1.10 percent based on the 

best data available at this time. The 

update factor is based on a projected 1.1 

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 2005 DRG 

reclassification and recalibration, and a 

forecast error correction of 0.0 percent. 

As discussed below in section III.C. of 

this Addendum, we 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 

2007 CIPI projection in that same 

section of this Addendum. Below we 

describe the policy adjustments that 

have been applied. 

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’’ casemix change); 

• Changes in hospital coding of 

patient records result in higher 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 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, 

2005 IPPS proposed rule for FY 2005 

(69 FR 28816)). (We are no longer using 

an update framework in making 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 2007, we are projecting a 1.0 

percent total increase in the case-mix 

index. We estimate that the real casemix increase will also equal 1.0 percent 

in FY 2007. The net adjustment for 

change in case-mix is the difference 

between the projected increase in casemix and the projected total increase in 

case-mix. Therefore, the net adjustment 

for case-mix change in FY 2007 is 0.0 

percentage points. 

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 

changes to the DRG classifications and 

relative weights, in order to retain 

budget neutrality for all case-mix indexrelated 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 are adjusting for the effects 

of the FY 2005 DRG reclassification and 

recalibration as part of our update for 

FY 2007. We estimate that FY 2005 DRG 

reclassification and recalibration will 

result in a 0.0 percent change in the 

case-mix when compared with the casemix index that would have resulted if 

we had not made the reclassification 

and recalibration changes to the DRGs. 

Therefore, we are making a 0.0 percent 

adjustment for DRG reclassification and 

recalibration in the update for FY 2007 

to maintain budget neutrality. 


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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 points or more. There is 

a 2-year lag between the forecast and the 

measurement of the forecast error. A 

forecast error of 0.1 percentage point 

was calculated for the FY 2005 update. 

That is, current historical data indicate 

that the forecasted FY 2005 CIPI used in 

calculating the FY 2005 update factor 

(0.7 percent) slightly understated the 

actual realized price increases (0.8 

percent) by 0.1 percentage point. This 

slight underprediction was mostly due 

to the incorporation of newly available 

source data for fixed asset prices into 

the market basket. However, because 

this estimation of the change in the CIPI 

is less than 0.25 percentage points, it is 

not reflected in the update 

recommended under this framework. 

Therefore, we are making a 0.0 percent 

adjustment for forecast error in the 

update for FY 2007. 

Under the capital IPPS update 

framework, we also make an adjustment 

for changes in intensity. We calculate 

this adjustment using the same 

methodology and data that were used in 

the framework used in the past under 

the operating IPPS. The intensity factor 

for the operating update framework 

reflects 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 

in within-DRG severity, and for 

expected modification of practice 

patterns to remove noncost-effective 

services. 

We calculate case-mix constant 

intensity as the change in total charges 

per admission, adjusted for price level 

changes (the CPI for hospital and related 

services) and changes in real case-mix. 

The use of total charges in the 

calculation of the intensity factor makes 

it a total intensity factor; that is, charges 

for capital services are already built into 

the calculation of the factor. Therefore, 

we have incorporated the intensity 

adjustment from the operating update 

framework into the capital update 

framework. Without reliable estimates 

of the proportions of the overall annual 

intensity increases that are due, 

respectively, to ineffective practice 

patterns and to the combination of 

quality-enhancing new technologies and 

within-DRG complexity, we assume, as 

in the operating update framework, 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 

within-DRG severity increases and the 

adoption of quality-enhancing 

technology. 

We have developed a Medicarespecific 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 1.0 to 1.4 percent per year. We 

use 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. 

We calculate case-mix constant 

intensity as the change in total charges 

per admission, adjusted for price level 

changes (the CPI for hospital and related 

services), and changes in real case-mix. 

As we noted above, in accordance with 

§ 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. For FYs 1996 through 

2001, we found that case-mix constant 

intensity was declining and we 

established a 0.0 percent adjustment for 

intensity in each of those years. For FYs 

2002 and 2003, we found that case-mix 

constant intensity was increasing and 

we established a 0.3 percent adjustment 

and 1.0 percent adjustment for intensity, 

respectively. For FYs 2004 and 2005, we 

found that the charge data appeared to 

be skewed (as discussed in greater detail 

below) and we established a 0.0 percent 

adjustment in each of those years. 

Furthermore, we stated that we would 

continue to apply a 0.0 percent 

adjustment for intensity until any 

increase in charges can be tied to 

intensity rather than attempts to 

maximize outlier payments. 

As noted above, our intensity measure 

is based on a 5-year average, and 

therefore, the intensity adjustment for 

FY 2007 is based on data from the 5- 

year period FY 2001 through FY 2005. 

We found a dramatic increase in 

hospital charges for each of those 5 

years without a corresponding increase 

in the hospital case-mix index. These 

findings are similar to the considerable 

increase in hospitals’ charges, which we 

found when we were determining the 

intensity factor in the FY 2004, FY 2005 

and FY 2006 update recommendations 

as discussed in the FY 2004 IPPS final 

rule (68 FR 45482), the FY 2005 IPPS 

final rule (69 FR 49285) and the FY 

2006 IPPS final rule (70 FR 47500), 

respectively. If hospitals were treating 

new or different types of cases, which 

would result in an appropriate increase 

in charges per discharge, then we would 

expect hospitals’ case-mix to increase 

proportionally. 

As we discussed in the FY 2006 IPPS 

final rule (70 FR 47500), because our 

intensity calculation relies heavily upon 

charge data and we believe that these 

charge data may be inappropriately 

skewed, we established a 0.0 percent 

adjustment for intensity for FY 2006. 

On June 9, 2003, we published 

revisions to our outlier policy for 

determining the additional payment for 

extraordinarily high-cost cases (68 FR 

34494 through 34515). These revised 

policies were effective on August 8, 

2003, and October 1, 2003. While it does 

appear that a response to these policy 

changes is beginning to occur, that is, 

the change in charges for FYs 2004 and 

2005 are somewhat less than the 

previous 4 years, they still show a 

significant annual increase in charges 

without a corresponding increase in 

hospital case-mix. The increase in 

charges in FY 2004, for example, is 

approximately 12 percent, which, while 

less than the increase in the previous 3 

years, is still much higher than 

increases in years prior to FY 2001. In 

addition, this approximate 12-percent 

increase in charges for FY 2004 

significantly exceeds the case-mix 

increase for the same period. Based on 

the approximate 12-percent increase in 

charges for FY 2004, we believe residual 

effects of hospitals’ charge practices 

prior to the implementation of the 

outlier policy revisions established in 

the June 9, 2003 final rule continue to 

appear in the data because hospitals 

may not have had enough time to adopt 

changes in their behavior in response to 

the new outlier policy. Thus, we believe 

that the FY 2004 and FY 2005 charge 

data may still be skewed. Because the 

intensity adjustment is based on a 5- 

year average, and although the new 

outlier policy was generally effective in 

FY 2004, we believe it still will be 

several years before all the effects of 

hospitals attempting to maximize outlier 


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payments are removed from the 

intensity calculation. Therefore, as 

proposed, we are making a 0.0 percent 

adjustment for intensity for FY 2007. In 

the past (FYs 1996 through 2001) when 

we found intensity to be declining, we 

believed a zero (rather than negative) 

intensity adjustment was appropriate. 

Similarly, we believe that it is 

appropriate to apply a zero intensity 

adjustment for FY 2007 until any 

increase in charges can be tied to 

intensity rather than to attempts to 

maximize outlier payments. 

Above, we described the basis of the 

components used to develop the 1.1 

percent capital update factor for FY 

2007 as shown in the table below. 

CMS FY 2007 UPDATE FACTOR TO

THE CAPITAL FEDERAL RATE

Capital Input Price Index .................. 1.1 

Intensity ............................................ 0.0 

Case-Mix Adjustment Factors: 

Real Across DRG Change ............ 1.0 

Projected Case-Mix Change ......... ¥1.0 

Subtotal ..................................... 0.0 

Effect of FY 2005 Reclassification 

and Recalibration .......................... 0.0 

Forecast Error Correction ................. 0.0 

Total Update .............................. 1.1 

b. Comparison of CMS and MedPAC 

Update Recommendation 

In the past, MedPAC has included 

update recommendations for capital 

PPS in a Report to Congress. In its 

March 2006 Report to Congress, 

MedPAC did not make an update 

recommendation for capital PPS 

payments for FY 2007. However, in that 

same report, MedPAC made an update 

recommendation for hospital inpatient 

and outpatient services (page 46). 

MedPAC reviews inpatient and 

outpatient services together because 

they are so closely interrelated. For FY 

2007, MedPAC recommended an 

increase in the payment rate for the 

operating IPPS by the projected increase 

in the hospital market basket index, less 

half of MedPAC’s expectation for 

productivity growth (or 0.45 percent, 

based on its assessment of beneficiaries’

access to care and changes in hospital 

capacity, volume of services, access to 

capital, quality of care, and the 

relationship of Medicare payments and 

hospitals’ costs.) In addition, MedPAC 

recommended combining the annual 

rate update with an incentive payment 

policy for quality. (MedPAC’s Report to 

the Congress: Medicare Payment Policy, 

March 2006, Section 2A.) 

2. Outlier Payment Adjustment Factor 

Section 412.312(c) establishes a 

unified outlier 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 capitalrelated PPS payments. The outlier 

thresholds are set so that operating 

outlier payments are projected to be 5.1 

percent of total operating DRG 

payments. 

In the FY 2006 IPPS final rule (70 FR 

47501), we estimated that outlier 

payments for capital would equal 4.85 

percent of inpatient capital-related 

payments based on the capital Federal 

rate in FY 2006. Based on the tentative 

thresholds as set forth in section 

II.A.4.c. of this Addendum, we estimate 

that tentative outlier payments for 

capital-related costs would equal 4.32 

percent for inpatient capital-related 

payments based on the tentative Federal 

rate in FY 2007. Therefore, we are 

applying a tentative outlier adjustment 

factor of 0.9568 to the tentative capital 

Federal rate. Thus, we estimate that the 

percentage of capital outlier payments 

to total capital standard payments for 

FY 2007 will be slightly lower than the 

percentages for FY 2006. 

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 tentative FY 2007 

outlier adjustment of 0.9568 is a 0.56 

percent change from the FY 2006 outlier 

adjustment of 0.9515. Therefore, the net 

change in the tentative outlier 

adjustment to the tentative capital 

Federal rate for FY 2007 is 1.0056 

(0.9568/0.9915). Thus, the outlier 

adjustment increases the tentative FY 

2007 capital Federal rate by 0.56 percent 

compared with the FY 2006 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 

explain in section III.A.4. of this 

Addendum, beginning in FY 2002, an 

adjustment for regular exception 

payments is no longer necessary. 

Therefore, we are no longer using the 

capital cost model. Instead, we are using 

historical data based on hospitals’ actual 

cost experiences to determine the 

exceptions payment adjustment factor 

for special exceptions payments. 

To determine the tentative factors for 

FY 2007, we compared (separately for 

the national capital rate and the Puerto 

Rico capital rate) estimated aggregate 

capital Federal rate payments based on 

the FY 2006 DRG relative weights and 

the FY 2006 GAF to estimated aggregate 

capital Federal rate payments based on 

the FY 2007 relative weights and the 

tentative FY 2007 GAF. As we 

established in the FY 2006 IPPS final 

rule (70 FR 47503), the budget neutrality 

factors were 0.9920 for the national 

capital rate and 0.9959 for the Puerto 

Rico capital rate. In making the 

comparison, we set the exceptions 

reduction factor to 1.00. To achieve 

budget neutrality for the changes in the 

national GAF, based on calculations 

using updated data, we are applying a 

tentative incremental budget neutrality 

adjustment of 1.0003 for FY 2007 to the 

previous cumulative FY 2006 

adjustments of 0.9920, yielding a 

tentative adjustment of 0.9923, through 

FY 2007 (calculations done on 

unrounded numbers). For the Puerto 

Rico GAF, we are applying a tentative 

incremental budget neutrality 


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adjustment of 1.0021 for FY 2007 to the 

previous cumulative FY 2006 

adjustment of 0.9959, yielding a 

tentative cumulative adjustment of 

0.9980 through FY 2007. 

We then compared estimated 

aggregate capital Federal rate payments 

based on the FY 2006 DRG relative 

weights and the FY 2006 GAF to 

estimated aggregate capital Federal rate 

payments based on the FY 2007 DRG 

relative weights and the tentative FY 

2007 GAF. The incremental adjustment 

for DRG classifications and changes in 

relative weights is 0.9992 both 

nationally and for Puerto Rico. The 

cumulative adjustments for DRG 

classifications and changes in relative 

weights and for changes in the tentative 

GAF through FY 2007 are 0.9914 

nationally and 0.9972 for Puerto Rico. 

The following table summarizes the 

adjustment factors for each fiscal year: 


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BUDGET

NEUTRALITY

ADJUSTMENT FOR DRG RECLASSIFICATIONS AND

RECALIBRATION AND THE

GEOGRAPHIC

ADJUSTMENT

FACTORS

Fiscal year 

National 

Cumulative 

Puerto Rico 

Cumulative 

Incremental adjustment Incremental adjustment 

Geographic 

adjustment 

factor 

DRG reclassifications and 

recalibration Combined 

Geographic 

adjustment 

factor 

DRG reclassifications and 

recalibration Combined 

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 

20011 ....................................................................... 0.99782 1.00009 0.99791 0.99933 1.00365 1.00009 1.00374 1.00508 

2001 2 ....................................................................... 3 0.99771 3 1.00009 3 0.99780 0.99922 3 1.00365 3 1.00009 3 1.00374 1.00508 2002 ......................................................................... 4 0.99666 4 0.99668 4 0.99335 0.99268 4 0.98991 4 0.99668 4 0.99662 0.99164 2003 5 ....................................................................... 0.99915 0.99662 0.99577 0.98848 1.00809 0.99662 1.00468 0.99628 2003 6 ....................................................................... 7 0.99896 7 0.99662 7 0.99558 0.98830 1.00809 0.99662 1.00468 0.99628 2004 8 ....................................................................... 9 1.00175 9 1.00081 9 1.00256 0.99083 1.00028 1.00081 1.00109 0.99736 2004 10 ..................................................................... 9 1.00164 9 1.00081 9 1.00245 0.99072 1.00028 1.00081 1.00109 0.99736 2005 11 ..................................................................... 12 0.99967 1.00094 12 1.00061 0.99137 0.99115 1.00094 0.99208 0.98946 2005 13 ..................................................................... 12 0.99946 1.00094 12 1.00040 0.99117 0.99115 1.00094 0.99208 0.98946 2006 ......................................................................... 14 1.00185 0.99892 14 1.00076 0.99198 1.00762 0.99892 1.00653 0.99592 2007 ......................................................................... 15 1.00029 0.99915 15 0.99943 15 0.99142 15 1.00213 0.99915 15 1.00128 15 0.99719 

1Factors effective for the first half of FY 2001 (October 2000 through March 2001). 2Factors 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. 5Factors effective for the first half of FY 2003 (October 2002 through March 2003). 6Factors effective for the second half of FY 2003 (April 2003 through September 2003). 7 Incremental factors are applied to FY 2002 cumulative factors. 8Factors 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. 10Factors effective for the second half of FY 2004 (April 2004 through September 2004). 11Factors 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. 

13Factors 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. 15Tentative factors for FY 2007, as discussed above in section III. of this Addendum. 


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The methodology used to determine 

the recalibration and geographic (DRG/ 

GAF) budget neutrality adjustment 

factor is similar to that used in 

establishing budget neutrality 

adjustments under the PPS for operating 

costs. One difference is that, under the 

operating PPS, 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 PPS, there is a single DRG/GAF 

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 serving low-income 

patients, indirect medical education 

payments, or the large urban add-on 

payments. 

In the FY 2006 IPPS final rule (70 FR 

47503), we calculated a GAF/DRG 

budget neutrality factor of 1.0008 for FY 

2006. For FY 2007, we are establishing 

a tentative GAF/DRG budget neutrality 

factor of 0.9994. 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 from 

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 GAF. The tentative 

incremental change in the adjustment 

from FY 2006 to FY 2007 is 0.9994. The 

tentative cumulative change in the 

capital Federal rate due to this 

adjustment is 0.9914 (the product of the 

incremental factors for FYs 1993 though 

2006 and the tentative incremental 

factor of 0.9994 for FY 2007). (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 tentative cumulative 

adjustment of 0.9994 for FY 2007.) 

This factor accounts for DRG 

reclassifications and recalibration and 

for changes in the GAF. It also 

incorporates the effects on the tentative 

GAF of FY 2007 geographic 

reclassification decisions made by the 

MGCRB compared to FY 2006 decisions. 

However, it does not account for 

changes in payments due to changes in 

the DSH and IME adjustment factors or 

in the large urban add-on. 

4. Exceptions Payment Adjustment 

Factor 

Section 412.308(c)(3) 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 § 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. 

An adjustment for regular exception 

payments is no longer necessary in 

determining the FY 2007 capital Federal 

rate because, in accordance with 

§ 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, as we explained in 

the FY 2002 IPPS final rule (66 FR 

39949), in FY 2002 and subsequent 

fiscal years, no payments will be made 

under the regular exceptions provision. 

However, in accordance with 

§ 412.308(c), we still need to compute a 

budget neutrality adjustment for special 

exception payments under § 412.348(g). 

We describe our methodology for 

determining the exceptions adjustment 

used in calculating the FY 2007 capital 

Federal rate below. 

Under the special exceptions 

provision specified at § 412.348(g)(1), 

eligible hospitals include SCHs, urban 

hospitals with at least 100 beds that 

have a disproportionate share 

percentage of at least 20.2 percent or 

qualify for DSH payments under 

§ 412.106(c)(2), and hospitals with a 

combined Medicare and Medicaid 

inpatient utilization of at least 70 

percent. An eligible hospital may 

receive special exceptions payments if it 

meets: (1) A project need requirement as 

described at § 412.348(g)(2), which, in 

the case of certain urban hospitals, 

includes an excess capacity test as 

described at § 412.348(g)(4); (2) an age of 

assets test as described at 

§ 412.348(g)(3); and (3) a project size 

requirement as described at 

§ 412.348(g)(5). 

Based on information compiled from 

our fiscal intermediaries, six hospitals 

have qualified for special exceptions 

payments under § 412.348(g). Because 

we have cost reports ending in FY 2005 

for all of these hospitals, we calculated 

the adjustment based on actual cost 

experience. Using data from cost reports 

ending in FY 2005 from the December 

2005 update of the HCRIS data, we 

divided the capital special exceptions 

payment amounts for the six hospitals 

that qualified for special exceptions by 

the total capital PPS payment amounts 

(including special exception payments) 

for all hospitals. Based on the data from 

cost reports ending in FY 2005, this 

ratio is rounded to 0.0003. Because we 

have not received all cost reports ending 

in FY 2005, we also divided the FY 

2005 special exceptions payments by 

the total capital PPS payment amounts 

for all hospitals with cost reports ending 

in FY 2004. This ratio also rounds to 

0.0003. Because special exceptions are 

budget neutral, we are offsetting the 

tentative capital Federal rate by 0.03 

percent for special exceptions payments 

for FY 2007. Therefore, the exceptions 

adjustment factor is equal to 0.9997 (1—

0.0003) to account for special 

exceptions payments in FY 2007. 

In the FY 2006 IPPS final rule (70 FR 

47503), we estimated that total (special) 

exceptions payments for FY 2006 would 

equal 0.03 percent of aggregate 

payments based on the capital Federal 

rate. Therefore, we applied an 

exceptions adjustment factor of 0.9997 

(1—0.0003) in determining the FY 2006 

capital Federal rate. As we stated above, 

we estimate that exceptions payments in 

FY 2007 will equal 0.03 percent of 

aggregate payments based on the 

tentative FY 2007 capital Federal rate. 

Therefore, we are applying an 

exceptions payment adjustment factor of 

0.9997 to the capital Federal rate for FY 

2007. The exceptions adjustment factor 

for FY 2007 is the same as the factor 

used in determining the FY 2006 capital 

Federal rate in the FY 2006 IPPS final 

rule (70 FR 47503). The exceptions 

reduction factors are not built 

permanently into the capital rates; that 

is, the factors are not applied 

cumulatively in determining the capital 

Federal rate. Therefore, the net change 

in the exceptions adjustment factor used 

in determining the tentative FY 2007 

capital Federal rate is 1.0000 (0.9997/ 

0.9997). 

5. Capital Standard Federal Rate for FY 

2007 

In the FY 2006 IPPS final rule (70 FR 

47503), we established a capital Federal 

rate of $420.65 for FY 2006. In this final 

rule, we are establishing a tentative 

capital Federal rate of $427.38 for FY 

2007. The tentative capital Federal rate 

for FY 2007 was calculated as follows: 

• The FY 2007 update factor is 

1.0110; that is, the update is 1.1 percent. 


bajohnson on PROD1PC67 with RULES2
48162 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

• The tentative FY 2007 budget 

neutrality adjustment factor that is 

applied to the capital standard Federal 

payment rate for changes in the DRG 

relative weights and in the GAF is 

0.9994. 

• The tentative FY 2007 outlier 

adjustment factor is 0.9568. 

• The FY 2007 (special) exceptions 

payment adjustment factor is 0.9997. 

Because the tentative capital Federal 

rate has already been adjusted for 

differences in case-mix, wages, cost-ofliving, 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 tentative budget neutrality factor for 

changes in the DRG relative weights and 

the GAF. 

We are providing a chart that shows 

how each of the factors and adjustments 

for FY 2007 affected the computation of 

the tentative FY 2007 capital Federal 

rate in comparison to the average FY 

2006 capital Federal rate. The FY 2007 

update factor has the effect of increasing 

the tentative capital Federal rate by 1.1 

percent compared to the average FY 

2006 Federal rate. The tentative GAF/ 

DRG budget neutrality factor has the 

effect of decreasing the tentative capital 

Federal rate by 0.06 percent. The 

tentative FY 2007 outlier adjustment 

factor has the effect of increasing the 

tentative capital Federal rate by 0.56 

percent compared to the average FY 

2006 capital Federal rate. The FY 2007 

exceptions payment adjustment factor 

remains unchanged from the FY 2006 

exceptions payment adjustment factor, 

and therefore, has a 0.0 percent net 

effect on the tentative FY 2007 capital 

Federal rate. The combined effect of all 

the changes is to tentatively increase the 

capital Federal rate by 1.6 percent 

compared to the average FY 2006 capital 

Federal rate. 

COMPARISON OF FACTORS AND ADJUSTMENTS: FY 2006 CAPITAL FEDERAL RATE AND FY 2007 CAPITAL FEDERAL RATE

FY 2006 FY 2007 Change Percent 

change 

Update Factor 1 ........................................................................................ 1 .0080 1 .0110 1 .0110 1 .10 

GAF/DRG Adjustment Factor 1 ................................................................ 1 .0008 3 0 .9994 0 .9994 ¥0 .06 

Outlier Adjustment Factor 2 ...................................................................... 0 .9515 3 0 .9568 1 .0056 0 .56 

Exceptions Adjustment Factor 2 ............................................................... 0 .9997 0 .9997 0 .0000 0 .00 

Capital Federal Rate ................................................................................ $420 .65 3 $427 .38 1 .0160 1 .60 

1The update factor and the GAF/DRG budget neutrality factors are built permanently into the capital rates. Thus, for example, the incremental 

change from FY 2006 to FY 2007 resulting from the application of the tentative 0.9994 GAF/DRG budget neutrality factor for FY 2007 is 0.9994. 2The outlier reduction factor and the exceptions adjustment factor are not built permanently into the capital rates; that is, these factors are not 

applied cumulatively in determining the capital rates. Thus, for example, the net change resulting from the application of the tentative FY 2007 

outlier adjustment factor would be 0.9568/0.9515, or 1.0056. 3Tentative factors for FY 2007, as discussed above in section III. of this Addendum. 

We are also providing a chart that 

shows how the tentative final FY 2007 

capital Federal rate differs from the 

proposed FY 2007 capital Federal rate 

presented in the FY 2007 IPPS proposed 

rule (71 FR 24158–24159). 

COMPARISON OF FACTORS AND ADJUSTMENTS: PROPOSED FY 2007 CAPITAL FEDERAL RATE AND TENTATIVE FINAL FY 

2007 CAPITAL FEDERAL RATE

Proposed 

FY 2007 

Final 

FY 2007 Change Percent change 

Update factor ........................................................................................... 1 .0080 1 .0110 1 .0030 0 .30 

GAF/DRG Adjustment Factor .................................................................. 1 .0012 *0 .9994 0 .9982 ¥0 .18 

Outlier Adjustment Factor ........................................................................ 0 .9513 *0 .9568 1 .0058 0 .58 

Exceptions Adjustment Factor ................................................................. 0 .9997 0 .9997 0 .0000 0 .00 

Capital Federal Rate ................................................................................ $424 .42 *$427 .38 1 .0070 0 .70 

* Tentative factors for FY 2007, as discussed above in section III. of this Addendum. 

6. Special Capital Rate for Puerto Rico 

Hospitals 

Section 412.374 provides for the use 

of a blended payment system for 

payments to Puerto Rico hospitals under 

the PPS for acute care hospital inpatient 

capital-related costs. Accordingly, under 

the capital PPS, 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. Under the 

broad authority of section 1886(g) of the 

Act, as discussed in section VI. of the 

preamble of this final rule, beginning 

with discharges occurring on or after 

October 1, 2004, capital payments to 

hospitals 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. As we stated above in section 

III.A.4. of this Addendum, for Puerto 

Rico, the tentative GAF budget 

neutrality factor is 1.0021, while the 

DRG adjustment is 0.9992, for a 


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combined tentative cumulative 

adjustment of 0.9972. 

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 Pub. L. 105–33. In FY 2003, a small 

part of that reduction was restored. 

For FY 2006, before application of the 

GAF, the special capital rate for Puerto 

Rico hospitals was $201.93 for 

discharges occurring on or after October 

1, 2005 through September 30, 2006. 

With the changes we are making to the 

factors used to determine the capital 

rate, the tentative FY 2007 special 

capital rate for Puerto Rico is $203.13. 

B. Calculation of the Inpatient CapitalRelated Prospective Payments for FY 

2007 

Because the 10-year capital PPS 

transition period ended in FY 2001, all 

hospitals (except ‘‘new’’ hospitals under 

§ 412.324(b) and under § 412.304(c)(2)) 

are paid based on 100 percent of the 

capital Federal rate in FY 2006. The 

applicable capital Federal rate was 

determined by making adjustments as 

follows: 

• For outliers, by dividing the capital 

standard Federal rate by the outlier 

reduction factor for that fiscal year; and 

• For the payment adjustments 

applicable to the hospital, by 

multiplying the hospital’s GAF, 

disproportionate share adjustment 

factor, and IME adjustment factor, when 

appropriate. 

For purposes of calculating payments 

for each discharge during FY 2007, the 

capital standard Federal rate is adjusted 

as follows: (Standard Federal Rate) × 

(DRG weight) × (GAF) × (Large Urban 

Add-on, if applicable) × (COLA for 

hospitals located in Alaska and Hawaii) 

× (1 + Disproportionate Share 

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 tentative outlier 

thresholds for FY 2007 are in section 

II.A.4.c. of this Addendum. For FY 

2007, a case qualifies as a cost outlier if 

the cost for the case plus the IME and 

DSH payments is greater than the 

prospective payment rate for the DRG 

plus the tentative fixed-loss amount of 

$24,475. 

An eligible hospital may also qualify 

for a special exceptions payment under 

§ 412.348(g) for up through the 10th 

year beyond the end of the capital 

transition period if it meets: (1) A 

project need requirement described at 

§ 412.348(g)(2), which in the case of 

certain urban hospitals includes an 

excess capacity test as described at 

§ 412.348(g)(4); and (2) a project size 

requirement as described at 

§ 412.348(g)(5). Eligible hospitals 

include SCHs, urban hospitals with at 

least 100 beds that have a DSH patient 

percentage of at least 20.2 percent or 

qualify for DSH payments under 

§ 412.106(c)(2), and hospitals that have 

a combined Medicare and Medicaid 

inpatient utilization of at least 70 

percent. Under § 412.348(g)(8), the 

amount of a special exceptions payment 

is determined by comparing the 

cumulative payments made to the 

hospital under the capital PPS to the 

cumulative minimum payment level. 

This amount is offset by: (1) Any 

amount by which a hospital’s 

cumulative capital payments exceed its 

cumulative minimum payment levels 

applicable under the regular exceptions 

process for cost reporting periods 

beginning during which the hospital has 

been subject to the capital PPS; and (2) 

any amount by which a hospital’s 

current year operating and capital 

payments (excluding 75 percent of 

operating DSH payments) exceed its 

operating and capital costs. Under 

§ 412.348(g)(6), the minimum payment 

level is 70 percent for all eligible 

hospitals. 

During the transition period, new 

hospitals (as defined under § 412.300) 

were exempt from the capital PPS for 

their first 2 years of operation and were 

paid 85 percent of their reasonable costs 

during that period. Effective with the 

third year of operation through the 

remainder of the transition period, 

under § 412.324(b), we paid the 

hospitals under the appropriate 

transition methodology (if the holdharmless methodology were applicable, 

the hold-harmless payment for assets in 

use during the base period would 

extend for 8 years, even if the holdharmless payments extend beyond the 

normal transition period). 

Under § 412.304(c)(2), for cost 

reporting periods beginning on or after 

October 1, 2002, 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 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 weightedaverage of past capital purchase prices 

up to and including the current year. 

We periodically update the base year 

for the operating and capital input 

prices to reflect the changing 

composition of inputs for operating and 

capital expenses. The CIPI was last 

rebased to FY 2002 in the FY 2006 IPPS 

final rule (70 FR 47387). 

2. Forecast of the CIPI for FY 2007 

Based on the latest forecast by Global 

Insight, Inc. (second quarter of 2006), 

we are forecasting the CIPI to increase 

1.1 percent in FY 2007. This reflects a 

projected 1.7 percent increase in 

vintage-weighted depreciation prices 

(building and fixed equipment, and 

movable equipment) and a 3.1 percent 

increase in other capital expense prices 

in FY 2007, partially offset by a 2.1 

percent decline in vintage-weighted 

interest expenses in FY 2007. The 

weighted average of these three factors 

produces the 1.1 percent increase for the 

CIPI as a whole in FY 2007. 

The CIPI forecast of 1.1 percent is 

higher than the CIPI forecast of 0.8 

percent that appeared in the proposed 

rule. This is mainly due to a change in 

the forecast of vintage-weighted 

depreciation prices from a 1.4 percent to 

a 1.7 percent increase and a change in 

vintage-weighted interest expenses from 

a 2.3 to a 2.1 percent decline. The 

change in the forecast for depreciation 


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prices reflects the incorporation of 

newly available source data for fixed 

asset prices into the market basket, 

while the change in the forecast for 

interest expenses reflects the 

incorporation of recent increases in 

interest rates. 

IV. Payment Rates for Excluded 

Hospitals and Hospital Units: Rate-ofIncrease Percentages 

A. Payments to Existing Excluded 

Hospitals and Units 

As discussed in section VI. of the 

preamble of this final rule, the inpatient 

operating costs of children’s hospitals 

and cancer hospitals that are excluded 

from the IPPS are paid on the basis of 

reasonable cost subject to the rate-ofincrease ceiling established under the 

authority of sections 1886(b)(3)(A)(i) 

and (ii) of the Act and § 413.40 of the 

regulations. The ceiling is based on a 

target amount per discharge under 

TEFRA. In addition, in accordance with 

§ 403.752(a) of the regulations, RNHCIs 

also are paid under § 413.40 which uses 

section 1886(b)(3)(B)(ii) of the Act to 

update the percentage increase in the 

rate of increase limits. The most recent 

projected forecast of the market basket 

percentage increase for FY 2007 for 

children’s hospitals, cancer hospitals, 

and RNHCIs using the IPPS market 

basket (70 FR 47396 through 47405) is 

3.4 percent (the same as we proposed). 

LTCHs, rehabilitation hospitals and 

units, and psychiatric hospitals and 

units, historically, were excluded from 

the IPPS and subject to the rate-ofincrease limits under § 413.40, as well. 

However, prospective payment systems 

have been developed for each of the 

three types of hospitals, and each kind 

of hospital is currently paid under its 

own PPS, either at 100 percent of the 

Federal rate or according to a transition 

period methodology, if applicable. (For 

more detailed discussion of these 

payment methodologies, see 69 FR 

49190; 69 FR 66922; 68 FR 45674; and 

67 FR 55954.) 

For cost reporting periods beginning 

on or after October 1, 2002, to the extent 

a LTCH or a psychiatric hospital or unit 

has all or a portion of its payment 

determined under reasonable cost 

principles, the target amounts for the 

reasonable cost-based portion of the 

blended payment are determined in 

accordance with sections 

1886(b)(3)(A)(i) and 1886(b)(3)(B)(ii) of 

the Act and the regulations at 

§ 413.40(c)(4)(ii). Section 413.40(c)(4)(ii) 

states, ‘‘Subject to the provisions of 

[§ 413.40], paragraph (c)(4)(iii) of this 

section, for subsequent cost reporting 

periods, the target amount equals the 

hospital’s target amount for the previous 

cost reporting period increased by the 

update factor for the subject cost 

reporting period, unless the provisions 

of [§ 413.40] paragraph (c)(5)(ii) of this 

section apply.’’ Thus, because 

§ 413.40(c)(4)(ii) indicates that the 

provisions of that paragraph are subject 

to the provisions of § 413.40(c)(4)(iii), 

which are applicable only for cost 

reporting periods beginning on or after 

October 1, 1997 through September 30, 

2002, the target amount for FY 2003 is 

determined by updating the target 

amount for FY 2002 by the applicable 

update factor. For example, if a provider 

was paid the cap amount for FY 2002 

(§ 413.40(c)(4)(iii)), the target amount for 

FY 2003 would be the amount paid in 

FY 2002, updated to FY 2003 (that is, 

the target amount from the previous 

year increased by the applicable update 

factor). 

Effective for cost reporting periods 

beginning on or after October 1, 2002, 

IRFs are paid 100 percent of the 

adjusted Federal prospective payment 

rate under the IRP PPS. 

Effective for cost reporting periods 

beginning on or after October 1, 2002, 

LTCHs also are no longer paid on a 

reasonable cost basis, but are paid under 

a LTCH DRG-based PPS. In 

implementing the LTCH PPS, an 

existing LTCH (that is, not defined as 

new under § 412.23(e)(4)) could have 

elected to be paid based on 100 percent 

of the standard Federal prospective 

payment rate during the transition 

period. However, we also established a 

5-year transition period from reasonable 

cost-based payments (subject to the 

TEFRA limit) to fully Federal 

prospective payment amounts during 

which an existing LTCH could receive 

a PPS-blended payment consisting of 

two payment components—one based 

on reasonable cost under the TEFRA 

payment system, and the other based on 

the standard Federal prospective 

payment rate. 

Effective for cost reporting periods 

that will begin on or after October 1, 

2006, the LTCHs that receive payment 

based on a blended payment amount 

will no longer receive a portion of their 

payment that is based, in part, on 

reasonable cost subject to the rate-ofincrease ceiling under § 413.40. This is 

because, in accordance with § 412.533, 

LTCHs are paid 100 percent of the 

adjusted Federal prospective payment 

amount and zero percent of the amount 

calculated under reasonable cost 

principles for cost reporting periods 

beginning on or after October 1, 2006. 

As part of the PPS for existing IPFs, 

we have established a 3-year transition 

period during which existing IPFs will 

be paid based on a blend of reasonable 

cost-based payment (subject to the 

TEFRA limit) and the prospective per 

diem payment rate. IPFs that are paid 

under a blended methodology will have 

the reasonable cost-based portion of 

their payment subject to a hospital 

target amount. The most recent 

projected forecast of the market basket 

percentage increase for FY 2007 for the 

reasonable cost-based portion of an 

IPF’s payment using the excluded 

hospital market basket (70 FR 47396 

through 47405) is 3.4 percent. For cost 

reporting periods beginning on or after 

January 1, 2008, IPFs will be paid 100 

percent of the Federal prospective per 

diem amount. 

The market basket percentage 

increases for FY 2007 are made by CMS’

Office of the Actuary and reflect the 

average change in the price of goods and 

services purchased by hospitals to 

furnish inpatient hospital care. They are 

based on the best available data. As 

discussed in section III.L. of the 

preamble of this FY 2006 IPPS final 

rule, we use the IPPS market basket for 

children’s hospitals, cancer hospitals, 

and RNHCIs, and the excluded hospital 

market basket for LTCHs, and IPFs for 

the reasonable cost portion of its 

payment to the extent a portion of its 

PPS payment is based on reasonable 

costs. We did not propose any changes 

to our method of calculating the 

hospital market basket for IPPS or for 

excluded hospitals for FY 2007. 

Consistent with our current 

methodology of calculating the hospital 

market basket for IPPS and excluded 

hospitals, we use updated data for our 

final rule to the extent it is available. As 

we indicated above, based on updated 

data, the projected IPPS market basket 

increase is 3.4 percent (the same as we 

proposed) and the projected excluded 

hospital market basket increase is 3.4 

percent (as opposed to 3.6 percent in the 

proposed rule) for FY 2007. 

B. New Excluded Hospitals and Units 

Section 1886(b)(7) of the Act 

established a payment methodology for 

new (cost reporting periods beginning 

on or after October 1, 1997) 

rehabilitation hospitals and units, 

psychiatric hospitals and units, and 

LTCHs. For the first two 12-month cost 

reporting periods, payment was based 

on the lower of the hospital’s net 

inpatient operating costs or 110 percent 

of the national median of target amounts 

for the particular class of hospital for FY 

1996, updated to the applicable cost 

reporting period, and adjusted for 

differences in area wage levels. 

Consequently, beginning with the FY 

1998 IPPS final rule, we published 


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annually in the Federal Register, the 

updated 110 percent median of the 

wage-neutral national target amounts, 

divided into the labor and nonlaborrelated share, for each of the three 

classes of providers affected by the 

payment limitation. As explained in the 

FY 2006 IPPS final rule (70 FR 47466 

through 47467), the charts containing 

the updated 110 percent median 

payment amount information are no 

longer needed and are discontinued. 

V. Payment for Blood Clotting Factor 

Administered to Inpatient With 

Hemophilia 

As discussed in section VIII. of the 

preamble to this final rule, in the FY 

2006 IPPS final rule (70 FR 47473), we 

amended our regulations at 

§§ 412.2(f)(8) and 412.115(b) to state 

that, for discharges occurring on or after 

October 1, 2005, we make payment for 

blood clotting factor administered to 

hospital inpatients using the Medicare 

Part B payment amounts for blood 

clotting factor as determined under 

Subpart K of 48 CFR Part 414 and for 

the furnished fee as determined under 

§ 410.63. 

In accordance with § 410.63(c)(2) and 

our November 21, 2005 regulations (70 

FR 70225), the furnishing fee for blood 

clotting factor for CY 2006 was 

determined to be $0.146 per individual 

unit (I.U.). Although the furnishing fee 

payment rate is calculated at 3 digits, 

the actual amount paid to providers and 

suppliers is rounded to 2 digits. In 

section VIII of the preamble to this final 

rule, we are providing that fiscal 

intermediaries continue to make 

payment amounts for blood clotting 

factor administered to hemophilia 

inpatients using the Medicare Part B 

payment amounts determined under 

Subpart K of 42 CFR Part 414 and that 

payment amounts for the furnishing fee 

for the blood clotting factor be 

calculated at 3 digits, currently at 

$0.146 per I.U. of blood clotting factor. 

The fiscal intermediaries continue to 

use the Medicare Part B Drug Pricing 

File to make payments for blood clotting 

factors. The furnishing fee is included 

in the ASP price per unit sent with the 

Medicare Part B Drug Pricing File that 

is updated quarterly. By using the 

Medicare Part B Drug Pricing File, 

Medicare will be making consistent 

payments for blood clotting factor 

provided to inpatients and outpatients. 

For further updates on pricing, we refer 

reader to the Medicare Part B drug 

pricing regulations. 

VI. Tables 

This section includes a majority of the 

tables referred to throughout the 

preamble to this final rule and in this 

Addendum. 

The following tables, which contain 

data relating to the FY 2007 wage 

indices and the hospital 

reclassifications and payment amounts 

for operating and capital-related costs 

that are affected by the new 

occupational mix survey data discussed 

in section III.C. of this final rule, will be 

published on the CMS Web site and in 

a subsequent Federal Register notice 

between August 1 and October 1, 2006. 

Table 2—Hospital Case-Mix Indexes for 

Discharges Occurring in Federal Fiscal 

Year 2005; Hospital Wage Indexes for 

Federal Fiscal Year 2007; Hospital Average 

Hourly Wage for Federal Fiscal Years 2005 

(2001 Wage Data), 2006 (2002 Wage Data), 

and 2007 (2003 Wage Data); Wage Indexes 

and 3-Year Average of Hospital Average 

Hourly Wages 

Table 3A—FY 2007 and 3-Year Average 

Hourly Wage for Urban Areas by CBSA 

Table 3B—FY 2007 and 3-Year Average 

Hourly Wage for Rural Areas by CBSA 

Table 4A–1—Wage Index and Capital 

Geographic Adjustment Factor (GAF) for 

Urban Areas by CBSA—FY 2007 

Table 4A–2—Wage Index and Capital 

Geographic Adjustment Factor (GAF) for 

Certain Urban Areas by CBSA for the 

Period April 1 through September 30, 2007 

Table 4B—Wage Index and Capital 

Geographic Adjustment Factor (GAF) for 

Rural Areas by CBSA—FY 2007 

Table 4C–1—Wage Index and Capital 

Geographic Adjustment Factor (GAF) for 

Hospitals That Are Reclassified by CBSA—

FY 2007 

Table 4C–2—Wage Index and Capital 

Geographic Adjustment Factor (GAF) for 

Certain Hospitals That Are Reclassified by 

CBSA for the Period April 1 through 

September 30, 2007 

Table 4F—Puerto Rico Wage Index and 

Capital Geographic Adjustment Factor 

(GAF) by CBSA—FY 2007 

The following tables are included in 

this final rule as tentative tables and do 

not reflect decisions that are yet to be 

made by CMS pending the final 

calculation of the occupational mix 

adjusted wage index. Additional 

information appears with each table. 

Revised tables reflecting CMS’ decisions 

on behalf of hospitals using 

occupational mix adjusted wage indices 

will be published on the CMS Web site, 

as well as in a subsequent Federal 

Register notice between August 1 and 

October 1, 2006. 

Table 1A—National Adjusted Operating 

Standardized Amounts, Labor/Nonlabor 

(69.7 Percent Labor Share/30.3 Percent 

Nonlabor Share if Wage Index Is Greater 

Than 1) 

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) 

Table 1C—Adjusted Operating Standardized 

Amounts for Puerto Rico, Labor/Nonlabor 

Table 1D—Capital Standard Federal Payment 

Rate 

Table 4J—Out-Migration Adjustment—FY 

2007 

Table 5—List of Diagnosis-Related Groups 

(DRGs), Relative Weighting Factors, and 

Geometric and Arithmetic Mean Length of 

Stay (LOS) 

Table 9A—Hospital Reclassifications and 

Redesignations by Individual Hospitals 

and CBSA for FY 2007 

Table 9B—Hospital Reclassifications and 

Redesignations by Individual Hospital 

Under Section 508 of Pub. L. 108–173 for 

FY 2007 

Table 9C—Hospitals Redesignated as Rural 

under Section 1886(d)(8)(E) of the Act for 

FY 2007 

Table 10—Tentative 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 

Diagnosis-Related Group (DRG)—July 2006 

The following tables are final and not 

subject to revision based on the final 

calculation of the occupational mix 

adjusted wage index. 

Table 6A—New Diagnosis Codes 

Table 6B—New Procedure Codes 

Table 6C—Invalid Diagnosis Codes 

Table 6D—Invalid Procedure Codes 

Table 6E—Revised Diagnosis Code Titles 

Table 6F—Revised Procedure Code Titles 

Table 6G—Additions to the CC Exclusions 

List 

Table 6H—Deletions from the CC Exclusions 

List 

Table 7A—Medicare Prospective Payment 

System Selected Percentile Lengths of Stay: 

FY 2005 MedPAR Update March 2006 

GROUPER V23.0 

Table 7B—Medicare Prospective Payment 

System Selected Percentile Lengths of Stay: 

FY 2005 MedPAR Update March 2006 

GROUPER V24.0 

Table 8A—Statewide Average Operating 

Cost-to-Charge Ratios—July 2006 

Table 8B—Statewide Average Capital Cost-toCharge Ratios—July 2006 

Table 8C—Statewide Average Total Cost-toCharge Ratios for LTCHs—July 2006 

Table 11—FY 2007 LTC–DRGs, Relative 

Weights, Geometric Average Length of 

Stay, and 5/6ths of the Geometric Average 

Length of Stay 


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TABLE 1A.—NATIONAL ADJUSTED OPERATING STANDARDIZED AMOUNTS, 69.7 PERCENT LABOR SHARE/30.3 PERCENT

NONLABOR SHARE IF WAGE INDEX GREATER THAN 1 

Full Update (3.4 percent) ......................................................................... *Note: Subsequent to this final rule, we will publish the final standardized amounts based on the final occupational mix adjustment. 

Tentative Labor Related Share: $3,400.13* 

Tentative Nonlabor Related Share: $1,478.10* 

Reduced Update (1.4 percent) ................................................................. *Note: Subsequent to this final rule, we will publish the final standardized amounts based on the final occupational mix adjustment. 

Tentative Labor Related Share: $3,334.36* 

Tentative Nonlabor Related Share: $1,449.51* 

TABLE 1B.—NATIONAL ADJUSTED OPERATING STANDARDIZED AMOUNTS, 62 PERCENT LABOR SHARE/38 PERCENT

NONLABOR SHARE IF WAGE INDEX LESS THAN OR EQUAL TO 1 

Full Update (3.4 percent) ......................................................................... *Note: Subsequent to this final rule, we will publish the final standardized amounts based on the final occupational mix adjustment. 

Tentative Labor Related Share: $3,024.51* 

Tentative Nonlabor Related Share: $1,853.72* 

Reduced Update (1.4 percent) ................................................................. *Note: Subsequent to this final rule, we will publish the final standardized amounts based on the final occupational mix adjustment. 

Tentative Labor Related Share: $2,966.00* 

Tentative Nonlabor Related Share: $1,817.87* 

TABLE 1C.—ADJUSTED OPERATING STANDARDIZED AMOUNTS FOR PUERTO RICO, LABOR/NONLABOR

Rates if wage index greater than one (National) ..................................... *Note: Subsequent to this final rule, we will publish the final standardized amounts based on the final occupational mix adjustment. 

Tentative Labor Related Share: $3,400.13* 

Tentative Nonlabor Related Share: $1,478.10* 

Rates if wage index greater than one (Puerto Rico) ............................... *Note: Subsequent to this final rule, we will publish the final standardized amounts based on the final occupational mix adjustment. 

Tentative Labor Related Share: $1,436.25* 

Tentative Nonlabor Related Share: $880.28* 

Rates if wage index less than one (National) .......................................... *Note: Subsequent to this final rule, we will publish the final standardized amounts based on the final occupational mix adjustment. 

Tentative Labor Related Share: $3,024.51* 

Tentative Nonlabor Related Share: $1,853.72* 

Rates if wage index less than one (Puerto Rico) .................................... *Note: Subsequent to this final rule, we will publish the final standardized amounts based on the final occupational mix adjustment. 

Tentative Labor Related Share: $1,359.80* 

Tentative Nonlabor Related Share: $956.72* 

TABLE 1D.—CAPITAL STANDARD FEDERAL PAYMENT RATE

National ..................................................................................................... *Note: Subsequent to this final rule, we will publish the final standardized amounts based on the final occupational mix adjustment. 

Tentative Capital Payment Rate: $427.38* 

Puerto Rico ............................................................................................... *Note: Subsequent to this final rule, we will publish the final standardized amounts based on the final occupational mix adjustment. 

Tentative Capital Payment Rate: $203.13* 

BILLING CODE 4120–01–P 


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Note: The following Table 5 is a tentative 

table. The final Table 5 will be published in 

a subsequent Federal Register notice. 

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48224 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 


bajohnson on PROD1PC67 with RULES2ER18AU06.072</GPH>
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48225 


bajohnson on PROD1PC67 with RULES2ER18AU06.073</GPH>
48226 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

BILLING CODE 4120–01–C 


bajohnson on PROD1PC67 with RULES2ER18AU06.074</GPH>
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48227 

[CCs that are added to the list are in this 

Table 6G—Additions to the CC 

Exclusions List. Each of the principal 

diagnoses is shown with an asterisk, 

and the revisions to the CC Exclusions 

List are provided in an indented column 

immediately following the affected 

principal diagnosis.] 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST

*0519 

0522 

*0522 

0520 

0521 

0522 

0527 

0528 

0529 

05314 

05474 

*0527 

0522 

*0528 

0522 

*0529 

0522 

*0530 

05314 

*05310 

05314 

*05311 

05314 

*05312 

05314 

*05313 

05314 

*05314 

0522 

0530 

05310 

05311 

05312 

05313 

05314 

05319 

05379 

0538 

05474 

5319 

05314 

*05379 

05314 

*0538 

05314 

*0539 

05314 

*05472 

05314 

*05474 

0522 

0530 

05310 

05311 

05312 

05313 

05314 

05319 

05379 

0538 

0543 

0545 

05471 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

05472 

05474 

05479 

0548 

*05479 

05314 

05474 

*0548 

05314 

05474 

*0549 

05314 

05474 

*07888 

0522 

05314 

05474 

*07889 

0522 

05314 

05474 

*07981 

0522 

05314 

05474 

*07988 

0522 

05314 

05474 

*07989 

0522 

05314 

05474 

*07998 

0522 

05314 

05474 

*07999 

0522 

05314 

05474 

*1398 

0522 

05314 

05474 

*28401 

2800 

2814 

2818 

28241 

28242 

28249 

28260 

28261 

28262 

28263 

28264 

28268 

28269 

2830 

28310 

28311 

28319 

2832 

2839 

2848 

2849 

2850 

2851 

*28409 

2800 

2814 

2818 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

28241 

28242 

28249 

28260 

28261 

28262 

28263 

28264 

28268 

28269 

2830 

28310 

28311 

28319 

2832 

2839 

2848 

2849 

2850 

2851 

*2841 

2800 

2814 

2818 

28241 

28242 

28249 

28260 

28261 

28262 

28263 

28264 

28268 

28269 

2830 

28310 

28311 

28319 

2832 

2839 

2848 

2849 

2850 

2851 

*2842 

2800 

2814 

2818 

28241 

28242 

28249 

28260 

28261 

28262 

28263 

28264 

28268 

28269 

2830 

28310 

28311 

28319 

2832 

2839 

2848 

2849 

2850 

2851 

*28800 

2881 

28981 

28982 

*28801 


bajohnson on PROD1PC67 with RULES2
48228 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

2881 

28981 

28982 

*28802 

2881 

28981 

28982 

*28803 

2881 

28981 

28982 

*28804 

2881 

28981 

28982 

*28809 

2881 

28981 

28982 

*2884 

2881 

28981 

28982 

*28850 

2881 

28981 

28982 

*28851 

2881 

28981 

28982 

*28859 

2881 

28981 

28982 

*28860 

2881 

28981 

28982 

*28861 

2881 

28981 

28982 

*28862 

2881 

28981 

28982 

*28863 

2881 

28981 

28982 

*28864 

2881 

28981 

28982 

*28865 

2881 

28981 

28982 

*28869 

2881 

28981 

28982 

*28953 

2881 

28981 

28982 

*28983 

2800 

2814 

2818 

28241 

28242 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

28249 

28260 

28261 

28262 

28263 

28264 

28268 

28269 

2830 

28310 

28311 

28319 

2832 

2839 

2848 

2849 

2850 

2851 

2860 

2861 

2862 

2863 

2864 

2865 

2866 

2867 

2869 

2870 

2871 

2872 

28730 

28731 

28732 

28733 

28739 

2874 

2875 

2878 

2879 

2881 

28981 

28982 

*32301 

0522 

05314 

05474 

34982 

*32302 

0522 

05314 

05474 

34982 

*32341 

0522 

05314 

05474 

34982 

*32342 

0522 

05314 

05474 

34982 

*32351 

0522 

05314 

05474 

34982 

*32352 

0522 

05314 

05474 

34982 

*32361 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

0522 

05314 

05474 

34982 

*32362 

0522 

05314 

05474 

34982 

*32363 

0522 

05314 

05474 

34982 

*32371 

0522 

05314 

05474 

34982 

*32372 

0522 

05314 

05474 

34982 

*32381 

0522 

05314 

05474 

34982 

*32382 

0522 

05314 

05474 

34982 

*33183 

3314 

*33371 

7817 

*33372 

7817 

*33379 

7817 

*33385 

7817 

*3380 

04082 

44024 

78001 

78003 

7801 

78031 

78032 

78039 

7817 

7854 

78550 

78551 

78552 

78559 

7863 

78820 

78829 

7895 

7907 

7911 

7913 

79901 

79902 

7991 

7994 

*33811 

04082 

44024 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48229 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

78001 

78003 

7801 

78031 

78032 

78039 

7817 

7854 

78550 

78551 

78552 

78559 

7863 

78820 

78829 

7895 

7907 

7911 

7913 

79901 

79902 

7991 

7994 

*33812 

04082 

44024 

78001 

78003 

7801 

78031 

78032 

78039 

7817 

7854 

78550 

78551 

78552 

78559 

7863 

78820 

78829 

7895 

7907 

7911 

7913 

79901 

79902 

7991 

7994 

*33818 

04082 

44024 

78001 

78003 

7801 

78031 

78032 

78039 

7817 

7854 

78550 

78551 

78552 

78559 

7863 

78820 

78829 

7895 

7907 

7911 

7913 

79901 

79902 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

7991 

7994 

*33819 

04082 

44024 

78001 

78003 

7801 

78031 

78032 

78039 

7817 

7854 

78550 

78551 

78552 

78559 

7863 

78820 

78829 

7895 

7907 

7911 

7913 

79901 

79902 

7991 

7994 

*33821 

04082 

44024 

78001 

78003 

7801 

78031 

78032 

78039 

7817 

7854 

78550 

78551 

78552 

78559 

7863 

78820 

78829 

7895 

7907 

7911 

7913 

79901 

79902 

7991 

7994 

*33822 

04082 

44024 

78001 

78003 

7801 

78031 

78032 

78039 

7817 

7854 

78550 

78551 

78552 

78559 

7863 

78820 

78829 

7895 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

7907 

7911 

7913 

79901 

79902 

7991 

7994 

*33828 

04082 

44024 

78001 

78003 

7801 

78031 

78032 

78039 

7817 

7854 

78550 

78551 

78552 

78559 

7863 

78820 

78829 

7895 

7907 

7911 

7913 

79901 

79902 

7991 

7994 

*33829 

04082 

44024 

78001 

78003 

7801 

78031 

78032 

78039 

7817 

7854 

78550 

78551 

78552 

78559 

7863 

78820 

78829 

7895 

7907 

7911 

7913 

79901 

79902 

7991 

7994 

*3383 

04082 

44024 

78001 

78003 

7801 

78031 

78032 

78039 

7817 

7854 

78550 

78551 

78552 


bajohnson on PROD1PC67 with RULES2
48230 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

78559 

7863 

78820 

78829 

7895 

7907 

7911 

7913 

79901 

79902 

7991 

7994 

*3384 

04082 

44024 

78001 

78003 

7801 

78031 

78032 

78039 

7817 

7854 

78550 

78551 

78552 

78559 

7863 

78820 

78829 

7895 

7907 

7911 

7913 

79901 

79902 

7991 

7994 

*34120 

0522 

05314 

05474 

34982 

*34121 

0522 

05314 

05474 

34982 

*34122 

0522 

05314 

05474 

34982 

*34500 

78032 

*34501 

78032 

*34510 

78032 

*34511 

78032 

*3452 

78032 

*3453 

78032 

*34540 

78032 

*34541 

78032 

*34550 

78032 

*34551 

78032 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

*34560 

78032 

*34561 

78032 

*34570 

78032 

*34571 

78032 

*34580 

78032 

*34581 

78032 

*34590 

78032 

*34591 

78032 

*3488 

78032 

*3489 

78032 

*34989 

78032 

*3499 

78032 

*37960 

37700 

37701 

37702 

*37961 

37700 

37701 

37702 

*37962 

37700 

37701 

37702 

*37963 

37700 

37701 

37702 

*5187 

5187 

9973 

*51911 

51900 

51901 

51902 

51909 

*51919 

51900 

51901 

51902 

51909 

*52800 

5283 

*52801 

5283 

*52802 

5283 

*52809 

5283 

*538 

5273 

5274 

53021 

53100 

53101 

53110 

53111 

53120 

53121 

53131 

53140 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

53141 

53150 

53151 

53160 

53161 

53171 

53191 

53200 

53201 

53210 

53211 

53220 

53221 

53231 

53240 

53241 

53250 

53251 

53260 

53261 

53271 

53291 

53300 

53301 

53310 

53311 

53320 

53321 

53331 

53340 

53341 

53350 

53351 

53360 

53361 

53371 

53391 

53400 

53401 

53410 

53411 

53420 

53421 

53431 

53440 

53441 

53450 

53451 

53460 

53461 

53471 

53491 

5400 

5401 

5409 

55000 

55001 

55002 

55003 

55010 

55011 

55012 

55013 

55100 

55101 

55102 

55103 

5511 

55120 

55121 

55129 

5518 

5519 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48231 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

55200 

55201 

55202 

55203 

*61681 

6140 

6143 

6145 

6150 

6163 

6164 

*61689 

6140 

6143 

6145 

6150 

6163 

6164 

*62929 

6140 

6143 

6145 

6150 

6163 

6164 

6207 

*62981 

6140 

6143 

6145 

6150 

6163 

6164 

6207 

*62989 

6140 

6143 

6145 

6150 

6163 

6164 

6207 

*64900 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 


bajohnson on PROD1PC67 with RULES2
48232 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64901 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48233 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64902 

63400 

63401 

63402 

63410 

63411 

63412 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 


bajohnson on PROD1PC67 with RULES2
48234 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67453 

67454 

67510 

67511 

67512 

*64903 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48235 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64904 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 


bajohnson on PROD1PC67 with RULES2
48236 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64910 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48237 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64911 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 


bajohnson on PROD1PC67 with RULES2
48238 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64912 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48239 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64913 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 


bajohnson on PROD1PC67 with RULES2
48240 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67454 

67510 

67511 

67512 

*64914 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48241 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64920 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 


bajohnson on PROD1PC67 with RULES2
48242 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64921 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48243 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64922 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 


bajohnson on PROD1PC67 with RULES2
48244 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64923 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48245 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64924 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 


bajohnson on PROD1PC67 with RULES2
48246 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48247 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67510 

67511 

67512 

*64930 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 


bajohnson on PROD1PC67 with RULES2
48248 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64931 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48249 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64932 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 


bajohnson on PROD1PC67 with RULES2
48250 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64933 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48251 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64934 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 


bajohnson on PROD1PC67 with RULES2
48252 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64940 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

4743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48253 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67511 

67512 

*64941 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 


bajohnson on PROD1PC67 with RULES2
48254 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64942 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48255 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64943 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 


bajohnson on PROD1PC67 with RULES2
48256 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64944 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48257 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64950 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 


bajohnson on PROD1PC67 with RULES2
48258 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64951 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48259 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67512 

*64953 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 


bajohnson on PROD1PC67 with RULES2
48260 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64960 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48261 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64961 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 


bajohnson on PROD1PC67 with RULES2
48262 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64962 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48263 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64963 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 


bajohnson on PROD1PC67 with RULES2
48264 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 

*64964 

63400 

63401 

63402 

63410 

63411 

63412 

63420 

63421 

63422 

63430 

63431 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48265 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

63432 

63440 

63441 

63442 

63450 

63451 

63452 

63460 

63461 

63462 

63470 

63471 

63472 

63480 

63481 

63482 

63490 

63491 

63492 

6390 

6391 

6392 

6393 

6394 

6395 

6396 

6398 

6399 

64000 

64001 

64003 

64080 

64081 

64083 

64090 

64091 

64093 

64100 

64101 

64103 

64110 

64111 

64113 

64130 

64131 

64133 

64180 

64181 

64183 

64190 

64191 

64193 

64240 

64241 

64242 

64243 

64244 

64250 

64251 

64252 

64253 

64254 

64260 

64261 

64262 

64263 

64264 

64270 

64271 

64272 

64273 

64274 

64400 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

64403 

64410 

64413 

64660 

64661 

64662 

64663 

64664 

64670 

64671 

64673 

64730 

64731 

64732 

64733 

64734 

64740 

64741 

64742 

64743 

64744 

64800 

64801 

64802 

64803 

64804 

64820 

64821 

64822 

64823 

64824 

64830 

64831 

64832 

64833 

64834 

64850 

64851 

64852 

64853 

64854 

64860 

64861 

64862 

64863 

64864 

65930 

65931 

65933 

66500 

66501 

66503 

66510 

66511 

66632 

66634 

66800 

66801 

66802 

66803 

66804 

66810 

66811 

66812 

66813 

66814 

66820 

66821 

66822 

66823 

66824 

66880 

66881 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

66882 

66883 

66884 

66890 

66891 

66892 

66893 

66894 

66910 

66911 

66912 

66913 

66914 

66930 

66932 

66934 

67000 

67002 

67004 

67120 

67121 

67122 

67123 

67124 

67130 

67131 

67133 

67140 

67142 

67144 

67300 

67301 

67302 

67303 

67304 

67310 

67311 

67312 

67313 

67314 

67320 

67321 

67322 

67323 

67324 

67330 

67331 

67332 

67333 

67334 

67380 

67381 

67382 

67383 

67384 

67400 

67401 

67402 

67403 

67404 

67410 

67412 

67420 

67422 

67424 

67450 

67451 

67452 

67453 

67454 

67510 

67511 

67512 


bajohnson on PROD1PC67 with RULES2
48266 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

*7790 

78032 

*7791 

78032 

*77985 

77985 

*78031 

78032 

*78032 

78031 

78032 

78039 

*78039 

78032 

*78091 

78032 

*78092 

78032 

*78093 

78032 

*78094 

78032 

*78095 

78032 

*78096 

04082 

44024 

78001 

78003 

7801 

78031 

78032 

78039 

7817 

7854 

78550 

78551 

78552 

78559 

7863 

78820 

78829 

7895 

7907 

7911 

7913 

79901 

79902 

7991 

7994 

*78097 

04082 

44024 

78001 

78003 

7801 

78031 

78032 

78039 

7817 

7854 

78550 

78551 

78552 

78559 

7863 

78820 

78829 

7895 

7907 

7911 

7913 

79901 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

79902 

7991 

7994 

*78099 

78032 

*78864 

78820 

78829 

*78865 

78820 

78829 

*79981 

78032 

*79989 

78032 

*95890 

80000 

80001 

80002 

80003 

80004 

80005 

80006 

80009 

80010 

80011 

80012 

80013 

80014 

80015 

80016 

80019 

80020 

80021 

80022 

80023 

80024 

80025 

80026 

80029 

80030 

80031 

80032 

80033 

80034 

80035 

80036 

80039 

80040 

80041 

80042 

80043 

80044 

80045 

80046 

80049 

80050 

80051 

80052 

80053 

80054 

80055 

80056 

80059 

80060 

80061 

80062 

80063 

80064 

80065 

80066 

80069 

80070 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80071 

80072 

80073 

80074 

80075 

80076 

80079 

80080 

80081 

80082 

80083 

80084 

80085 

80086 

80089 

80090 

80091 

80092 

80093 

80094 

80095 

80096 

80099 

80100 

80101 

80102 

80103 

80104 

80105 

80106 

80109 

80110 

80111 

80112 

80113 

80114 

80115 

80116 

80119 

80120 

80121 

80122 

80123 

80124 

80125 

80126 

80129 

80130 

80131 

80132 

80133 

80134 

80135 

80136 

80139 

80140 

80141 

80142 

80143 

80144 

80145 

80146 

80149 

80150 

80151 

80152 

80153 

80154 

80155 

80156 

80159 

80160 

80161 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48267 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80162 

80163 

80164 

80165 

80166 

80169 

80170 

80171 

80172 

80173 

80174 

80175 

80176 

80179 

80180 

80181 

80182 

80183 

80184 

80185 

80186 

80189 

80190 

80191 

80192 

80193 

80194 

80195 

80196 

80199 

8021 

80220 

80221 

80222 

80223 

80224 

80225 

80226 

80227 

80228 

80229 

80230 

80231 

80232 

80233 

80234 

80235 

80236 

80237 

80238 

80239 

8024 

8025 

8026 

8027 

8028 

8029 

80300 

80301 

80302 

80303 

80304 

80305 

80306 

80309 

80310 

80311 

80312 

80313 

80314 

80315 

80316 

80319 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80320 

80321 

80322 

80323 

80324 

80325 

80326 

80329 

80330 

80331 

80332 

80333 

80334 

80335 

80336 

80339 

80340 

80341 

80342 

80343 

80344 

80345 

80346 

80349 

80350 

80351 

80352 

80353 

80354 

80355 

80356 

80359 

80360 

80361 

80362 

80363 

80364 

80365 

80366 

80369 

80370 

80371 

80372 

80373 

80374 

80375 

80376 

80379 

80380 

80381 

80382 

80383 

80384 

80385 

80386 

80389 

80390 

80391 

80392 

80393 

80394 

80395 

80396 

80399 

80400 

80401 

80402 

80403 

80404 

80405 

80406 

80409 

80410 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80411 

80412 

80413 

80414 

80415 

80416 

80419 

80420 

80421 

80422 

80423 

80424 

80425 

80426 

80429 

80430 

80431 

80432 

80433 

80434 

80435 

80436 

80439 

80440 

80441 

80442 

80443 

80444 

80445 

80446 

80449 

80450 

80451 

80452 

80453 

80454 

80455 

80456 

80459 

80460 

80461 

80462 

80463 

80464 

80465 

80466 

80469 

80470 

80471 

80472 

80473 

80474 

80475 

80476 

80479 

80480 

80481 

80482 

80483 

80484 

80485 

80486 

80489 

80490 

80491 

80492 

80493 

80494 

80495 

80496 

80499 

80500 

80501 


bajohnson on PROD1PC67 with RULES2
48268 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80502 

80503 

80504 

80505 

80506 

80507 

80508 

80510 

80511 

80512 

80513 

80514 

80515 

80516 

80517 

80518 

8052 

8053 

8054 

8055 

8056 

8057 

8058 

8059 

80600 

80601 

80602 

80603 

80604 

80605 

80606 

80607 

80608 

80609 

80610 

80611 

80612 

80613 

80614 

80615 

80616 

80617 

80618 

80619 

80620 

80621 

80622 

80623 

80624 

80625 

80626 

80627 

80628 

80629 

80630 

80631 

80632 

80633 

80634 

80635 

80636 

80637 

80638 

80639 

8064 

8065 

80660 

80661 

80662 

80669 

80670 

80671 

80672 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80679 

8068 

8069 

80704 

80705 

80706 

80707 

80708 

80709 

80710 

80711 

80712 

80713 

80714 

80715 

80716 

80717 

80718 

80719 

8072 

8073 

8074 

8075 

8076 

8080 

8081 

8082 

8083 

80843 

80849 

80851 

80852 

80853 

80859 

8088 

8089 

82000 

82001 

82002 

82003 

82009 

82010 

82011 

82012 

82013 

82019 

82020 

82021 

82022 

82030 

82031 

82032 

8208 

8209 

82100 

82101 

82110 

82111 

83900 

83901 

83902 

83903 

83904 

83905 

83906 

83907 

83908 

83910 

83911 

83912 

83913 

83914 

83915 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

83916 

83917 

83918 

8500 

85011 

85012 

8502 

8503 

8504 

8505 

8509 

85100 

85101 

85102 

85103 

85104 

85105 

85106 

85109 

85110 

85111 

85112 

85113 

85114 

85115 

85116 

85119 

85120 

85121 

85122 

85123 

85124 

85125 

85126 

85129 

85130 

85131 

85132 

85133 

85134 

85135 

85136 

85139 

85140 

85141 

85142 

85143 

85144 

85145 

85146 

85149 

85150 

85151 

85152 

85153 

85154 

85155 

85156 

85159 

85160 

85161 

85162 

85163 

85164 

85165 

85166 

85169 

85170 

85171 

85172 

85173 

85174 

85175 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48269 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

85176 

85179 

85180 

85181 

85182 

85183 

85184 

85185 

85186 

85189 

85190 

85191 

85192 

85193 

85194 

85195 

85196 

85199 

85200 

85201 

85202 

85203 

85204 

85205 

85206 

85209 

85210 

85211 

85212 

85213 

85214 

85215 

85216 

85219 

85220 

85221 

85222 

85223 

85224 

85225 

85226 

85229 

85230 

85231 

85232 

85233 

85234 

85235 

85236 

85239 

85240 

85241 

85242 

85243 

85244 

85245 

85246 

85249 

85250 

85251 

85252 

85253 

85254 

85255 

85256 

85259 

85300 

85301 

85302 

85303 

85304 

85305 

85306 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

85309 

85310 

85311 

85312 

85313 

85314 

85315 

85316 

85319 

85400 

85401 

85402 

85403 

85404 

85405 

85406 

85409 

85410 

85411 

85412 

85413 

85414 

85415 

85416 

85419 

8600 

8601 

8602 

8603 

8604 

8605 

86101 

86102 

86103 

86110 

86111 

86112 

86113 

86122 

86130 

86131 

86132 

8621 

86221 

86222 

86229 

86231 

86232 

86239 

8629 

8631 

86330 

86331 

86339 

86350 

86351 

86352 

86353 

86354 

86355 

86356 

86359 

86390 

86391 

86392 

86393 

86394 

86395 

86399 

86400 

86401 

86402 

86403 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

86404 

86405 

86409 

86410 

86411 

86412 

86413 

86414 

86415 

86419 

86500 

86501 

86502 

86503 

86504 

86509 

86510 

86511 

86512 

86513 

86514 

86519 

86600 

86601 

86602 

86603 

86610 

86611 

86612 

86613 

8670 

8671 

8672 

8673 

8674 

8675 

8676 

8677 

8678 

8679 

86800 

86801 

86802 

86803 

86804 

86809 

86810 

86811 

86812 

86813 

86814 

86819 

8690 

8691 

8703 

8704 

8708 

8709 

8710 

8711 

8712 

8713 

8714 

8719 

87272 

87273 

87274 

87333 

8739 

87400 

87401 

87402 

87410 


bajohnson on PROD1PC67 with RULES2
48270 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

87411 

87412 

8743 

8745 

8750 

8751 

8870 

8871 

8872 

8873 

8874 

8875 

8876 

8877 

8960 

8961 

8962 

8963 

8970 

8971 

8972 

8973 

8974 

8975 

8976 

8977 

90000 

90001 

90002 

90003 

9001 

90081 

90082 

90089 

9009 

9010 

9011 

9012 

9013 

90141 

90142 

90183 

9020 

90210 

90211 

90219 

90220 

90222 

90223 

90224 

90225 

90226 

90227 

90229 

90231 

90232 

90233 

90234 

90239 

90240 

90241 

90242 

90249 

90250 

90251 

90252 

90253 

90254 

90259 

90287 

9251 

9252 

9290 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

95200 

95201 

95202 

95203 

95204 

95205 

95206 

95207 

95208 

95209 

95210 

95211 

95212 

95213 

95214 

95215 

95216 

95217 

95218 

95219 

9522 

9523 

9524 

9528 

9529 

9530 

9531 

9532 

9533 

9534 

9535 

9538 

9539 

9580 

9581 

9582 

9583 

9584 

9585 

9587 

*95891 

80000 

80001 

80002 

80003 

80004 

80005 

80006 

80009 

80010 

80011 

80012 

80013 

80014 

80015 

80016 

80019 

80020 

80021 

80022 

80023 

80024 

80025 

80026 

80029 

80030 

80031 

80032 

80033 

80034 

80035 

80036 

80039 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80040 

80041 

80042 

80043 

80044 

80045 

80046 

80049 

80050 

80051 

80052 

80053 

80054 

80055 

80056 

80059 

80060 

80061 

80062 

80063 

80064 

80065 

80066 

80069 

80070 

80071 

80072 

80073 

80074 

80075 

80076 

80079 

80080 

80081 

80082 

80083 

80084 

80085 

80086 

80089 

80090 

80091 

80092 

80093 

80094 

80095 

80096 

80099 

80100 

80101 

80102 

80103 

80104 

80105 

80106 

80109 

80110 

80111 

80112 

80113 

80114 

80115 

80116 

80119 

80120 

80121 

80122 

80123 

80124 

80125 

80126 

80129 

80130 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48271 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80131 

80132 

80133 

80134 

80135 

80136 

80139 

80140 

80141 

80142 

80143 

80144 

80145 

80146 

80149 

80150 

80151 

80152 

80153 

80154 

80155 

80156 

80159 

80160 

80161 

80162 

80163 

80164 

80165 

80166 

80169 

80170 

80171 

80172 

80173 

80174 

80175 

80176 

80179 

80180 

80181 

80182 

80183 

80184 

80185 

80186 

80189 

80190 

80191 

80192 

80193 

80194 

80195 

80196 

80199 

8021 

80220 

80221 

80222 

80223 

80224 

80225 

80226 

80227 

80228 

80229 

80230 

80231 

80232 

80233 

80234 

80235 

80236 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80237 

80238 

80239 

8024 

8025 

8026 

8027 

8028 

8029 

80300 

80301 

80302 

80303 

80304 

80305 

80306 

80309 

80310 

80311 

80312 

80313 

80314 

80315 

80316 

80319 

80320 

80321 

80322 

80323 

80324 

80325 

80326 

80329 

80330 

80331 

80332 

80333 

80334 

80335 

80336 

80339 

80340 

80341 

80342 

80343 

80344 

80345 

80346 

80349 

80350 

80351 

80352 

80353 

80354 

80355 

80356 

80359 

80360 

80361 

80362 

80363 

80364 

80365 

80366 

80369 

80370 

80371 

80372 

80373 

80374 

80375 

80376 

80379 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80380 

80381 

80382 

80383 

80384 

80385 

80386 

80389 

80390 

80391 

80392 

80393 

80394 

80395 

80396 

80399 

80400 

80401 

80402 

80403 

80404 

80405 

80406 

80409 

80410 

80411 

80412 

80413 

80414 

80415 

80416 

80419 

80420 

80421 

80422 

80423 

80424 

80425 

80426 

80429 

80430 

80431 

80432 

80433 

80434 

80435 

80436 

80439 

80440 

80441 

80442 

80443 

80444 

80445 

80446 

80449 

80450 

80451 

80452 

80453 

80454 

80455 

80456 

80459 

80460 

80461 

80462 

80463 

80464 

80465 

80466 

80469 

80470 


bajohnson on PROD1PC67 with RULES2
48272 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80471 

80472 

80473 

80474 

80475 

80476 

80479 

80480 

80481 

80482 

80483 

80484 

80485 

80486 

80489 

80490 

80491 

80492 

80493 

80494 

80495 

80496 

80499 

80500 

80501 

80502 

80503 

80504 

80505 

80506 

80507 

80508 

80510 

80511 

80512 

80513 

80514 

80515 

80516 

80517 

80518 

8052 

8053 

8054 

8055 

8056 

8057 

8058 

8059 

80600 

80601 

80602 

80603 

80604 

80605 

80606 

80607 

80608 

80609 

80610 

80611 

80612 

80613 

80614 

80615 

80616 

80617 

80618 

80619 

80620 

80621 

80622 

80623 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80624 

80625 

80626 

80627 

80628 

80629 

80630 

80631 

80632 

80633 

80634 

80635 

80636 

80637 

80638 

80639 

8064 

8065 

80660 

80661 

80662 

80669 

80670 

80671 

80672 

80679 

8068 

8069 

80704 

80705 

80706 

80707 

80708 

80709 

80710 

80711 

80712 

80713 

80714 

80715 

80716 

80717 

80718 

80719 

8072 

8073 

8074 

8075 

8076 

8080 

8081 

8082 

8083 

80843 

80849 

80851 

80852 

80853 

80859 

8088 

8089 

82000 

82001 

82002 

82003 

82009 

82010 

82011 

82012 

82013 

82019 

82020 

82021 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

82022 

82030 

82031 

82032 

8208 

8209 

82100 

82101 

82110 

82111 

83900 

83901 

83902 

83903 

83904 

83905 

83906 

83907 

83908 

83910 

83911 

83912 

83913 

83914 

83915 

83916 

83917 

83918 

8500 

85011 

85012 

8502 

8503 

8504 

8505 

8509 

85100 

85101 

85102 

85103 

85104 

85105 

85106 

85109 

85110 

85111 

85112 

85113 

85114 

85115 

85116 

85119 

85120 

85121 

85122 

85123 

85124 

85125 

85126 

85129 

85130 

85131 

85132 

85133 

85134 

85135 

85136 

85139 

85140 

85141 

85142 

85143 

85144 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48273 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

85145 

85146 

85149 

85150 

85151 

85152 

85153 

85154 

85155 

85156 

85159 

85160 

85161 

85162 

85163 

85164 

85165 

85166 

85169 

85170 

85171 

85172 

85173 

85174 

85175 

85176 

85179 

85180 

85181 

85182 

85183 

85184 

85185 

85186 

85189 

85190 

85191 

85192 

85193 

85194 

85195 

85196 

85199 

85200 

85201 

85202 

85203 

85204 

85205 

85206 

85209 

85210 

85211 

85212 

85213 

85214 

85215 

85216 

85219 

85220 

85221 

85222 

85223 

85224 

85225 

85226 

85229 

85230 

85231 

85232 

85233 

85234 

85235 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

85236 

85239 

85240 

85241 

85242 

85243 

85244 

85245 

85246 

85249 

85250 

85251 

85252 

85253 

85254 

85255 

85256 

85259 

85300 

85301 

85302 

85303 

85304 

85305 

85306 

85309 

85310 

85311 

85312 

85313 

85314 

85315 

85316 

85319 

85400 

85401 

85402 

85403 

85404 

85405 

85406 

85409 

85410 

85411 

85412 

85413 

85414 

85415 

85416 

85419 

8600 

8601 

8602 

8603 

8604 

8605 

86101 

86102 

86103 

86110 

86111 

86112 

86113 

86122 

86130 

86131 

86132 

8621 

86221 

86222 

86229 

86231 

86232 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

86239 

8629 

8631 

86330 

86331 

86339 

86350 

86351 

86352 

86353 

86354 

86355 

86356 

86359 

86390 

86391 

86392 

86393 

86394 

86395 

86399 

86400 

86401 

86402 

86403 

86404 

86405 

86409 

86410 

86411 

86412 

86413 

86414 

86415 

86419 

86500 

86501 

86502 

86503 

86504 

86509 

86510 

86511 

86512 

86513 

86514 

86519 

86600 

86601 

86602 

86603 

86610 

86611 

86612 

86613 

8670 

8671 

8672 

8673 

8674 

8675 

8676 

8677 

8678 

8679 

86800 

86801 

86802 

86803 

86804 

86809 

86810 

86811 


bajohnson on PROD1PC67 with RULES2
48274 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

86812 

86813 

86814 

86819 

8690 

8691 

8703 

8704 

8708 

8709 

8710 

8711 

8712 

8713 

8714 

8719 

87272 

87273 

87274 

87333 

8739 

87400 

87401 

87402 

87410 

87411 

87412 

8743 

8745 

8750 

8751 

8870 

8871 

8872 

8873 

8874 

8875 

8876 

8877 

8960 

8961 

8962 

8963 

8970 

8971 

8972 

8973 

8974 

8975 

8976 

8977 

90000 

90001 

90002 

90003 

9001 

90081 

90082 

90089 

9009 

9010 

9011 

9012 

9013 

90141 

90142 

90183 

9020 

90210 

90211 

90219 

90220 

90222 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

90223 

90224 

90225 

90226 

90227 

90229 

90231 

90232 

90233 

90234 

90239 

90240 

90241 

90242 

90249 

90250 

90251 

90252 

90253 

90254 

90259 

90287 

9251 

9252 

9290 

95200 

95201 

95202 

95203 

95204 

95205 

95206 

95207 

95208 

95209 

95210 

95211 

95212 

95213 

95214 

95215 

95216 

95217 

95218 

95219 

9522 

9523 

9524 

9528 

9529 

9530 

9531 

9532 

9533 

9534 

9535 

9538 

9539 

9580 

9581 

9582 

9583 

9584 

9585 

9587 

*95892 

80000 

80001 

80002 

80003 

80004 

80005 

80006 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80009 

80010 

80011 

80012 

80013 

80014 

80015 

80016 

80019 

80020 

80021 

80022 

80023 

80024 

80025 

80026 

80029 

80030 

80031 

80032 

80033 

80034 

80035 

80036 

80039 

80040 

80041 

80042 

80043 

80044 

80045 

80046 

80049 

80050 

80051 

80052 

80053 

80054 

80055 

80056 

80059 

80060 

80061 

80062 

80063 

80064 

80065 

80066 

80069 

80070 

80071 

80072 

80073 

80074 

80075 

80076 

80079 

80080 

80081 

80082 

80083 

80084 

80085 

80086 

80089 

80090 

80091 

80092 

80093 

80094 

80095 

80096 

80099 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48275 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80100 

80101 

80102 

80103 

80104 

80105 

80106 

80109 

80110 

80111 

80112 

80113 

80114 

80115 

80116 

80119 

80120 

80121 

80122 

80123 

80124 

80125 

80126 

80129 

80130 

80131 

80132 

80133 

80134 

80135 

80136 

80139 

80140 

80141 

80142 

80143 

80144 

80145 

80146 

80149 

80150 

80151 

80152 

80153 

80154 

80155 

80156 

80159 

80160 

80161 

80162 

80163 

80164 

80165 

80166 

80169 

80170 

80171 

80172 

80173 

80174 

80175 

80176 

80179 

80180 

80181 

80182 

80183 

80184 

80185 

80186 

80189 

80190 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80191 

80192 

80193 

80194 

80195 

80196 

80199 

8021 

80220 

80221 

80222 

80223 

80224 

80225 

80226 

80227 

80228 

80229 

80230 

80231 

80232 

80233 

80234 

80235 

80236 

80237 

80238 

80239 

8024 

8025 

8026 

8027 

8028 

8029 

80300 

80301 

80302 

80303 

80304 

80305 

80306 

80309 

80310 

80311 

80312 

80313 

80314 

80315 

80316 

80319 

80320 

80321 

80322 

80323 

80324 

80325 

80326 

80329 

80330 

80331 

80332 

80333 

80334 

80335 

80336 

80339 

80340 

80341 

80342 

80343 

80344 

80345 

80346 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80349 

80350 

80351 

80352 

80353 

80354 

80355 

80356 

80359 

80360 

80361 

80362 

80363 

80364 

80365 

80366 

80369 

80370 

80371 

80372 

80373 

80374 

80375 

80376 

80379 

80380 

80381 

80382 

80383 

80384 

80385 

80386 

80389 

80390 

80391 

80392 

80393 

80394 

80395 

80396 

80399 

80400 

80401 

80402 

80403 

80404 

80405 

80406 

80409 

80410 

80411 

80412 

80413 

80414 

80415 

80416 

80419 

80420 

80421 

80422 

80423 

80424 

80425 

80426 

80429 

80430 

80431 

80432 

80433 

80434 

80435 

80436 

80439 


bajohnson on PROD1PC67 with RULES2
48276 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80440 

80441 

80442 

80443 

80444 

80445 

80446 

80449 

80450 

80451 

80452 

80453 

80454 

80455 

80456 

80459 

80460 

80461 

80462 

80463 

80464 

80465 

80466 

80469 

80470 

80471 

80472 

80473 

80474 

80475 

80476 

80479 

80480 

80481 

80482 

80483 

80484 

80485 

80486 

80489 

80490 

80491 

80492 

80493 

80494 

80495 

80496 

80499 

80500 

80501 

80502 

80503 

80504 

80505 

80506 

80507 

80508 

80510 

80511 

80512 

80513 

80514 

80515 

80516 

80517 

80518 

8052 

8053 

8054 

8055 

8056 

8057 

8058 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

8059 

80600 

80601 

80602 

80603 

80604 

80605 

80606 

80607 

80608 

80609 

80610 

80611 

80612 

80613 

80614 

80615 

80616 

80617 

80618 

80619 

80620 

80621 

80622 

80623 

80624 

80625 

80626 

80627 

80628 

80629 

80630 

80631 

80632 

80633 

80634 

80635 

80636 

80637 

80638 

80639 

8064 

8065 

80660 

80661 

80662 

80669 

80670 

80671 

80672 

80679 

8068 

8069 

80704 

80705 

80706 

80707 

80708 

80709 

80710 

80711 

80712 

80713 

80714 

80715 

80716 

80717 

80718 

80719 

8072 

8073 

8074 

8075 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

8076 

8080 

8081 

8082 

8083 

80843 

80849 

80851 

80852 

80853 

80859 

8088 

8089 

82000 

82001 

82002 

82003 

82009 

82010 

82011 

82012 

82013 

82019 

82020 

82021 

82022 

82030 

82031 

82032 

8208 

8209 

82100 

82101 

82110 

82111 

83900 

83901 

83902 

83903 

83904 

83905 

83906 

83907 

83908 

83910 

83911 

83912 

83913 

83914 

83915 

83916 

83917 

83918 

8500 

85011 

85012 

8502 

8503 

8504 

8505 

8509 

85100 

85101 

85102 

85103 

85104 

85105 

85106 

85109 

85110 

85111 

85112 

85113 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48277 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

85114 

85115 

85116 

85119 

85120 

85121 

85122 

85123 

85124 

85125 

85126 

85129 

85130 

85131 

85132 

85133 

85134 

85135 

85136 

85139 

85140 

85141 

85142 

85143 

85144 

85145 

85146 

85149 

85150 

85151 

85152 

85153 

85154 

85155 

85156 

85159 

85160 

85161 

85162 

85163 

85164 

85165 

85166 

85169 

85170 

85171 

85172 

85173 

85174 

85175 

85176 

85179 

85180 

85181 

85182 

85183 

85184 

85185 

85186 

85189 

85190 

85191 

85192 

85193 

85194 

85195 

85196 

85199 

85200 

85201 

85202 

85203 

85204 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

85205 

85206 

85209 

85210 

85211 

85212 

85213 

85214 

85215 

85216 

85219 

85220 

85221 

85222 

85223 

85224 

85225 

85226 

85229 

85230 

85231 

85232 

85233 

85234 

85235 

85236 

85239 

85240 

85241 

85242 

85243 

85244 

85245 

85246 

85249 

85250 

85251 

85252 

85253 

85254 

85255 

85256 

85259 

85300 

85301 

85302 

85303 

85304 

85305 

85306 

85309 

85310 

85311 

85312 

85313 

85314 

85315 

85316 

85319 

85400 

85401 

85402 

85403 

85404 

85405 

85406 

85409 

85410 

85411 

85412 

85413 

85414 

85415 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

85416 

85419 

8600 

8601 

8602 

8603 

8604 

8605 

86101 

86102 

86103 

86110 

86111 

86112 

86113 

86122 

86130 

86131 

86132 

8621 

86221 

86222 

86229 

86231 

86232 

86239 

8629 

8631 

86330 

86331 

86339 

86350 

86351 

86352 

86353 

86354 

86355 

86356 

86359 

86390 

86391 

86392 

86393 

86394 

86395 

86399 

86400 

86401 

86402 

86403 

86404 

86405 

86409 

86410 

86411 

86412 

86413 

86414 

86415 

86419 

86500 

86501 

86502 

86503 

86504 

86509 

86510 

86511 

86512 

86513 

86514 

86519 

86600 


bajohnson on PROD1PC67 with RULES2
48278 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

86601 

86602 

86603 

86610 

86611 

86612 

86613 

8670 

8671 

8672 

8673 

8674 

8675 

8676 

8677 

8678 

8679 

86800 

86801 

86802 

86803 

86804 

86809 

86810 

86811 

86812 

86813 

86814 

86819 

8690 

8691 

8703 

8704 

8708 

8709 

8710 

8711 

8712 

8713 

8714 

8719 

87272 

87273 

87274 

87333 

8739 

87400 

87401 

87402 

87410 

87411 

87412 

8743 

8745 

8750 

8751 

8870 

8871 

8872 

8873 

8874 

8875 

8876 

8877 

8960 

8961 

8962 

8963 

8970 

8971 

8972 

8973 

8974 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

8975 

8976 

8977 

90000 

90001 

90002 

90003 

9001 

90081 

90082 

90089 

9009 

9010 

9011 

9012 

9013 

90141 

90142 

90183 

9020 

90210 

90211 

90219 

90220 

90222 

90223 

90224 

90225 

90226 

90227 

90229 

90231 

90232 

90233 

90234 

90239 

90240 

90241 

90242 

90249 

90250 

90251 

90252 

90253 

90254 

90259 

90287 

9251 

9252 

9290 

95200 

95201 

95202 

95203 

95204 

95205 

95206 

95207 

95208 

95209 

95210 

95211 

95212 

95213 

95214 

95215 

95216 

95217 

95218 

95219 

9522 

9523 

9524 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

9528 

9529 

9530 

9531 

9532 

9533 

9534 

9535 

9538 

9539 

9580 

9581 

9582 

9583 

9584 

9585 

9587 

*95893 

80000 

80001 

80002 

80003 

80004 

80005 

80006 

80009 

80010 

80011 

80012 

80013 

80014 

80015 

80016 

80019 

80020 

80021 

80022 

80023 

80024 

80025 

80026 

80029 

80030 

80031 

80032 

80033 

80034 

80035 

80036 

80039 

80040 

80041 

80042 

80043 

80044 

80045 

80046 

80049 

80050 

80051 

80052 

80053 

80054 

80055 

80056 

80059 

80060 

80061 

80062 

80063 

80064 

80065 

80066 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48279 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80069 

80070 

80071 

80072 

80073 

80074 

80075 

80076 

80079 

80080 

80081 

80082 

80083 

80084 

80085 

80086 

80089 

80090 

80091 

80092 

80093 

80094 

80095 

80096 

80099 

80100 

80101 

80102 

80103 

80104 

80105 

80106 

80109 

80110 

80111 

80112 

80113 

80114 

80115 

80116 

80119 

80120 

80121 

80122 

80123 

80124 

80125 

80126 

80129 

80130 

80131 

80132 

80133 

80134 

80135 

80136 

80139 

80140 

80141 

80142 

80143 

80144 

80145 

80146 

80149 

80150 

80151 

80152 

80153 

80154 

80155 

80156 

80159 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80160 

80161 

80162 

80163 

80164 

80165 

80166 

80169 

80170 

80171 

80172 

80173 

80174 

80175 

80176 

80179 

80180 

80181 

80182 

80183 

80184 

80185 

80186 

80189 

80190 

80191 

80192 

80193 

80194 

80195 

80196 

80199 

8021 

80220 

80221 

80222 

80223 

80224 

80225 

80226 

80227 

80228 

80229 

80230 

80231 

80232 

80233 

80234 

80235 

80236 

80237 

80238 

80239 

8024 

8025 

8026 

8027 

8028 

8029 

80300 

80301 

80302 

80303 

80304 

80305 

80306 

80309 

80310 

80311 

80312 

80313 

80314 

80315 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80316 

80319 

80320 

80321 

80322 

80323 

80324 

80325 

80326 

80329 

80330 

80331 

80332 

80333 

80334 

80335 

80336 

80339 

80340 

80341 

80342 

80343 

80344 

80345 

80346 

80349 

80350 

80351 

80352 

80353 

80354 

80355 

80356 

80359 

80360 

80361 

80362 

80363 

80364 

80365 

80366 

80369 

80370 

80371 

80372 

80373 

80374 

80375 

80376 

80379 

80380 

80381 

80382 

80383 

80384 

80385 

80386 

80389 

80390 

80391 

80392 

80393 

80394 

80395 

80396 

80399 

80400 

80401 

80402 

80403 

80404 

80405 

80406 


bajohnson on PROD1PC67 with RULES2
48280 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80409 

80410 

80411 

80412 

80413 

80414 

80415 

80416 

80419 

80420 

80421 

80422 

80423 

80424 

80425 

80426 

80429 

80430 

80431 

80432 

80433 

80434 

80435 

80436 

80439 

80440 

80441 

80442 

80443 

80444 

80445 

80446 

80449 

80450 

80451 

80452 

80453 

80454 

80455 

80456 

80459 

80460 

80461 

80462 

80463 

80464 

80465 

80466 

80469 

80470 

80471 

80472 

80473 

80474 

80475 

80476 

80479 

80480 

80481 

80482 

80483 

80484 

80485 

80486 

80489 

80490 

80491 

80492 

80493 

80494 

80495 

80496 

80499 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80500 

80501 

80502 

80503 

80504 

80505 

80506 

80507 

80508 

80510 

80511 

80512 

80513 

80514 

80515 

80516 

80517 

80518 

8052 

8053 

8054 

8055 

8056 

8057 

8058 

8059 

80600 

80601 

80602 

80603 

80604 

80605 

80606 

80607 

80608 

80609 

80610 

80611 

80612 

80613 

80614 

80615 

80616 

80617 

80618 

80619 

80620 

80621 

80622 

80623 

80624 

80625 

80626 

80627 

80628 

80629 

80630 

80631 

80632 

80633 

80634 

80635 

80636 

80637 

80638 

80639 

8064 

8065 

80660 

80661 

80662 

80669 

80670 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80671 

80672 

80679 

8068 

8069 

80704 

80705 

80706 

80707 

80708 

80709 

80710 

80711 

80712 

80713 

80714 

80715 

80716 

80717 

80718 

80719 

8072 

8073 

8074 

8075 

8076 

8080 

8081 

8082 

8083 

80843 

80849 

80851 

80852 

80853 

80859 

8088 

8089 

82000 

82001 

82002 

82003 

82009 

82010 

82011 

82012 

82013 

82019 

82020 

82021 

82022 

82030 

82031 

82032 

8208 

8209 

82100 

82101 

82110 

82111 

83900 

83901 

83902 

83903 

83904 

83905 

83906 

83907 

83908 

83910 

83911 

83912 

83913 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48281 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

83914 

83915 

83916 

83917 

83918 

8500 

85011 

85012 

8502 

8503 

8504 

8505 

8509 

85100 

85101 

85102 

85103 

85104 

85105 

85106 

85109 

85110 

85111 

85112 

85113 

85114 

85115 

85116 

85119 

85120 

85121 

85122 

85123 

85124 

85125 

85126 

85129 

85130 

85131 

85132 

85133 

85134 

85135 

85136 

85139 

85140 

85141 

85142 

85143 

85144 

85145 

85146 

85149 

85150 

85151 

85152 

85153 

85154 

85155 

85156 

85159 

85160 

85161 

85162 

85163 

85164 

85165 

85166 

85169 

85170 

85171 

85172 

85173 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

85174 

85175 

85176 

85179 

85180 

85181 

85182 

85183 

85184 

85185 

85186 

85189 

85190 

85191 

85192 

85193 

85194 

85195 

85196 

85199 

85200 

85201 

85202 

85203 

85204 

85205 

85206 

85209 

85210 

85211 

85212 

85213 

85214 

85215 

85216 

85219 

85220 

85221 

85222 

85223 

85224 

85225 

85226 

85229 

85230 

85231 

85232 

85233 

85234 

85235 

85236 

85239 

85240 

85241 

85242 

85243 

85244 

85245 

85246 

85249 

85250 

85251 

85252 

85253 

85254 

85255 

85256 

85259 

85300 

85301 

85302 

85303 

85304 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

85305 

85306 

85309 

85310 

85311 

85312 

85313 

85314 

85315 

85316 

85319 

85400 

85401 

85402 

85403 

85404 

85405 

85406 

85409 

85410 

85411 

85412 

85413 

85414 

85415 

85416 

85419 

8600 

8601 

8602 

8603 

8604 

8605 

86101 

86102 

86103 

86110 

86111 

86112 

86113 

86122 

86130 

86131 

86132 

8621 

86221 

86222 

86229 

86231 

86232 

86239 

8629 

8631 

86330 

86331 

86339 

86350 

86351 

86352 

86353 

86354 

86355 

86356 

86359 

86390 

86391 

86392 

86393 

86394 

86395 

86399 

86400 

86401 


bajohnson on PROD1PC67 with RULES2
48282 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

86402 

86403 

86404 

86405 

86409 

86410 

86411 

86412 

86413 

86414 

86415 

86419 

86500 

86501 

86502 

86503 

86504 

86509 

86510 

86511 

86512 

86513 

86514 

86519 

86600 

86601 

86602 

86603 

86610 

86611 

86612 

86613 

8670 

8671 

8672 

8673 

8674 

8675 

8676 

8677 

8678 

8679 

86800 

86801 

86802 

86803 

86804 

86809 

86810 

86811 

86812 

86813 

86814 

86819 

8690 

8691 

8703 

8704 

8708 

8709 

8710 

8711 

8712 

8713 

8714 

8719 

87272 

87273 

87274 

87333 

8739 

87400 

87401 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

87402 

87410 

87411 

87412 

8743 

8745 

8750 

8751 

8870 

8871 

8872 

8873 

8874 

8875 

8876 

8877 

8960 

8961 

8962 

8963 

8970 

8971 

8972 

8973 

8974 

8975 

8976 

8977 

90000 

90001 

90002 

90003 

9001 

90081 

90082 

90089 

9009 

9010 

9011 

9012 

9013 

90141 

90142 

90183 

9020 

90210 

90211 

90219 

90220 

90222 

90223 

90224 

90225 

90226 

90227 

90229 

90231 

90232 

90233 

90234 

90239 

90240 

90241 

90242 

90249 

90250 

90251 

90252 

90253 

90254 

90259 

90287 

9251 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

9252 

9290 

95200 

95201 

95202 

95203 

95204 

95205 

95206 

95207 

95208 

95209 

95210 

95211 

95212 

95213 

95214 

95215 

95216 

95217 

95218 

95219 

9522 

9523 

9524 

9528 

9529 

9530 

9531 

9532 

9533 

9534 

9535 

9538 

9539 

9580 

9581 

9582 

9583 

9584 

9585 

9587 

*95899 

80000 

80001 

80002 

80003 

80004 

80005 

80006 

80009 

80010 

80011 

80012 

80013 

80014 

80015 

80016 

80019 

80020 

80021 

80022 

80023 

80024 

80025 

80026 

80029 

80030 

80031 

80032 

80033 

80034 

80035 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48283 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80036 

80039 

80040 

80041 

80042 

80043 

80044 

80045 

80046 

80049 

80050 

80051 

80052 

80053 

80054 

80055 

80056 

80059 

80060 

80061 

80062 

80063 

80064 

80065 

80066 

80069 

80070 

80071 

80072 

80073 

80074 

80075 

80076 

80079 

80080 

80081 

80082 

80083 

80084 

80085 

80086 

80089 

80090 

80091 

80092 

80093 

80094 

80095 

80096 

80099 

80100 

80101 

80102 

80103 

80104 

80105 

80106 

80109 

80110 

80111 

80112 

80113 

80114 

80115 

80116 

80119 

80120 

80121 

80122 

80123 

80124 

80125 

80126 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80129 

80130 

80131 

80132 

80133 

80134 

80135 

80136 

80139 

80140 

80141 

80142 

80143 

80144 

80145 

80146 

80149 

80150 

80151 

80152 

80153 

80154 

80155 

80156 

80159 

80160 

80161 

80162 

80163 

80164 

80165 

80166 

80169 

80170 

80171 

80172 

80173 

80174 

80175 

80176 

80179 

80180 

80181 

80182 

80183 

80184 

80185 

80186 

80189 

80190 

80191 

80192 

80193 

80194 

80195 

80196 

80199 

8021 

80220 

80221 

80222 

80223 

80224 

80225 

80226 

80227 

80228 

80229 

80230 

80231 

80232 

80233 

80234 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80235 

80236 

80237 

80238 

80239 

8024 

8025 

8026 

8027 

8028 

8029 

80300 

80301 

80302 

80303 

80304 

80305 

80306 

80309 

80310 

80311 

80312 

80313 

80314 

80315 

80316 

80319 

80320 

80321 

80322 

80323 

80324 

80325 

80326 

80329 

80330 

80331 

80332 

80333 

80334 

80335 

80336 

80339 

80340 

80341 

80342 

80343 

80344 

80345 

80346 

80349 

80350 

80351 

80352 

80353 

80354 

80355 

80356 

80359 

80360 

80361 

80362 

80363 

80364 

80365 

80366 

80369 

80370 

80371 

80372 

80373 

80374 

80375 


bajohnson on PROD1PC67 with RULES2
48284 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80376 

80379 

80380 

80381 

80382 

80383 

80384 

80385 

80386 

80389 

80390 

80391 

80392 

80393 

80394 

80395 

80396 

80399 

80400 

80401 

80402 

80403 

80404 

80405 

80406 

80409 

80410 

80411 

80412 

80413 

80414 

80415 

80416 

80419 

80420 

80421 

80422 

80423 

80424 

80425 

80426 

80429 

80430 

80431 

80432 

80433 

80434 

80435 

80436 

80439 

80440 

80441 

80442 

80443 

80444 

80445 

80446 

80449 

80450 

80451 

80452 

80453 

80454 

80455 

80456 

80459 

80460 

80461 

80462 

80463 

80464 

80465 

80466 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80469 

80470 

80471 

80472 

80473 

80474 

80475 

80476 

80479 

80480 

80481 

80482 

80483 

80484 

80485 

80486 

80489 

80490 

80491 

80492 

80493 

80494 

80495 

80496 

80499 

80500 

80501 

80502 

80503 

80504 

80505 

80506 

80507 

80508 

80510 

80511 

80512 

80513 

80514 

80515 

80516 

80517 

80518 

8052 

8053 

8054 

8055 

8056 

8057 

8058 

8059 

80600 

80601 

80602 

80603 

80604 

80605 

80606 

80607 

80608 

80609 

80610 

80611 

80612 

80613 

80614 

80615 

80616 

80617 

80618 

80619 

80620 

80621 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

80622 

80623 

80624 

80625 

80626 

80627 

80628 

80629 

80630 

80631 

80632 

80633 

80634 

80635 

80636 

80637 

80638 

80639 

8064 

8065 

80660 

80661 

80662 

80669 

80670 

80671 

80672 

80679 

8068 

8069 

80704 

80705 

80706 

80707 

80708 

80709 

80710 

80711 

80712 

80713 

80714 

80715 

80716 

80717 

80718 

80719 

8072 

8073 

8074 

8075 

8076 

8080 

8081 

8082 

8083 

80843 

80849 

80851 

80852 

80853 

80859 

8088 

8089 

82000 

82001 

82002 

82003 

82009 

82010 

82011 

82012 

82013 

82019 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48285 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

82020 

82021 

82022 

82030 

82031 

82032 

8208 

8209 

82100 

82101 

82110 

82111 

83900 

83901 

83902 

83903 

83904 

83905 

83906 

83907 

83908 

83910 

83911 

83912 

83913 

83914 

83915 

83916 

83917 

83918 

8500 

85011 

85012 

8502 

8503 

8504 

8505 

8509 

85100 

85101 

85102 

85103 

85104 

85105 

85106 

85109 

85110 

85111 

85112 

85113 

85114 

85115 

85116 

85119 

85120 

85121 

85122 

85123 

85124 

85125 

85126 

85129 

85130 

85131 

85132 

85133 

85134 

85135 

85136 

85139 

85140 

85141 

85142 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

85143 

85144 

85145 

85146 

85149 

85150 

85151 

85152 

85153 

85154 

85155 

85156 

85159 

85160 

85161 

85162 

85163 

85164 

85165 

85166 

85169 

85170 

85171 

85172 

85173 

85174 

85175 

85176 

85179 

85180 

85181 

85182 

85183 

85184 

85185 

85186 

85189 

85190 

85191 

85192 

85193 

85194 

85195 

85196 

85199 

85200 

85201 

85202 

85203 

85204 

85205 

85206 

85209 

85210 

85211 

85212 

85213 

85214 

85215 

85216 

85219 

85220 

85221 

85222 

85223 

85224 

85225 

85226 

85229 

85230 

85231 

85232 

85233 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

85234 

85235 

85236 

85239 

85240 

85241 

85242 

85243 

85244 

85245 

85246 

85249 

85250 

85251 

85252 

85253 

85254 

85255 

85256 

85259 

85300 

85301 

85302 

85303 

85304 

85305 

85306 

85309 

85310 

85311 

85312 

85313 

85314 

85315 

85316 

85319 

85400 

85401 

85402 

85403 

85404 

85405 

85406 

85409 

85410 

85411 

85412 

85413 

85414 

85415 

85416 

85419 

8600 

8601 

8602 

8603 

8604 

8605 

86101 

86102 

86103 

86110 

86111 

86112 

86113 

86122 

86130 

86131 

86132 

8621 

86221 

86222 

86229 


bajohnson on PROD1PC67 with RULES2
48286 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

86231 

86232 

86239 

8629 

8631 

86330 

86331 

86339 

86350 

86351 

86352 

86353 

86354 

86355 

86356 

86359 

86390 

86391 

86392 

86393 

86394 

86395 

86399 

86400 

86401 

86402 

86403 

86404 

86405 

86409 

86410 

86411 

86412 

86413 

86414 

86415 

86419 

86500 

86501 

86502 

86503 

86504 

86509 

86510 

86511 

86512 

86513 

86514 

86519 

86600 

86601 

86602 

86603 

86610 

86611 

86612 

86613 

8670 

8671 

8672 

8673 

8674 

8675 

8676 

8677 

8678 

8679 

86800 

86801 

86802 

86803 

86804 

86809 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

86810 

86811 

86812 

86813 

86814 

86819 

8690 

8691 

8703 

8704 

8708 

8709 

8710 

8711 

8712 

8713 

8714 

8719 

87272 

87273 

87274 

87333 

8739 

87400 

87401 

87402 

87410 

87411 

87412 

8743 

8745 

8750 

8751 

8870 

8871 

8872 

8873 

8874 

8875 

8876 

8877 

8960 

8961 

8962 

8963 

8970 

8971 

8972 

8973 

8974 

8975 

8976 

8977 

90000 

90001 

90002 

90003 

9001 

90081 

90082 

90089 

9009 

9010 

9011 

9012 

9013 

90141 

90142 

90183 

9020 

90210 

90211 

90219 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

90220 

90222 

90223 

90224 

90225 

90226 

90227 

90229 

90231 

90232 

90233 

90234 

90239 

90240 

90241 

90242 

90249 

90250 

90251 

90252 

90253 

90254 

90259 

90287 

9251 

9252 

9290 

95200 

95201 

95202 

95203 

95204 

95205 

95206 

95207 

95208 

95209 

95210 

95211 

95212 

95213 

95214 

95215 

95216 

95217 

95218 

95219 

9522 

9523 

9524 

9528 

9529 

9530 

9531 

9532 

9533 

9534 

9535 

9538 

9539 

9580 

9581 

9582 

9583 

9584 

9585 

9587 

*9973 

5187 

*99791 

5187 

*99799 

5187 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48287 

TABLE 6G.—ADDITIONS TO THE CC 

EXCLUSIONS LIST—Continued 

*99881 

5187 

*99883 

5187 

*99889 

5187 

*9989 

5187 

TABLE 6H.—DELETIONS FROM THE CC 

EXCLUSIONS LIST

[CCs that are deleted from the list are in this 

Table 6H—Deletions to the CC Exclusions 

List. Each of the principal diagnoses is 

shown with an asterisk, and the revisions to 

the CC Exclusions List are provided in an 

indented column immediately following the 

affected principal diagnosis.] 

*2800 

2840 

*2801 

2840 

*2808 

2840 

*2809 

2840 

*2810 

2840 

*2811 

2840 

*2812 

2840 

*2813 

2840 

*2814 

2840 

*2818 

2840 

*2819 

2840 

*2820 

2840 

*2821 

2840 

*2822 

2840 

*2823 

2840 

*28241 

2840 

*28242 

2840 

*28249 

2840 

*2825 

2840 

*28260 

2840 

*28261 

2840 

*28262 

2840 

*28263 

2840 

*28264 

2840 

*28268 

2840 

*28269 

2840 

*2827 

2840 

TABLE 6H.—DELETIONS FROM THE CC 

EXCLUSIONS LIST—Continued 

[CCs that are deleted from the list are in this 

Table 6H—Deletions to the CC Exclusions 

List. Each of the principal diagnoses is 

shown with an asterisk, and the revisions to 

the CC Exclusions List are provided in an 

indented column immediately following the 

affected principal diagnosis.] 

*2828 

2840 

*2829 

2840 

*2830 

2840 

*28310 

2840 

*28311 

2840 

*28319 

2840 

*2832 

2840 

*2839 

2840 

*2840 

2800 

2814 

2818 

28241 

28242 

28249 

28260 

28261 

28262 

28263 

28264 

28268 

28269 

2830 

28310 

28311 

28319 

2832 

2839 

2840 

2848 

2849 

2850 

2851 

*2848 

2840 

*2849 

2840 

*2850 

2840 

*2851 

2840 

*28521 

2840 

*28522 

2840 

*28529 

2840 

*2858 

2840 

*2859 

2840 

*2880 

2880 

2881 

28981 

28982 

*2881 

2880 

TABLE 6H.—DELETIONS FROM THE CC 

EXCLUSIONS LIST—Continued 

[CCs that are deleted from the list are in this 

Table 6H—Deletions to the CC Exclusions 

List. Each of the principal diagnoses is 

shown with an asterisk, and the revisions to 

the CC Exclusions List are provided in an 

indented column immediately following the 

affected principal diagnosis.] 

*2882 

2880 

*2883 

2880 

*2888 

2880 

*2889 

2880 

*28981 

2840 

2880 

*28982 

2840 

2880 

*28989 

2840 

2880 

*2899 

2840 

2880 

*3230 

34982 

*3234 

34982 

*3235 

34982 

*3236 

34982 

*3237 

34982 

*3238 

34982 

*3337 

7817 

*5173 

2840 

*5191 

51900 

51901 

51902 

51909 

*5280 

5283 

*6168 

6140 

6143 

6145 

6150 

6163 

6164 

*6298 

6140 

6143 

6145 

6150 

6163 

6164 

6207 

*7758 

00841 

00842 

00843 

00844 

00845 

00846 

00847 


bajohnson on PROD1PC67 with RULES2
48288 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 6H.—DELETIONS FROM THE CC 

EXCLUSIONS LIST—Continued 

[CCs that are deleted from the list are in this 

Table 6H—Deletions to the CC Exclusions 

List. Each of the principal diagnoses is 

shown with an asterisk, and the revisions to 

the CC Exclusions List are provided in an 

indented column immediately following the 

affected principal diagnosis.] 

00849 

7751 

7752 

TABLE 6H.—DELETIONS FROM THE CC 

EXCLUSIONS LIST—Continued 

[CCs that are deleted from the list are in this 

Table 6H—Deletions to the CC Exclusions 

List. Each of the principal diagnoses is 

shown with an asterisk, and the revisions to 

the CC Exclusions List are provided in an 

indented column immediately following the 

affected principal diagnosis.] 

7753 

7754 

7755 

TABLE 6H.—DELETIONS FROM THE CC 

EXCLUSIONS LIST—Continued 

[CCs that are deleted from the list are in this 

Table 6H—Deletions to the CC Exclusions 

List. Each of the principal diagnoses is 

shown with an asterisk, and the revisions to 

the CC Exclusions List are provided in an 

indented column immediately following the 

affected principal diagnosis.] 

7756 

7757 

TABLE 7A.—MEDICARE PROSPECTIVE PAYMENT SYSTEM SELECTED PERCENTILE LENGTHS OF STAY FY 2005 MEDPAR 

UPDATE MARCH 2006 GROUPER V23.0 

DRG Number 

discharge 

Arithmetic 

mean LOS 

10th 

percentile 

25th 

percentile 

50th 

percentile 

75th 

percentile 

90th 

percentile 

1 ............................................................... 24,464 9.6076 2 4 7 12 19 

2 ............................................................... 10,338 4.3927 1 2 3 6 8 

3 ............................................................... 3 11.0000 4 4 8 21 21 

6 ............................................................... 288 3.0833 1 1 2 3 7 

7 ............................................................... 15,034 9.2559 2 4 7 12 19 

8 ............................................................... 3,441 2.7629 1 1 2 3 6 

9 ............................................................... 1,775 6.0248 1 3 4 7 11 

10 ............................................................. 19,639 5.9172 2 3 4 7 11 

11 ............................................................. 3,074 3.5501 1 2 3 5 7 

12 ............................................................. 56,196 5.3631 2 3 4 6 10 

13 ............................................................. 7,529 4.8515 2 3 4 6 8 

14 ............................................................. 278,864 5.3705 2 3 4 7 10 

15 ............................................................. 20,004 4.0156 1 2 3 5 7 

16 ............................................................. 17,310 6.3008 2 3 5 8 12 

17 ............................................................. 2,967 3.0334 1 1 2 4 6 

18 ............................................................. 33,512 5.1525 2 3 4 6 9 

19 ............................................................. 8,422 3.3749 1 2 3 4 6 

20 ............................................................. 6,409 9.8313 3 5 8 12 18 

21 ............................................................. 2,220 6.1752 2 3 5 8 12 

22 ............................................................. 3,169 5.0104 2 2 4 6 10 

23 ............................................................. 10,671 3.8995 1 2 3 5 7 

24 ............................................................. 63,246 4.6433 1 2 3 6 9 

25 ............................................................. 27,218 3.1280 1 2 2 4 6 

26 ............................................................. 25 3.8000 1 1 2 5 9 

27 ............................................................. 5,974 4.7370 1 1 3 6 10 

28 ............................................................. 19,919 5.5701 1 2 4 7 11 

29 ............................................................. 6,517 3.2118 1 1 3 4 6 

31 ............................................................. 5,043 3.9038 1 2 3 5 7 

32 ............................................................. 1,900 2.2716 1 1 2 3 4 

34 ............................................................. 27,478 4.7063 1 2 4 6 9 

35 ............................................................. 7,843 3.0360 1 1 3 4 5 

36 ............................................................. 1,045 1.7962 1 1 1 1 1 

37 ............................................................. 1,219 4.1132 1 1 3 5 8 

38 ............................................................. 50 2.8000 1 1 2 3 6 

39 ............................................................. 328 2.1220 1 1 1 2 3 

40 ............................................................. 1,188 4.2315 1 1 3 4 6 

42 ............................................................. 901 3.0844 1 1 2 3 5 

43 ............................................................. 125 2.9600 1 1 2 4 5 

44 ............................................................. 1,291 4.7506 2 3 4 6 8 

45 ............................................................. 2,771 3.0278 1 2 2 4 6 

46 ............................................................. 3,930 4.1913 1 2 3 5 8 

47 ............................................................. 1,308 3.0145 1 1 2 4 6 

49 ............................................................. 2,416 4.5219 1 2 3 5 9 

50 ............................................................. 2,026 1.8638 1 1 1 2 3 

51 ............................................................. 193 2.6684 1 1 1 3 5 

52 ............................................................. 316 1.6962 1 1 1 2 3 

53 ............................................................. 2,147 4.0051 1 1 2 5 9 

55 ............................................................. 1,370 2.8832 1 1 1 3 6 

56 ............................................................. 451 2.6785 1 1 2 3 5 

57 ............................................................. 888 3.1543 1 1 2 3 7 

59 ............................................................. 126 2.3730 1 1 2 3 5 

60 ............................................................. 3 1.6667 1 1 1 3 3 

61 ............................................................. 222 6.0541 1 1 4 8 13 

62 ............................................................. 4 1.5000 1 1 1 1 3 

63 ............................................................. 2,827 4.5313 1 1 3 6 10 

64 ............................................................. 3,234 6.2004 1 2 4 8 13 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48289 

TABLE 7A.—MEDICARE PROSPECTIVE PAYMENT SYSTEM SELECTED PERCENTILE LENGTHS OF STAY FY 2005 MEDPAR 

UPDATE MARCH 2006 GROUPER V23.0—Continued 

DRG Number 

discharge 

Arithmetic 

mean LOS 

10th 

percentile 

25th 

percentile 

50th 

percentile 

75th 

percentile 

90th 

percentile 

65 ............................................................. 40,495 2.7634 1 1 2 3 5 

66 ............................................................. 8,197 3.1080 1 1 2 4 6 

67 ............................................................. 379 3.6834 1 2 3 5 8 

68 ............................................................. 18,963 3.8500 1 2 3 5 7 

69 ............................................................. 5,104 2.9414 1 2 2 4 5 

70 ............................................................. 25 2.4000 1 1 2 3 4 

71 ............................................................. 70 4.3429 1 2 3 5 7 

72 ............................................................. 1,326 3.3205 1 2 3 4 6 

73 ............................................................. 9,961 4.2979 1 2 3 5 8 

74 ............................................................. 3 3.3333 3 3 3 4 4 

75 ............................................................. 46,867 9.5747 3 5 7 12 19 

76 ............................................................. 48,182 10.4832 3 5 8 13 20 

77 ............................................................. 2,096 4.4938 1 2 4 6 9 

78 ............................................................. 49,708 6.0925 2 4 5 7 10 

79 ............................................................. 160,452 8.0513 3 4 7 10 15 

80 ............................................................. 7,128 5.2173 2 3 4 6 9 

81 ............................................................. 6 6.1667 2 3 5 8 8 

82 ............................................................. 63,222 6.6658 2 3 5 9 13 

83 ............................................................. 7,154 5.1918 2 3 4 6 10 

84 ............................................................. 1,402 3.1284 1 2 3 4 5 

85 ............................................................. 22,231 6.1082 2 3 5 8 12 

86 ............................................................. 1,714 3.4568 1 2 3 4 7 

87 ............................................................. 96,725 6.3706 2 3 5 8 12 

88 ............................................................. 427,153 4.8563 2 3 4 6 9 

89 ............................................................. 554,440 5.5245 2 3 5 7 10 

90 ............................................................. 43,208 3.7030 1 2 3 5 6 

91 ............................................................. 53 3.4151 1 1 2 4 6 

92 ............................................................. 16,523 5.9402 2 3 5 7 11 

93 ............................................................. 1,436 3.7632 1 2 3 5 7 

94 ............................................................. 13,657 5.9022 2 3 5 8 12 

95 ............................................................. 1,576 3.3839 1 2 3 4 6 

96 ............................................................. 59,742 4.2995 2 2 4 5 7 

97 ............................................................. 26,592 3.3652 1 2 3 4 6 

98 ............................................................. 13 3.0769 2 2 2 4 6 

99 ............................................................. 21,402 3.0982 1 1 2 4 6 

100 ........................................................... 6,406 2.1071 1 1 2 3 4 

101 ........................................................... 23,399 4.1820 1 2 3 5 8 

102 ........................................................... 4,907 2.5345 1 1 2 3 5 

103 ........................................................... 884 35.1640 8 11 22 46 78 

104 ........................................................... 20,125 14.6458 6 8 12 18 26 

105 ........................................................... 32,635 9.9310 4 6 8 11 18 

106 ........................................................... 3,440 10.9392 5 7 9 13 18 

108 ........................................................... 8,759 10.7132 4 6 9 13 19 

110 ........................................................... 57,721 8.0026 1 3 6 10 16 

111 ........................................................... 10,783 3.1055 1 1 2 4 6 

113 ........................................................... 34,750 12.5640 4 6 10 15 24 

114 ........................................................... 7,960 8.3485 2 4 7 11 16 

117 ........................................................... 5,350 4.2781 1 1 2 5 9 

118 ........................................................... 7,634 3.0183 1 1 2 4 7 

119 ........................................................... 963 5.3998 1 1 3 7 13 

120 ........................................................... 33,561 8.9647 1 3 6 12 19 

121 ........................................................... 150,085 6.1981 2 3 5 8 11 

122 ........................................................... 54,555 3.2992 1 1 3 4 6 

123 ........................................................... 29,576 4.7318 1 1 3 6 11 

124 ........................................................... 120,562 4.3876 1 2 3 6 9 

125 ........................................................... 92,475 2.7008 1 1 2 3 5 

126 ........................................................... 5,424 10.6875 3 6 9 13 19 

127 ........................................................... 667,522 5.0851 2 3 4 6 9 

128 ........................................................... 4,213 5.1899 2 3 5 6 9 

129 ........................................................... 3,527 2.5373 1 1 1 2 5 

130 ........................................................... 87,554 5.3511 1 3 4 7 10 

131 ........................................................... 22,885 3.6965 1 2 3 5 6 

132 ........................................................... 101,433 2.8006 1 1 2 3 5 

133 ........................................................... 5,845 2.1384 1 1 2 3 4 

134 ........................................................... 39,838 3.1001 1 2 2 4 6 

135 ........................................................... 7,171 4.2924 1 2 3 5 8 

136 ........................................................... 939 2.6944 1 1 2 3 5 

138 ........................................................... 206,296 3.8764 1 2 3 5 7 

139 ........................................................... 73,965 2.4267 1 1 2 3 4 

140 ........................................................... 31,123 2.4049 1 1 2 3 4 


bajohnson on PROD1PC67 with RULES2
48290 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 7A.—MEDICARE PROSPECTIVE PAYMENT SYSTEM SELECTED PERCENTILE LENGTHS OF STAY FY 2005 MEDPAR 

UPDATE MARCH 2006 GROUPER V23.0—Continued 

DRG Number 

discharge 

Arithmetic 

mean LOS 

10th 

percentile 

25th 

percentile 

50th 

percentile 

75th 

percentile 

90th 

percentile 

141 ........................................................... 123,214 3.4307 1 2 3 4 6 

142 ........................................................... 49,069 2.4897 1 1 2 3 4 

143 ........................................................... 237,871 2.0978 1 1 2 3 4 

144 ........................................................... 104,970 5.8254 1 2 4 7 11 

145 ........................................................... 5,698 2.5470 1 1 2 3 5 

146 ........................................................... 10,278 9.7685 4 6 8 11 17 

147 ........................................................... 2,613 5.5427 2 4 5 7 8 

148 ........................................................... 133,146 11.9344 5 6 9 15 22 

149 ........................................................... 19,525 5.6364 3 4 5 7 8 

150 ........................................................... 22,987 10.7225 4 6 9 13 19 

151 ........................................................... 5,401 5.0224 1 2 4 7 9 

152 ........................................................... 5,016 7.9314 3 5 7 9 14 

153 ........................................................... 1,953 4.8669 2 3 5 6 7 

154 ........................................................... 27,071 12.9678 3 6 10 16 25 

155 ........................................................... 6,015 3.9583 1 2 3 6 8 

156 ........................................................... 4 9.2500 7 7 8 8 14 

157 ........................................................... 8,329 5.6899 1 2 4 7 11 

158 ........................................................... 3,716 2.6453 1 1 2 3 5 

159 ........................................................... 19,241 5.0838 1 2 4 6 10 

160 ........................................................... 11,945 2.6548 1 1 2 3 5 

161 ........................................................... 10,158 4.5026 1 2 3 6 9 

162 ........................................................... 4,952 2.0889 1 1 1 3 4 

163 ........................................................... 5 2.4000 1 1 2 3 5 

164 ........................................................... 6,003 7.6838 3 4 7 9 13 

165 ........................................................... 2,457 3.9935 2 2 4 5 7 

166 ........................................................... 5,157 4.3198 1 2 3 5 8 

167 ........................................................... 4,922 2.1260 1 1 2 3 4 

168 ........................................................... 1,538 4.8563 1 2 3 6 10 

169 ........................................................... 774 2.7661 1 1 2 3 5 

170 ........................................................... 17,939 10.6904 2 5 8 13 21 

171 ........................................................... 1,404 4.1660 1 2 3 5 8 

172 ........................................................... 33,099 6.7836 2 3 5 8 13 

173 ........................................................... 2,192 3.4995 1 1 3 4 7 

174 ........................................................... 261,557 4.6848 2 3 4 6 8 

175 ........................................................... 29,879 2.8529 1 2 2 4 5 

176 ........................................................... 14,653 5.0912 2 3 4 6 9 

177 ........................................................... 7,659 4.4332 2 2 4 5 8 

178 ........................................................... 2,559 3.0770 1 2 3 4 5 

179 ........................................................... 14,734 5.7800 2 3 4 7 11 

180 ........................................................... 91,464 5.2570 2 3 4 6 10 

181 ........................................................... 25,262 3.3086 1 2 3 4 6 

182 ........................................................... 297,116 4.4864 1 2 3 5 8 

183 ........................................................... 81,577 2.8984 1 1 2 4 5 

184 ........................................................... 79 4.2911 1 2 3 4 8 

185 ........................................................... 6,254 4.4915 1 2 3 6 9 

186 ........................................................... 7 3.1429 1 2 2 3 5 

187 ........................................................... 647 4.1468 1 2 3 6 8 

188 ........................................................... 93,711 5.4548 1 2 4 7 10 

189 ........................................................... 13,047 3.0530 1 1 2 4 6 

190 ........................................................... 65 4.8000 1 2 3 6 8 

191 ........................................................... 10,595 12.3655 3 6 9 15 25 

192 ........................................................... 1,380 5.5087 1 3 5 7 9 

193 ........................................................... 4,044 12.5321 5 7 10 15 23 

194 ........................................................... 461 6.2603 2 4 6 8 11 

195 ........................................................... 2,846 10.5569 4 6 9 13 19 

196 ........................................................... 595 5.3345 2 3 5 7 9 

197 ........................................................... 16,435 9.0254 3 5 7 11 16 

198 ........................................................... 4,114 4.2859 2 3 4 5 7 

199 ........................................................... 1,484 8.9892 2 4 7 12 19 

200 ........................................................... 1,017 10.3520 1 3 7 13 21 

201 ........................................................... 2,717 13.5628 3 6 10 17 27 

202 ........................................................... 27,516 6.1264 2 3 5 7 12 

203 ........................................................... 32,434 6.4368 2 3 5 8 12 

204 ........................................................... 69,460 5.3914 2 3 4 6 10 

205 ........................................................... 32,822 5.8530 2 3 4 7 11 

206 ........................................................... 2,051 3.8035 1 2 3 5 7 

207 ........................................................... 38,329 5.2350 1 2 4 7 10 

208 ........................................................... 9,427 2.9434 1 1 2 4 5 

210 ........................................................... 126,884 6.6228 3 4 5 8 11 

211 ........................................................... 25,813 4.5833 3 3 4 5 7 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48291 

TABLE 7A.—MEDICARE PROSPECTIVE PAYMENT SYSTEM SELECTED PERCENTILE LENGTHS OF STAY FY 2005 MEDPAR 

UPDATE MARCH 2006 GROUPER V23.0—Continued 

DRG Number 

discharge 

Arithmetic 

mean LOS 

10th 

percentile 

25th 

percentile 

50th 

percentile 

75th 

percentile 

90th 

percentile 

212 ........................................................... 10 2.5000 1 2 2 4 4 

213 ........................................................... 9,511 8.9931 2 4 7 11 18 

216 ........................................................... 19,925 5.3298 1 1 3 7 12 

217 ........................................................... 15,693 12.1157 3 5 8 15 24 

218 ........................................................... 30,213 5.3787 2 3 4 7 10 

219 ........................................................... 21,194 3.1641 1 2 3 4 5 

220 ........................................................... 2 4.0000 1 1 7 7 7 

223 ........................................................... 12,689 3.2720 1 1 2 4 6 

224 ........................................................... 9,927 1.9411 1 1 1 2 3 

225 ........................................................... 6,275 5.2709 1 2 4 7 11 

226 ........................................................... 6,776 6.3719 1 3 4 8 13 

227 ........................................................... 4,855 2.6360 1 1 2 3 5 

228 ........................................................... 2,683 4.2046 1 1 3 5 9 

229 ........................................................... 1,117 2.5004 1 1 2 3 5 

230 ........................................................... 2,474 5.4321 1 2 4 7 11 

232 ........................................................... 572 2.7395 1 1 2 3 6 

233 ........................................................... 18,500 6.3363 1 2 5 8 13 

234 ........................................................... 9,052 2.6740 1 1 1 3 6 

235 ........................................................... 4,763 4.6431 1 2 4 6 8 

236 ........................................................... 41,789 4.4010 1 3 4 5 8 

237 ........................................................... 1,925 3.7844 1 2 3 5 7 

238 ........................................................... 9,693 7.9706 2 4 6 9 14 

239 ........................................................... 40,343 6.0356 2 3 5 7 11 

240 ........................................................... 12,933 6.4411 2 3 5 8 12 

241 ........................................................... 2,818 3.6427 1 2 3 4 6 

242 ........................................................... 2,725 6.4499 2 3 5 8 12 

243 ........................................................... 100,998 4.4968 1 2 4 6 8 

244 ........................................................... 16,946 4.4343 1 2 4 5 8 

245 ........................................................... 5,798 3.0942 1 1 3 4 5 

246 ........................................................... 1,393 3.5635 1 2 3 4 6 

247 ........................................................... 21,356 3.2905 1 2 3 4 6 

248 ........................................................... 16,406 4.8154 2 3 4 6 8 

249 ........................................................... 13,490 3.9493 1 1 3 5 8 

250 ........................................................... 4,165 3.8363 1 2 3 5 7 

251 ........................................................... 2,059 2.7936 1 1 3 3 5 

252 ........................................................... 1 1.0000 1 1 1 1 1 

253 ........................................................... 24,816 4.5259 2 3 4 5 8 

254 ........................................................... 10,019 3.0639 1 2 3 4 5 

255 ........................................................... 1 1.0000 1 1 1 1 1 

256 ........................................................... 7,606 4.9471 1 2 4 6 9 

257 ........................................................... 13,128 2.5517 1 1 2 3 5 

258 ........................................................... 11,400 1.6964 1 1 1 2 3 

259 ........................................................... 2,660 2.8173 1 1 1 3 7 

260 ........................................................... 2,431 1.4048 1 1 1 1 2 

261 ........................................................... 1,571 2.2037 1 1 1 2 4 

262 ........................................................... 602 4.6561 1 2 3 6 9 

263 ........................................................... 22,544 10.4724 3 5 7 13 20 

264 ........................................................... 3,912 6.2150 2 3 5 7 11 

265 ........................................................... 4,036 6.5347 1 2 4 8 14 

266 ........................................................... 2,230 3.0296 1 1 2 4 6 

267 ........................................................... 276 4.2428 1 1 3 5 8 

268 ........................................................... 1,007 3.6495 1 1 2 4 7 

269 ........................................................... 11,070 7.9865 2 3 6 10 15 

270 ........................................................... 2,573 3.5876 1 1 3 5 7 

271 ........................................................... 21,579 6.7917 2 3 5 8 12 

272 ........................................................... 6,079 5.8195 2 3 4 7 11 

273 ........................................................... 1,256 3.7070 1 2 3 5 7 

274 ........................................................... 2,222 6.1787 1 3 5 7 11 

275 ........................................................... 173 3.2081 1 1 2 4 6 

276 ........................................................... 1,611 4.6096 1 2 4 6 8 

277 ........................................................... 119,184 5.4238 2 3 4 7 9 

278 ........................................................... 33,737 3.9926 2 2 3 5 7 

279 ........................................................... 6 4.1667 1 2 3 5 5 

280 ........................................................... 19,335 3.9854 1 2 3 5 7 

281 ........................................................... 6,583 2.7961 1 1 2 3 5 

283 ........................................................... 6,770 4.5786 1 2 3 6 8 

284 ........................................................... 1,845 2.9176 1 1 2 4 5 

285 ........................................................... 8,079 9.8267 3 5 8 12 18 

286 ........................................................... 2,869 5.1921 2 2 4 6 10 

287 ........................................................... 5,462 9.5002 3 5 7 11 18 


bajohnson on PROD1PC67 with RULES2
48292 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 7A.—MEDICARE PROSPECTIVE PAYMENT SYSTEM SELECTED PERCENTILE LENGTHS OF STAY FY 2005 MEDPAR 

UPDATE MARCH 2006 GROUPER V23.0—Continued 

DRG Number 

discharge 

Arithmetic 

mean LOS 

10th 

percentile 

25th 

percentile 

50th 

percentile 

75th 

percentile 

90th 

percentile 

288 ........................................................... 11,463 3.7000 1 2 3 4 6 

289 ........................................................... 6,352 2.3909 1 1 1 2 5 

290 ........................................................... 11,894 2.0268 1 1 1 2 3 

291 ........................................................... 60 1.4833 1 1 1 1 2 

292 ........................................................... 7,592 9.9870 2 4 8 12 19 

293 ........................................................... 317 4.7192 1 2 3 6 8 

294 ........................................................... 96,836 4.2502 1 2 3 5 8 

295 ........................................................... 4,384 3.7003 1 2 3 4 7 

296 ........................................................... 247,467 4.6444 1 2 4 6 9 

297 ........................................................... 42,523 3.0312 1 2 3 4 5 

298 ........................................................... 111 3.5405 1 1 2 4 6 

299 ........................................................... 1,529 5.0680 1 2 4 6 9 

300 ........................................................... 21,700 5.8032 2 3 5 7 11 

301 ........................................................... 3,909 3.3592 1 2 3 4 6 

302 ........................................................... 10,499 7.9355 4 5 6 9 13 

303 ........................................................... 24,646 7.2778 3 4 6 8 14 

304 ........................................................... 14,090 8.3271 2 3 6 10 17 

305 ........................................................... 3,012 3.1016 1 2 3 4 6 

306 ........................................................... 5,818 5.5734 1 2 3 8 13 

307 ........................................................... 1,950 2.0292 1 1 2 2 3 

308 ........................................................... 6,684 6.1339 1 2 4 8 14 

309 ........................................................... 3,266 1.9801 1 1 1 2 4 

310 ........................................................... 25,386 4.4935 1 2 3 6 10 

311 ........................................................... 5,890 1.8514 1 1 1 2 3 

312 ........................................................... 1,328 4.9315 1 2 3 6 10 

313 ........................................................... 505 2.3921 1 1 2 3 5 

314 ........................................................... 2 89.0000 5 5 173 173 173 

315 ........................................................... 34,911 6.7495 1 1 4 9 16 

316 ........................................................... 204,550 6.1591 2 3 5 8 12 

317 ........................................................... 2,716 3.5044 1 1 2 4 7 

318 ........................................................... 5,914 5.9731 1 3 4 7 12 

319 ........................................................... 384 2.5651 1 1 2 3 5 

320 ........................................................... 225,069 4.9879 2 3 4 6 9 

321 ........................................................... 31,860 3.5371 1 2 3 4 6 

322 ........................................................... 67 3.5821 2 2 3 4 6 

323 ........................................................... 20,427 3.1029 1 1 2 4 6 

324 ........................................................... 4,637 1.8462 1 1 1 2 3 

325 ........................................................... 9,930 3.7407 1 2 3 5 7 

326 ........................................................... 2,586 2.5607 1 1 2 3 5 

327 ........................................................... 11 2.0000 1 1 2 2 3 

328 ........................................................... 574 3.4146 1 1 3 4 6 

329 ........................................................... 54 1.6852 1 1 1 2 3 

331 ........................................................... 57,039 5.4034 1 2 4 7 10 

332 ........................................................... 4,145 3.0625 1 1 2 4 6 

333 ........................................................... 247 5.3320 1 2 4 6 9 

334 ........................................................... 9,532 4.0415 1 2 3 5 7 

335 ........................................................... 12,203 2.4946 1 2 2 3 4 

336 ........................................................... 28,202 3.2201 1 1 2 4 7 

337 ........................................................... 21,501 1.8442 1 1 2 2 3 

338 ........................................................... 674 5.7953 1 2 4 8 13 

339 ........................................................... 1,237 5.1924 1 2 3 7 12 

340 ........................................................... 1 2.0000 2 2 2 2 2 

341 ........................................................... 3,131 3.2031 1 1 1 3 7 

342 ........................................................... 457 3.0394 1 1 2 3 6 

344 ........................................................... 2,343 2.7222 1 1 1 3 7 

345 ........................................................... 1,390 5.4324 1 2 3 7 12 

346 ........................................................... 3,963 5.9066 2 3 4 7 11 

347 ........................................................... 234 2.7094 1 1 2 3 5 

348 ........................................................... 4,262 4.0082 1 2 3 5 7 

349 ........................................................... 554 2.6408 1 1 2 3 5 

350 ........................................................... 7,281 4.5187 2 2 4 5 8 

352 ........................................................... 1,177 4.1623 1 2 3 5 9 

353 ........................................................... 3,092 6.0155 2 3 4 7 11 

354 ........................................................... 7,572 5.5539 2 3 4 6 10 

355 ........................................................... 5,006 3.0224 2 2 3 3 4 

356 ........................................................... 22,278 1.8696 1 1 2 2 3 

357 ........................................................... 5,543 8.0319 3 4 6 10 15 

358 ........................................................... 20,961 3.8545 2 2 3 4 7 

359 ........................................................... 28,665 2.3497 1 2 2 3 3 

360 ........................................................... 14,282 2.5518 1 1 2 3 4 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48293 

TABLE 7A.—MEDICARE PROSPECTIVE PAYMENT SYSTEM SELECTED PERCENTILE LENGTHS OF STAY FY 2005 MEDPAR 

UPDATE MARCH 2006 GROUPER V23.0—Continued 

DRG Number 

discharge 

Arithmetic 

mean LOS 

10th 

percentile 

25th 

percentile 

50th 

percentile 

75th 

percentile 

90th 

percentile 

361 ........................................................... 287 2.9303 1 1 2 3 6 

362 ........................................................... 2 1.0000 1 1 1 1 1 

363 ........................................................... 1,981 4.0848 1 2 2 4 9 

364 ........................................................... 1,380 4.1754 1 2 3 5 8 

365 ........................................................... 1,617 7.8411 2 3 5 10 16 

366 ........................................................... 4,654 6.2426 1 3 5 8 12 

367 ........................................................... 438 2.9612 1 1 2 3 5 

368 ........................................................... 4,145 6.4068 2 3 5 8 12 

369 ........................................................... 3,727 3.2659 1 1 2 4 6 

370 ........................................................... 2,251 4.9964 2 3 4 5 7 

371 ........................................................... 2,715 3.3908 2 3 3 4 4 

372 ........................................................... 1,377 3.4415 2 2 2 3 5 

373 ........................................................... 5,284 2.2470 1 2 2 3 3 

374 ........................................................... 153 2.9739 2 2 2 3 4 

375 ........................................................... 12 6.5000 1 2 3 6 8 

376 ........................................................... 476 3.2815 1 2 2 4 7 

377 ........................................................... 109 4.4954 1 2 3 6 8 

378 ........................................................... 202 2.1782 1 1 2 3 4 

379 ........................................................... 500 3.2960 1 1 2 3 6 

380 ........................................................... 111 2.0180 1 1 1 2 4 

381 ........................................................... 170 2.4647 1 1 1 2 4 

382 ........................................................... 48 1.4792 1 1 1 1 2 

383 ........................................................... 2,806 3.6433 1 1 2 4 7 

384 ........................................................... 151 2.5960 1 1 1 3 4 

387 ........................................................... 1 9.0000 9 9 9 9 9 

389 ........................................................... 3 8.6667 1 1 2 3 3 

392 ........................................................... 2,140 8.8757 2 4 6 11 19 

394 ........................................................... 2,761 7.3032 1 2 5 9 16 

395 ........................................................... 115,607 4.2768 1 2 3 5 8 

396 ........................................................... 20 2.9500 1 2 3 3 4 

397 ........................................................... 16,443 5.1098 1 2 4 6 10 

398 ........................................................... 18,696 5.7191 2 3 4 7 11 

399 ........................................................... 1,643 3.3603 1 2 3 4 6 

401 ........................................................... 6,462 11.0371 2 5 8 14 22 

402 ........................................................... 1,348 3.8858 1 1 3 5 9 

403 ........................................................... 31,551 7.8595 2 3 6 10 16 

404 ........................................................... 3,624 3.9914 1 2 3 5 8 

406 ........................................................... 2,304 9.3859 2 4 7 12 20 

407 ........................................................... 616 3.4935 1 2 3 5 7 

408 ........................................................... 1,949 8.2104 1 2 5 10 19 

409 ........................................................... 1,750 6.0383 2 3 4 6 12 

410 ........................................................... 29,067 3.7654 1 2 3 4 6 

411 ........................................................... 5 2.0000 1 1 1 3 4 

412 ........................................................... 9 1.5556 1 1 2 2 2 

413 ........................................................... 5,748 6.7189 2 3 5 9 13 

414 ........................................................... 481 4.0146 1 2 3 5 7 

415 ........................................................... 55,992 14.0950 4 6 11 17 27 

416 ........................................................... 288,502 7.4508 2 3 6 9 14 

417 ........................................................... 33 6.5455 2 3 5 8 12 

418 ........................................................... 29,991 6.0675 2 3 5 7 11 

419 ........................................................... 17,719 4.3438 1 2 3 5 8 

420 ........................................................... 3,023 3.1667 1 2 3 4 5 

421 ........................................................... 13,262 4.0156 1 2 3 5 7 

422 ........................................................... 79 3.6456 1 2 2 4 7 

423 ........................................................... 8,970 8.0750 2 3 6 10 15 

424 ........................................................... 1,041 11.5053 2 4 8 14 23 

425 ........................................................... 13,101 3.4571 1 1 3 4 6 

426 ........................................................... 4,237 4.3099 1 2 3 5 8 

427 ........................................................... 1,579 4.6390 1 2 3 5 9 

428 ........................................................... 845 7.2769 1 2 4 8 14 

429 ........................................................... 23,941 5.4509 2 3 4 6 10 

430 ........................................................... 75,545 7.7573 2 3 6 9 15 

431 ........................................................... 333 6.6667 1 2 4 7 11 

432 ........................................................... 402 4.0199 1 1 3 4 8 

433 ........................................................... 4,472 2.8233 1 1 2 3 4 

439 ........................................................... 1,759 8.3337 1 3 5 9 17 

440 ........................................................... 5,216 8.1532 2 3 5 9 16 

441 ........................................................... 686 3.4125 1 1 2 4 6 

442 ........................................................... 18,608 8.6730 2 3 6 10 17 

443 ........................................................... 3,590 3.5279 1 1 3 5 7 


bajohnson on PROD1PC67 with RULES2
48294 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 7A.—MEDICARE PROSPECTIVE PAYMENT SYSTEM SELECTED PERCENTILE LENGTHS OF STAY FY 2005 MEDPAR 

UPDATE MARCH 2006 GROUPER V23.0—Continued 

DRG Number 

discharge 

Arithmetic 

mean LOS 

10th 

percentile 

25th 

percentile 

50th 

percentile 

75th 

percentile 

90th 

percentile 

444 ........................................................... 6,014 4.0328 1 2 3 5 7 

445 ........................................................... 2,243 2.8270 1 1 2 3 5 

447 ........................................................... 6,324 2.5745 1 1 2 3 5 

449 ........................................................... 40,869 3.6910 1 1 3 4 7 

450 ........................................................... 7,453 1.9804 1 1 1 2 4 

451 ........................................................... 2 10.5000 8 8 13 13 13 

452 ........................................................... 28,831 4.9369 1 2 3 6 10 

453 ........................................................... 5,388 2.7572 1 1 2 3 5 

454 ........................................................... 4,741 4.1080 1 2 3 5 8 

455 ........................................................... 885 2.2802 1 1 2 3 4 

461 ........................................................... 2,290 5.5782 1 1 3 7 12 

462 ........................................................... 7,891 9.5516 4 5 7 10 13 

463 ........................................................... 32,925 3.8763 1 2 3 5 7 

464 ........................................................... 7,635 2.8998 1 1 2 4 5 

465 ........................................................... 163 3.4724 1 1 2 4 6 

466 ........................................................... 1,204 4.9086 1 1 2 4 7 

467 ........................................................... 1,028 2.6722 1 1 2 3 5 

468 ........................................................... 52,062 12.5395 3 6 10 16 24 

471 ........................................................... 16,780 4.8545 3 3 4 5 8 

473 ........................................................... 8,582 12.4204 2 3 7 17 32 

475 ........................................................... 119,965 10.6382 2 5 9 14 20 

476 ........................................................... 2,851 9.9056 1 4 8 14 20 

477 ........................................................... 28,211 8.5081 1 3 7 11 17 

479 ........................................................... 27,660 2.5490 1 1 2 3 5 

480 ........................................................... 908 19.1013 6 8 13 23 39 

481 ........................................................... 1,199 22.0025 12 16 20 24 33 

482 ........................................................... 5,084 11.1810 4 6 9 13 20 

484 ........................................................... 472 12.7564 2 5 10 17 26 

485 ........................................................... 3,714 9.4715 4 5 7 11 18 

486 ........................................................... 2,712 12.1962 2 5 10 16 24 

487 ........................................................... 5,017 6.8405 1 3 5 9 14 

488 ........................................................... 828 17.6437 4 7 12 21 33 

489 ........................................................... 13,555 8.1669 2 3 6 10 15 

490 ........................................................... 5,255 5.3115 1 2 4 6 9 

491 ........................................................... 22,688 3.0224 1 2 2 3 5 

492 ........................................................... 3,924 13.8081 3 5 6 23 32 

493 ........................................................... 61,129 6.0304 2 3 5 8 11 

494 ........................................................... 24,558 2.6900 1 1 2 4 5 

495 ........................................................... 342 17.3421 8 10 13 20 33 

496 ........................................................... 3,727 8.7631 3 4 6 10 17 

497 ........................................................... 31,236 5.6849 3 3 5 6 9 

498 ........................................................... 21,296 3.6794 2 3 3 4 5 

499 ........................................................... 35,261 4.1633 1 2 3 5 8 

500 ........................................................... 46,497 2.1981 1 1 2 3 4 

501 ........................................................... 3,203 9.8392 4 5 8 12 18 

502 ........................................................... 762 5.6995 2 3 5 7 10 

503 ........................................................... 5,916 3.9238 1 2 3 5 7 

504 ........................................................... 192 28.0260 8 13 24 36 51 

505 ........................................................... 180 6.8889 1 1 2 6 13 

506 ........................................................... 964 15.1432 3 7 12 20 30 

507 ........................................................... 322 7.7112 1 3 6 10 14 

508 ........................................................... 655 7.3542 1 3 5 9 14 

509 ........................................................... 155 5.2323 1 2 3 6 11 

510 ........................................................... 1,783 6.0432 1 2 4 7 12 

511 ........................................................... 627 3.6364 1 1 2 4 7 

512 ........................................................... 550 13.6200 6 8 10 14 25 

513 ........................................................... 216 10.7407 5 7 8 11 17 

515 ........................................................... 58,668 3.8406 1 1 1 5 9 

518 ........................................................... 23,803 2.4598 1 1 1 3 5 

519 ........................................................... 12,597 4.6702 1 1 3 6 11 

520 ........................................................... 16,544 1.9403 1 1 1 2 3 

521 ........................................................... 29,404 5.2599 1 2 4 6 8 

522 ........................................................... 3,423 10.2875 3 4 5 7 8 

523 ........................................................... 14,428 3.7573 1 2 3 4 5 

524 ........................................................... 109,116 3.1429 1 2 3 4 6 

525 ........................................................... 206 14.2718 1 3 7 17 35 

528 ........................................................... 1,845 16.3252 6 9 14 21 29 

529 ........................................................... 5,115 7.2502 1 2 4 9 16 

530 ........................................................... 3,391 2.9451 1 1 2 3 6 

531 ........................................................... 4,910 8.9709 2 4 7 11 18 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48295 

TABLE 7A.—MEDICARE PROSPECTIVE PAYMENT SYSTEM SELECTED PERCENTILE LENGTHS OF STAY FY 2005 MEDPAR 

UPDATE MARCH 2006 GROUPER V23.0—Continued 

DRG Number 

discharge 

Arithmetic 

mean LOS 

10th 

percentile 

25th 

percentile 

50th 

percentile 

75th 

percentile 

90th 

percentile 

532 ........................................................... 2,849 3.6413 1 1 3 5 7 

533 ........................................................... 46,773 3.6548 1 1 2 4 8 

534 ........................................................... 42,812 1.7223 1 1 1 2 3 

535 ........................................................... 8,822 9.2409 2 4 8 12 18 

536 ........................................................... 8,260 7.2738 2 3 6 9 14 

537 ........................................................... 8,986 6.5032 1 3 5 8 13 

538 ........................................................... 5,461 2.9145 1 1 2 4 6 

539 ........................................................... 4,978 10.5552 2 4 7 14 23 

540 ........................................................... 1,501 3.5097 1 1 3 4 7 

541 ........................................................... 25,114 41.6431 16 23 34 50 72 

542 ........................................................... 23,126 30.3529 11 17 25 37 52 

543 ........................................................... 5,507 11.7066 2 5 9 16 23 

544 ........................................................... 446,467 4.3995 3 3 4 5 7 

545 ........................................................... 43,772 5.0362 3 3 4 6 8 

546 ........................................................... 2,364 8.7657 3 4 7 10 16 

547 ........................................................... 32,723 12.1254 6 8 10 14 20 

548 ........................................................... 32,268 8.7755 5 6 8 10 13 

549 ........................................................... 13,145 10.0860 5 6 8 12 18 

550 ........................................................... 34,583 6.7752 4 5 6 8 10 

551 ........................................................... 53,960 6.0685 1 2 5 8 12 

552 ........................................................... 82,137 3.4766 1 1 2 5 7 

553 ........................................................... 39,301 9.0530 1 3 7 12 19 

554 ........................................................... 77,365 5.5722 1 2 4 7 12 

555 ........................................................... 37,404 4.8144 1 2 3 6 10 

556 ........................................................... 19,008 2.0085 1 1 1 2 4 

557 ........................................................... 124,278 4.1023 1 2 3 5 8 

558 ........................................................... 193,170 1.8108 1 1 1 2 4 

559 ........................................................... 2,895 6.8370 2 3 5 8 13 

12,150,46 

TABLE 7A.—MEDICARE PROSPECTIVE PAYMENT SYSTEM SELECTED PERCENTILE LENGTHS OF STAY FY 2005 MEDPAR 

UPDATE MARCH 2006 GROUPER V24.0 

DRG Number 

discharge 

Arithmetic 

mean LOS 

10th 

percentile 

25th 

percentile 

50th 

percentile 

75th 

percentile 

90th 

percentile 

1 ............................................................... 24,403 9.6172 2 4 7 12 19 

2 ............................................................... 10,188 4.4271 1 2 4 6 8 

3 ............................................................... 3 11.0000 4 4 8 21 21 

6 ............................................................... 288 3.0833 1 1 2 3 7 

7 ............................................................... 15,033 9.2561 2 4 7 12 19 

8 ............................................................... 3,442 2.7638 1 1 2 3 6 

9 ............................................................... 1,775 6.0248 1 3 4 7 11 

10 ............................................................. 19,628 5.9178 2 3 4 7 11 

11 ............................................................. 3,085 3.5546 1 2 3 5 7 

12 ............................................................. 55,972 5.3686 2 3 4 6 10 

13 ............................................................. 7,529 4.8515 2 3 4 6 8 

14 ............................................................. 278,864 5.3705 2 3 4 7 10 

15 ............................................................. 20,004 4.0156 1 2 3 5 7 

16 ............................................................. 17,302 6.3015 2 3 5 8 12 

17 ............................................................. 2,975 3.0376 1 1 2 4 6 

18 ............................................................. 33,467 5.1537 2 3 4 6 9 

19 ............................................................. 8,467 3.3795 1 2 3 4 6 

21 ............................................................. 2,220 6.1752 2 3 5 8 12 

22 ............................................................. 3,169 5.0104 2 2 4 6 10 

23 ............................................................. 10,671 3.8995 1 2 3 5 7 

26 ............................................................. 25 3.8000 1 1 2 5 9 

27 ............................................................. 5,974 4.7370 1 1 3 6 10 

28 ............................................................. 19,912 5.5699 1 2 4 7 11 

29 ............................................................. 6,524 3.2149 1 1 3 4 6 

31 ............................................................. 5,039 3.9036 1 2 3 5 7 

32 ............................................................. 1,904 2.2757 1 1 2 3 4 

34 ............................................................. 27,632 4.7034 1 2 4 6 9 

35 ............................................................. 7,913 3.0404 1 1 3 4 5 

36 ............................................................. 308 1.9156 1 1 1 1 2 

37 ............................................................. 1,219 4.1132 1 1 3 5 8 

38 ............................................................. 50 2.8000 1 1 2 3 6 

39 ............................................................. 328 2.1220 1 1 1 2 3 


bajohnson on PROD1PC67 with RULES2
48296 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 7A.—MEDICARE PROSPECTIVE PAYMENT SYSTEM SELECTED PERCENTILE LENGTHS OF STAY FY 2005 MEDPAR 

UPDATE MARCH 2006 GROUPER V24.0—Continued 

DRG Number 

discharge 

Arithmetic 

mean LOS 

10th 

percentile 

25th 

percentile 

50th 

percentile 

75th 

percentile 

90th 

percentile 

40 ............................................................. 1,188 4.2315 1 1 3 4 6 

42 ............................................................. 1,638 2.4823 1 1 1 2 3 

43 ............................................................. 125 2.9600 1 1 2 4 5 

44 ............................................................. 1,291 4.7506 2 3 4 6 8 

45 ............................................................. 2,771 3.0278 1 2 2 4 6 

46 ............................................................. 3,929 4.1917 1 2 3 5 8 

47 ............................................................. 1,309 3.0145 1 1 2 4 6 

49 ............................................................. 2,416 4.5219 1 2 3 5 9 

50 ............................................................. 2,026 1.8638 1 1 1 2 3 

51 ............................................................. 193 2.6684 1 1 1 3 5 

52 ............................................................. 235 1.5149 1 1 1 2 2 

53 ............................................................. 2,147 4.0051 1 1 2 5 9 

55 ............................................................. 1,370 2.8832 1 1 1 3 6 

56 ............................................................. 451 2.6785 1 1 2 3 5 

57 ............................................................. 742 3.2520 1 1 2 3 7 

59 ............................................................. 126 2.3730 1 1 2 3 5 

60 ............................................................. 3 1.6667 1 1 1 3 3 

61 ............................................................. 222 6.0541 1 1 4 8 13 

62 ............................................................. 4 1.5000 1 1 1 1 3 

63 ............................................................. 2,827 4.5313 1 1 3 6 10 

64 ............................................................. 3,234 6.2004 1 2 4 8 13 

65 ............................................................. 40,495 2.7634 1 1 2 3 5 

66 ............................................................. 8,197 3.1080 1 1 2 4 6 

67 ............................................................. 379 3.6834 1 2 3 5 8 

68 ............................................................. 18,918 3.8500 1 2 3 5 7 

69 ............................................................. 5,149 2.9493 1 2 2 4 5 

70 ............................................................. 25 2.4000 1 1 2 3 4 

71 ............................................................. 70 4.3429 1 2 3 5 7 

72 ............................................................. 1,326 3.3205 1 2 3 4 6 

73 ............................................................. 9,961 4.2979 1 2 3 5 8 

74 ............................................................. 3 3.3333 3 3 3 4 4 

75 ............................................................. 46,867 9.5747 3 5 7 12 19 

76 ............................................................. 48,166 10.4844 3 5 8 13 20 

77 ............................................................. 2,112 4.5123 1 2 4 6 9 

78 ............................................................. 49,708 6.0925 2 4 5 7 10 

79 ............................................................. 160,420 8.0517 3 4 7 10 15 

80 ............................................................. 7,160 5.2197 2 3 4 6 9 

81 ............................................................. 6 6.1667 2 3 5 8 8 

82 ............................................................. 63,222 6.6658 2 3 5 9 13 

83 ............................................................. 7,153 5.1922 2 3 4 6 10 

84 ............................................................. 1,403 3.1276 1 2 3 4 5 

85 ............................................................. 22,228 6.1087 2 3 5 8 12 

86 ............................................................. 1,717 3.4549 1 2 3 4 6 

87 ............................................................. 96,725 6.3706 2 3 5 8 12 

88 ............................................................. 427,153 4.8563 2 3 4 6 9 

89 ............................................................. 554,136 5.5251 2 3 5 7 10 

90 ............................................................. 43,512 3.7080 2 2 3 5 6 

91 ............................................................. 53 3.4151 1 1 2 4 6 

92 ............................................................. 16,519 5.9408 2 3 5 7 11 

93 ............................................................. 1,440 3.7625 1 2 3 5 7 

94 ............................................................. 13,656 5.9023 2 3 5 8 12 

95 ............................................................. 1,577 3.3843 1 2 3 4 6 

96 ............................................................. 59,631 4.3002 2 2 4 5 7 

97 ............................................................. 26,703 3.3674 1 2 3 4 6 

98 ............................................................. 13 3.0769 2 2 2 4 6 

99 ............................................................. 21,392 3.0989 1 1 2 4 6 

100 ........................................................... 6,416 2.1061 1 1 2 3 4 

101 ........................................................... 23,370 4.1822 1 2 3 5 8 

102 ........................................................... 4,936 2.5432 1 1 2 3 5 

103 ........................................................... 886 35.2641 8 11 22 46 78 

104 ........................................................... 20,125 14.6458 6 8 12 18 26 

105 ........................................................... 32,635 9.9310 4 6 8 11 18 

106 ........................................................... 3,440 10.9392 5 7 9 13 18 

108 ........................................................... 8,758 10.7099 4 6 9 13 19 

110 ........................................................... 57,710 8.0024 1 3 6 10 16 

111 ........................................................... 10,785 3.1058 1 1 2 4 6 

113 ........................................................... 34,750 12.5640 4 6 10 15 24 

114 ........................................................... 7,959 8.3465 2 4 7 11 16 

117 ........................................................... 5,350 4.2781 1 1 2 5 9 

118 ........................................................... 7,634 3.0183 1 1 2 4 7 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48297 

TABLE 7A.—MEDICARE PROSPECTIVE PAYMENT SYSTEM SELECTED PERCENTILE LENGTHS OF STAY FY 2005 MEDPAR 

UPDATE MARCH 2006 GROUPER V24.0—Continued 

DRG Number 

discharge 

Arithmetic 

mean LOS 

10th 

percentile 

25th 

percentile 

50th 

percentile 

75th 

percentile 

90th 

percentile 

119 ........................................................... 963 5.3998 1 1 3 7 13 

120 ........................................................... 33,561 8.9647 1 3 6 12 19 

121 ........................................................... 150,085 6.1981 2 3 5 8 11 

122 ........................................................... 54,555 3.2992 1 1 3 4 6 

123 ........................................................... 29,576 4.7318 1 1 3 6 11 

124 ........................................................... 120,562 4.3876 1 2 3 6 9 

125 ........................................................... 92,475 2.7008 1 1 2 3 5 

126 ........................................................... 5,424 10.6875 3 6 9 13 19 

127 ........................................................... 667,522 5.0851 2 3 4 6 9 

128 ........................................................... 4,213 5.1899 2 3 5 6 9 

129 ........................................................... 3,527 2.5373 1 1 1 2 5 

130 ........................................................... 87,480 5.3514 1 3 4 7 10 

131 ........................................................... 22,959 3.7009 1 2 3 5 6 

132 ........................................................... 101,418 2.8006 1 1 2 3 5 

133 ........................................................... 5,860 2.1410 1 1 2 3 4 

134 ........................................................... 39,838 3.1001 1 2 2 4 6 

135 ........................................................... 7,167 4.2931 1 2 3 5 8 

136 ........................................................... 943 2.6957 1 1 2 3 5 

138 ........................................................... 206,188 3.8769 1 2 3 5 7 

139 ........................................................... 74,073 2.4274 1 1 2 3 4 

140 ........................................................... 31,123 2.4049 1 1 2 3 4 

141 ........................................................... 123,116 3.4312 1 2 3 4 6 

142 ........................................................... 49,167 2.4904 1 1 2 3 4 

143 ........................................................... 237,871 2.0978 1 1 2 3 4 

144 ........................................................... 104,925 5.8262 1 2 4 7 11 

145 ........................................................... 5,743 2.5581 1 1 2 3 5 

146 ........................................................... 10,276 9.7688 4 6 8 11 17 

147 ........................................................... 2,615 5.5449 2 4 5 7 8 

149 ........................................................... 19,545 5.6387 3 4 5 7 8 

150 ........................................................... 22,981 10.7232 4 6 9 13 19 

151 ........................................................... 5,407 5.0255 1 2 4 7 9 

152 ........................................................... 5,016 7.9314 3 5 7 9 14 

153 ........................................................... 1,953 4.8669 2 3 5 6 7 

155 ........................................................... 6,019 3.9621 1 2 3 6 8 

156 ........................................................... 4 9.2500 7 7 8 8 14 

157 ........................................................... 8,321 5.6913 1 2 4 7 11 

158 ........................................................... 3,724 2.6488 1 1 2 3 5 

159 ........................................................... 19,233 5.0843 1 2 4 6 10 

160 ........................................................... 11,953 2.6555 1 1 2 3 5 

161 ........................................................... 10,152 4.5036 1 2 3 6 9 

162 ........................................................... 4,958 2.0896 1 1 1 3 4 

163 ........................................................... 5 2.4000 1 1 2 3 5 

164 ........................................................... 5,999 7.6861 3 4 7 9 13 

165 ........................................................... 2,461 3.9939 2 2 4 5 7 

166 ........................................................... 5,156 4.3200 1 2 3 5 8 

167 ........................................................... 4,923 2.1261 1 1 2 3 4 

168 ........................................................... 1,640 4.7726 1 2 3 6 10 

169 ........................................................... 899 2.6151 1 1 2 3 4 

170 ........................................................... 17,935 10.6919 2 5 8 13 21 

171 ........................................................... 1,408 4.1648 1 2 3 5 8 

172 ........................................................... 33,065 6.7846 2 3 5 8 13 

173 ........................................................... 2,226 3.5341 1 1 3 4 7 

174 ........................................................... 253,265 4.6853 2 3 4 6 8 

175 ........................................................... 29,252 2.8605 1 2 2 4 5 

176 ........................................................... 14,653 5.0912 2 3 4 6 9 

177 ........................................................... 7,656 4.4327 2 2 4 5 8 

178 ........................................................... 2,562 3.0800 1 2 3 4 5 

179 ........................................................... 14,734 5.7800 2 3 4 7 11 

180 ........................................................... 91,370 5.2580 2 3 4 6 10 

181 ........................................................... 25,356 3.3125 1 2 3 4 6 

182 ........................................................... 255,772 4.0692 1 2 3 5 7 

183 ........................................................... 79,046 2.8475 1 1 2 4 5 

184 ........................................................... 72 3.7361 1 1 2 4 7 

185 ........................................................... 6,254 4.4915 1 2 3 6 9 

186 ........................................................... 7 3.1429 1 2 2 3 5 

187 ........................................................... 647 4.1468 1 2 3 6 8 

188 ........................................................... 87,040 5.3291 1 2 4 6 10 

189 ........................................................... 12,406 2.9703 1 1 2 4 5 

190 ........................................................... 10 3.0000 1 1 2 6 6 

191 ........................................................... 10,592 12.3671 3 6 9 15 25 


bajohnson on PROD1PC67 with RULES2
48298 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 7A.—MEDICARE PROSPECTIVE PAYMENT SYSTEM SELECTED PERCENTILE LENGTHS OF STAY FY 2005 MEDPAR 

UPDATE MARCH 2006 GROUPER V24.0—Continued 

DRG Number 

discharge 

Arithmetic 

mean LOS 

10th 

percentile 

25th 

percentile 

50th 

percentile 

75th 

percentile 

90th 

percentile 

192 ........................................................... 1,380 5.5087 1 3 5 7 9 

193 ........................................................... 4,042 12.5339 5 7 10 15 23 

194 ........................................................... 463 6.2721 2 4 6 8 11 

195 ........................................................... 2,846 10.5569 4 6 9 13 19 

196 ........................................................... 595 5.3345 2 3 5 7 9 

197 ........................................................... 16,432 9.0256 3 5 7 11 16 

198 ........................................................... 4,117 4.2888 2 3 4 5 7 

199 ........................................................... 1,484 8.9892 2 4 7 12 19 

200 ........................................................... 1,017 10.3520 1 3 7 13 21 

201 ........................................................... 2,717 13.5628 3 6 10 17 27 

202 ........................................................... 27,516 6.1264 2 3 5 7 12 

203 ........................................................... 32,434 6.4368 2 3 5 8 12 

204 ........................................................... 69,460 5.3914 2 3 4 6 10 

205 ........................................................... 32,803 5.8542 2 3 4 7 11 

206 ........................................................... 2,070 3.8024 1 2 3 5 7 

207 ........................................................... 38,305 5.2356 1 2 4 7 10 

208 ........................................................... 9,451 2.9471 1 1 2 4 5 

210 ........................................................... 126,867 6.6230 3 4 5 8 11 

211 ........................................................... 25,830 4.5839 3 3 4 5 7 

212 ........................................................... 10 2.5000 1 2 2 4 4 

213 ........................................................... 9,553 9.0206 2 4 7 11 18 

216 ........................................................... 19,883 5.3088 1 1 3 7 12 

217 ........................................................... 15,724 12.1410 3 5 8 15 24 

218 ........................................................... 30,210 5.3789 2 3 4 7 10 

219 ........................................................... 21,197 3.1642 1 2 3 4 5 

220 ........................................................... 2 4.0000 1 1 7 7 7 

223 ........................................................... 12,688 3.2719 1 1 2 4 6 

224 ........................................................... 9,928 1.9413 1 1 1 2 3 

225 ........................................................... 6,275 5.2709 1 2 4 7 11 

226 ........................................................... 6,771 6.3738 1 3 4 8 13 

227 ........................................................... 4,860 2.6372 1 1 2 3 5 

228 ........................................................... 2,679 4.2027 1 1 3 5 9 

229 ........................................................... 1,121 2.5112 1 1 2 3 5 

230 ........................................................... 2,474 5.4321 1 2 4 7 11 

232 ........................................................... 572 2.7395 1 1 2 3 6 

233 ........................................................... 18,493 6.3374 1 2 5 8 13 

234 ........................................................... 9,059 2.6746 1 1 1 3 6 

235 ........................................................... 4,763 4.6431 1 2 4 6 8 

236 ........................................................... 41,789 4.4010 1 3 4 5 8 

237 ........................................................... 1,925 3.7844 1 2 3 5 7 

238 ........................................................... 9,693 7.9706 2 4 6 9 14 

239 ........................................................... 40,343 6.0356 2 3 5 7 11 

240 ........................................................... 12,896 6.4472 2 3 5 8 12 

241 ........................................................... 2,855 3.6515 1 2 3 4 6 

242 ........................................................... 2,725 6.4499 2 3 5 8 12 

243 ........................................................... 100,998 4.4968 1 2 4 6 8 

244 ........................................................... 16,933 4.4351 1 2 4 5 8 

245 ........................................................... 5,811 3.0950 1 1 3 4 5 

246 ........................................................... 1,393 3.5635 1 2 3 4 6 

247 ........................................................... 21,356 3.2905 1 2 3 4 6 

248 ........................................................... 16,406 4.8154 2 3 4 6 8 

249 ........................................................... 13,490 3.9493 1 1 3 5 8 

250 ........................................................... 4,164 3.8365 1 2 3 5 7 

251 ........................................................... 2,060 2.7937 1 1 3 3 5 

252 ........................................................... 1 1.0000 1 1 1 1 1 

253 ........................................................... 24,805 4.5258 2 3 4 5 8 

254 ........................................................... 10,030 3.0656 1 2 3 4 5 

255 ........................................................... 1 1.0000 1 1 1 1 1 

256 ........................................................... 7,606 4.9471 1 2 4 6 9 

257 ........................................................... 13,126 2.5519 1 1 2 3 5 

258 ........................................................... 11,402 1.6964 1 1 1 2 3 

259 ........................................................... 2,660 2.8173 1 1 1 3 7 

260 ........................................................... 2,431 1.4048 1 1 1 1 2 

261 ........................................................... 1,571 2.2037 1 1 1 2 4 

262 ........................................................... 602 4.6561 1 2 3 6 9 

263 ........................................................... 22,532 10.4725 3 5 7 13 20 

264 ........................................................... 3,924 6.2273 2 3 5 7 11 

265 ........................................................... 4,036 6.5347 1 2 4 8 14 

266 ........................................................... 2,230 3.0296 1 1 2 4 6 

267 ........................................................... 276 4.2428 1 1 3 5 8 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48299 

TABLE 7A.—MEDICARE PROSPECTIVE PAYMENT SYSTEM SELECTED PERCENTILE LENGTHS OF STAY FY 2005 MEDPAR 

UPDATE MARCH 2006 GROUPER V24.0—Continued 

DRG Number 

discharge 

Arithmetic 

mean LOS 

10th 

percentile 

25th 

percentile 

50th 

percentile 

75th 

percentile 

90th 

percentile 

268 ........................................................... 1,007 3.6495 1 1 2 4 7 

269 ........................................................... 11,061 7.9889 2 3 6 10 15 

270 ........................................................... 2,582 3.5930 1 1 3 5 7 

271 ........................................................... 21,579 6.7917 2 3 5 8 12 

272 ........................................................... 6,067 5.8218 2 3 4 7 11 

273 ........................................................... 1,268 3.7161 1 2 3 5 7 

274 ........................................................... 2,214 6.1847 1 3 5 7 11 

275 ........................................................... 181 3.2652 1 1 2 4 6 

276 ........................................................... 1,611 4.6096 1 2 4 6 8 

277 ........................................................... 119,041 5.4248 2 3 4 7 9 

278 ........................................................... 33,880 3.9954 2 2 3 5 7 

279 ........................................................... 6 4.1667 1 2 3 5 5 

280 ........................................................... 19,329 3.9844 1 2 3 5 7 

281 ........................................................... 6,589 2.8001 1 1 2 3 5 

283 ........................................................... 6,755 4.5760 1 2 3 6 8 

284 ........................................................... 1,860 2.9403 1 1 2 4 5 

285 ........................................................... 8,082 9.8285 3 5 8 12 18 

286 ........................................................... 2,869 5.1921 2 2 4 6 10 

287 ........................................................... 5,462 9.5002 3 5 7 11 18 

288 ........................................................... 11,460 3.6971 1 2 3 4 6 

289 ........................................................... 6,352 2.3909 1 1 1 2 5 

290 ........................................................... 11,894 2.0268 1 1 1 2 3 

291 ........................................................... 60 1.4833 1 1 1 1 2 

292 ........................................................... 7,590 9.9858 2 4 8 12 19 

293 ........................................................... 318 4.7673 1 2 3 6 8 

294 ........................................................... 96,836 4.2502 1 2 3 5 8 

295 ........................................................... 4,384 3.7003 1 2 3 4 7 

296 ........................................................... 247,119 4.6457 1 2 4 6 9 

297 ........................................................... 42,871 3.0365 1 2 3 4 5 

298 ........................................................... 111 3.5405 1 1 2 4 6 

299 ........................................................... 1,529 5.0680 1 2 4 6 9 

300 ........................................................... 21,678 5.8044 2 3 5 7 11 

301 ........................................................... 3,931 3.3666 1 2 3 4 6 

302 ........................................................... 10,496 7.9354 4 5 6 9 13 

303 ........................................................... 19,984 6.3149 2 3 5 7 12 

304 ........................................................... 13,649 8.1660 2 3 6 10 17 

305 ........................................................... 2,690 3.0331 1 2 2 4 5 

306 ........................................................... 5,818 5.5734 1 2 3 8 13 

307 ........................................................... 1,950 2.0292 1 1 2 2 3 

308 ........................................................... 5,454 5.2913 1 2 3 7 12 

309 ........................................................... 2,964 1.7190 1 1 1 2 3 

310 ........................................................... 25,380 4.4933 1 2 3 6 10 

311 ........................................................... 5,896 1.8552 1 1 1 2 3 

312 ........................................................... 1,328 4.9315 1 2 3 6 10 

313 ........................................................... 505 2.3921 1 1 2 3 5 

314 ........................................................... 2 89.0000 5 5 173 173 173 

315 ........................................................... 34,913 6.7494 1 1 4 9 16 

316 ........................................................... 205,633 6.1505 2 3 5 8 12 

317 ........................................................... 2,716 3.5044 1 1 2 4 7 

318 ........................................................... 5,912 5.9738 1 3 4 7 12 

319 ........................................................... 386 2.5725 1 1 2 3 5 

320 ........................................................... 224,944 4.9886 2 3 4 6 9 

321 ........................................................... 31,985 3.5383 1 2 3 4 6 

322 ........................................................... 67 3.5821 2 2 3 4 6 

323 ........................................................... 20,425 3.1030 1 1 2 4 6 

324 ........................................................... 4,639 1.8463 1 1 1 2 3 

325 ........................................................... 9,924 3.7401 1 2 3 5 7 

326 ........................................................... 2,592 2.5656 1 1 2 3 5 

327 ........................................................... 11 2.0000 1 1 2 2 3 

328 ........................................................... 574 3.4146 1 1 3 4 6 

329 ........................................................... 54 1.6852 1 1 1 2 3 

331 ........................................................... 56,139 5.4124 1 2 4 7 10 

332 ........................................................... 3,963 3.0636 1 1 2 4 6 

333 ........................................................... 244 5.3648 1 2 4 6 10 

334 ........................................................... 9,529 4.0421 1 2 3 5 7 

335 ........................................................... 12,206 2.4946 1 2 2 3 4 

336 ........................................................... 28,193 3.2206 1 1 2 4 7 

337 ........................................................... 21,510 1.8441 1 1 2 2 3 

338 ........................................................... 674 5.7953 1 2 4 8 13 

339 ........................................................... 1,237 5.1924 1 2 3 7 12 


bajohnson on PROD1PC67 with RULES2
48300 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 7A.—MEDICARE PROSPECTIVE PAYMENT SYSTEM SELECTED PERCENTILE LENGTHS OF STAY FY 2005 MEDPAR 

UPDATE MARCH 2006 GROUPER V24.0—Continued 

DRG Number 

discharge 

Arithmetic 

mean LOS 

10th 

percentile 

25th 

percentile 

50th 

percentile 

75th 

percentile 

90th 

percentile 

340 ........................................................... 1 2.0000 2 2 2 2 2 

341 ........................................................... 3,131 3.2031 1 1 1 3 7 

342 ........................................................... 457 3.0394 1 1 2 3 6 

344 ........................................................... 2,343 2.7222 1 1 1 3 7 

345 ........................................................... 1,390 5.4324 1 2 3 7 12 

346 ........................................................... 3,962 5.9079 2 3 4 7 11 

347 ........................................................... 235 2.7021 1 1 2 3 5 

348 ........................................................... 4,262 4.0082 1 2 3 5 7 

349 ........................................................... 554 2.6408 1 1 2 3 5 

350 ........................................................... 7,281 4.5187 2 2 4 5 8 

352 ........................................................... 1,177 4.1623 1 2 3 5 9 

353 ........................................................... 3,092 6.0155 2 3 4 7 11 

354 ........................................................... 7,572 5.5539 2 3 4 6 10 

355 ........................................................... 5,006 3.0224 2 2 3 3 4 

356 ........................................................... 22,085 1.8693 1 1 2 2 3 

357 ........................................................... 5,543 8.0319 3 4 6 10 15 

358 ........................................................... 20,947 3.8543 2 2 3 4 7 

359 ........................................................... 28,679 2.3506 1 2 2 3 3 

360 ........................................................... 13,879 2.5012 1 1 2 3 4 

361 ........................................................... 287 2.9303 1 1 2 3 6 

362 ........................................................... 2 1.0000 1 1 1 1 1 

363 ........................................................... 2,157 4.2165 1 2 3 5 9 

364 ........................................................... 1,800 3.8100 1 1 3 5 8 

365 ........................................................... 1,617 7.8411 2 3 5 10 16 

366 ........................................................... 4,645 6.2474 1 3 5 8 12 

367 ........................................................... 447 2.9776 1 1 2 4 5 

368 ........................................................... 4,145 6.4068 2 3 5 8 12 

369 ........................................................... 3,727 3.2659 1 1 2 4 6 

370 ........................................................... 2,251 4.9964 2 3 4 5 7 

371 ........................................................... 2,715 3.3908 2 3 3 4 4 

372 ........................................................... 1,377 3.4415 2 2 2 3 5 

373 ........................................................... 5,284 2.2470 1 2 2 3 3 

374 ........................................................... 153 2.9739 2 2 2 3 4 

375 ........................................................... 12 6.5000 1 2 3 6 8 

376 ........................................................... 476 3.2815 1 2 2 4 7 

377 ........................................................... 109 4.4954 1 2 3 6 8 

378 ........................................................... 202 2.1782 1 1 2 3 4 

379 ........................................................... 500 3.2960 1 1 2 3 6 

380 ........................................................... 111 2.0180 1 1 1 2 4 

381 ........................................................... 170 2.4647 1 1 1 2 4 

382 ........................................................... 48 1.4792 1 1 1 1 2 

383 ........................................................... 2,806 3.6433 1 1 2 4 7 

384 ........................................................... 151 2.5960 1 1 1 3 4 

387 ........................................................... 1 9.0000 9 9 9 9 9 

389 ........................................................... 3 8.6667 1 1 2 3 3 

392 ........................................................... 2,140 8.8757 2 4 6 11 19 

394 ........................................................... 2,761 7.3032 1 2 5 9 16 

395 ........................................................... 101,519 4.0933 1 2 3 5 8 

396 ........................................................... 18 3.0556 1 2 3 3 4 

397 ........................................................... 16,443 5.1098 1 2 4 6 10 

398 ........................................................... 6,708 5.4499 1 2 4 7 10 

399 ........................................................... 1,084 3.2260 1 1 3 4 6 

401 ........................................................... 6,451 11.0460 2 5 8 14 22 

402 ........................................................... 1,359 3.9014 1 1 3 5 9 

403 ........................................................... 31,351 7.8732 2 3 6 10 16 

404 ........................................................... 3,824 4.0811 1 2 3 5 8 

406 ........................................................... 2,304 9.3859 2 4 7 12 20 

407 ........................................................... 616 3.4935 1 2 3 5 7 

408 ........................................................... 1,949 8.2104 1 2 5 10 19 

409 ........................................................... 1,750 6.0383 2 3 4 6 12 

410 ........................................................... 29,067 3.7654 1 2 3 4 6 

411 ........................................................... 5 2.0000 1 1 1 3 4 

412 ........................................................... 9 1.5556 1 1 2 2 2 

413 ........................................................... 5,742 6.7180 2 3 5 9 13 

414 ........................................................... 487 4.0575 1 2 3 5 7 

417 ........................................................... 33 6.5455 2 3 5 8 12 

418 ........................................................... 29,991 6.0675 2 3 5 7 11 

419 ........................................................... 17,640 4.3459 1 2 3 5 8 

420 ........................................................... 3,102 3.1847 1 2 3 4 6 

421 ........................................................... 13,262 4.0156 1 2 3 5 7 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48301 

TABLE 7A.—MEDICARE PROSPECTIVE PAYMENT SYSTEM SELECTED PERCENTILE LENGTHS OF STAY FY 2005 MEDPAR 

UPDATE MARCH 2006 GROUPER V24.0—Continued 

DRG Number 

discharge 

Arithmetic 

mean LOS 

10th 

percentile 

25th 

percentile 

50th 

percentile 

75th 

percentile 

90th 

percentile 

422 ........................................................... 79 3.6456 1 2 2 4 7 

423 ........................................................... 8,970 8.0750 2 3 6 10 15 

424 ........................................................... 1,041 11.5053 2 4 8 14 23 

425 ........................................................... 13,101 3.4571 1 1 3 4 6 

426 ........................................................... 4,237 4.3099 1 2 3 5 8 

427 ........................................................... 1,579 4.6390 1 2 3 5 9 

428 ........................................................... 845 7.2769 1 2 4 8 14 

429 ........................................................... 23,941 5.4509 2 3 4 6 10 

430 ........................................................... 75,545 7.7573 2 3 6 9 15 

431 ........................................................... 333 6.6667 1 2 4 7 11 

432 ........................................................... 402 4.0199 1 1 3 4 8 

433 ........................................................... 4,472 2.8233 1 1 2 3 4 

439 ........................................................... 1,759 8.3337 1 3 5 9 17 

440 ........................................................... 5,216 8.1532 2 3 5 9 16 

441 ........................................................... 686 3.4125 1 1 2 4 6 

442 ........................................................... 18,606 8.6736 2 3 6 10 17 

443 ........................................................... 3,592 3.5276 1 1 3 5 7 

444 ........................................................... 6,013 4.0331 1 2 3 5 7 

445 ........................................................... 2,244 2.8266 1 1 2 3 5 

447 ........................................................... 6,324 2.5745 1 1 2 3 5 

449 ........................................................... 40,859 3.6912 1 1 3 4 7 

450 ........................................................... 7,463 1.9812 1 1 1 2 4 

451 ........................................................... 2 10.5000 8 8 13 13 13 

452 ........................................................... 28,822 4.9372 1 2 3 6 10 

453 ........................................................... 5,397 2.7589 1 1 2 3 5 

454 ........................................................... 4,739 4.1087 1 2 3 5 8 

455 ........................................................... 887 2.2807 1 1 2 3 4 

461 ........................................................... 2,290 5.5782 1 1 3 7 12 

462 ........................................................... 7,891 9.5516 4 5 7 10 13 

463 ........................................................... 32,894 3.8764 1 2 3 5 7 

464 ........................................................... 7,666 2.9032 1 1 2 4 5 

465 ........................................................... 163 3.4724 1 1 2 4 6 

466 ........................................................... 1,204 4.9086 1 1 2 4 7 

467 ........................................................... 1,028 2.6722 1 1 2 3 5 

468 ........................................................... 52,050 12.5411 3 6 10 16 24 

471 ........................................................... 15,677 4.5470 3 3 4 5 7 

473 ........................................................... 8,582 12.4204 2 3 7 17 32 

476 ........................................................... 2,851 9.9056 1 4 8 14 20 

477 ........................................................... 28,205 8.5083 1 3 7 11 17 

479 ........................................................... 27,673 2.5493 1 1 2 3 5 

480 ........................................................... 908 19.1013 6 8 13 23 39 

481 ........................................................... 1,199 22.0025 12 16 20 24 33 

482 ........................................................... 5,084 11.1810 4 6 9 13 20 

484 ........................................................... 472 12.7564 2 5 10 17 26 

485 ........................................................... 3,714 9.4715 4 5 7 11 18 

486 ........................................................... 2,712 12.1962 2 5 10 16 24 

487 ........................................................... 5,017 6.8405 1 3 5 9 14 

488 ........................................................... 828 17.6437 4 7 12 21 33 

489 ........................................................... 13,555 8.1669 2 3 6 10 15 

490 ........................................................... 5,255 5.3115 1 2 4 6 9 

491 ........................................................... 22,688 3.0224 1 2 2 3 5 

492 ........................................................... 3,924 13.8081 3 5 6 23 32 

493 ........................................................... 61,105 6.0306 2 3 5 8 11 

494 ........................................................... 24,582 2.6927 1 1 2 4 5 

495 ........................................................... 342 17.3421 8 10 13 20 33 

496 ........................................................... 3,727 8.7631 3 4 6 10 17 

497 ........................................................... 31,227 5.6855 3 3 5 6 9 

498 ........................................................... 21,305 3.6795 2 3 3 4 5 

499 ........................................................... 35,251 4.1635 1 2 3 5 8 

500 ........................................................... 46,507 2.1984 1 1 2 3 4 

501 ........................................................... 3,201 9.8416 4 5 8 12 18 

502 ........................................................... 764 5.7003 2 3 5 7 10 

503 ........................................................... 5,916 3.9238 1 2 3 5 7 

504 ........................................................... 192 28.0260 8 13 24 36 51 

505 ........................................................... 180 6.8889 1 1 2 6 13 

506 ........................................................... 963 15.1547 3 7 12 20 30 

507 ........................................................... 323 7.6997 1 3 6 10 14 

508 ........................................................... 655 7.3542 1 3 5 9 14 

509 ........................................................... 155 5.2323 1 2 3 6 11 

510 ........................................................... 1,783 6.0432 1 2 4 7 12 


bajohnson on PROD1PC67 with RULES2
48302 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 7A.—MEDICARE PROSPECTIVE PAYMENT SYSTEM SELECTED PERCENTILE LENGTHS OF STAY FY 2005 MEDPAR 

UPDATE MARCH 2006 GROUPER V24.0—Continued 

DRG Number 

discharge 

Arithmetic 

mean LOS 

10th 

percentile 

25th 

percentile 

50th 

percentile 

75th 

percentile 

90th 

percentile 

511 ........................................................... 627 3.6364 1 1 2 4 7 

512 ........................................................... 550 13.6200 6 8 10 14 25 

513 ........................................................... 226 10.6327 5 7 8 11 17 

515 ........................................................... 58,749 3.8459 1 1 2 5 9 

518 ........................................................... 23,803 2.4598 1 1 1 3 5 

519 ........................................................... 12,589 4.6711 1 1 3 6 11 

520 ........................................................... 16,552 1.9409 1 1 1 2 3 

521 ........................................................... 29,368 5.2609 1 2 4 6 8 

522 ........................................................... 3,425 10.2908 3 4 5 7 8 

523 ........................................................... 14,462 3.7574 1 2 3 4 5 

524 ........................................................... 109,116 3.1429 1 2 3 4 6 

525 ........................................................... 205 13.7366 1 3 7 17 35 

528 ........................................................... 1,845 16.3252 6 9 14 21 29 

529 ........................................................... 5,027 7.1317 1 2 4 9 16 

530 ........................................................... 3,362 2.9140 1 1 2 3 5 

531 ........................................................... 4,994 9.0631 2 4 7 12 18 

532 ........................................................... 2,882 3.6724 1 1 3 5 7 

533 ........................................................... 43,722 3.6996 1 1 2 4 9 

534 ........................................................... 40,255 1.7365 1 1 1 2 3 

535 ........................................................... 8,831 9.2481 2 4 8 12 18 

536 ........................................................... 8,262 7.2781 2 3 6 9 14 

537 ........................................................... 8,985 6.5037 1 3 5 8 13 

538 ........................................................... 5,462 2.9143 1 1 2 4 6 

539 ........................................................... 4,974 10.5589 2 4 7 14 23 

540 ........................................................... 1,505 3.5163 1 1 3 4 7 

541 ........................................................... 25,113 41.6433 16 23 34 50 72 

542 ........................................................... 23,126 30.3529 11 17 25 37 52 

543 ........................................................... 5,718 11.3902 2 4 9 16 23 

544 ........................................................... 446,467 4.3995 3 3 4 5 7 

545 ........................................................... 44,844 5.1255 3 3 4 6 9 

546 ........................................................... 2,364 8.7657 3 4 7 10 16 

547 ........................................................... 32,721 12.1244 6 8 10 14 20 

548 ........................................................... 32,268 8.7755 5 6 8 10 13 

549 ........................................................... 13,144 10.0859 5 6 8 12 18 

550 ........................................................... 34,583 6.7752 4 5 6 8 10 

551 ........................................................... 53,881 6.0660 1 2 5 8 12 

552 ........................................................... 82,137 3.4766 1 1 2 5 7 

553 ........................................................... 39,303 9.0525 1 3 7 12 19 

554 ........................................................... 77,366 5.5730 1 2 4 7 12 

555 ........................................................... 37,404 4.8144 1 2 3 6 10 

556 ........................................................... 19,008 2.0085 1 1 1 2 4 

557 ........................................................... 124,278 4.1023 1 2 3 5 8 

558 ........................................................... 193,170 1.8108 1 1 1 2 4 

559 ........................................................... 2,895 6.8370 2 3 5 8 13 

560 ........................................................... 3,457 10.2242 3 5 8 13 19 

561 ........................................................... 2,952 9.3713 2 5 8 12 18 

562 ........................................................... 52,973 4.8176 1 2 4 6 9 

563 ........................................................... 21,161 3.1806 1 2 3 4 6 

564 ........................................................... 16,330 3.4475 1 2 3 4 6 

565 ........................................................... 46,864 15.3640 6 9 13 19 26 

566 ........................................................... 73,101 7.6086 1 3 6 10 15 

567 ........................................................... 10,369 15.6256 6 8 12 19 29 

568 ........................................................... 16,698 11.3181 2 5 9 14 22 

569 ........................................................... 60,835 14.2697 6 8 12 17 26 

570 ........................................................... 72,291 9.9702 4 6 8 12 18 

571 ........................................................... 11,162 4.7775 2 2 4 6 9 

572 ........................................................... 49,006 6.9624 2 3 5 8 13 

573 ........................................................... 6,687 10.9047 5 6 8 12 19 

574 ........................................................... 26,637 5.6791 2 3 4 7 11 

575 ........................................................... 10,982 15.6028 6 8 13 19 27 

576 ........................................................... 277,520 7.1282 2 3 6 9 14 

577 ........................................................... 5,608 2.3229 1 1 1 2 5 

578 ........................................................... 35,320 15.9644 5 8 13 20 30 

579 ........................................................... 20,672 10.9008 3 5 8 13 22 

12,150,466 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48303 

TABLE 8A.— STATEWIDE AVERAGE

OPERATING COST-TO-CHARGE RATIOS—JULY 2006 

State Urban Rural 

Alabama .................... 0.263 0.336 

Alaska ....................... 0.407 0.7 

Arizona ...................... 0.284 0.36 

Arkansas ................... 0.336 0.356 

California ................... 0.238 0.342 

Colorado ................... 0.308 0.508 

Connecticut ............... 0.427 0.501 

Delaware ................... 0.496 0.462 

District of Columbia .. 0.357 ................

Florida ....................... 0.251 0.295 

Georgia ..................... 0.351 0.403 

Hawaii ....................... 0.366 0.447 

Idaho ......................... 0.474 0.541 

Illinois ........................ 0.327 0.417 

Indiana ...................... 0.417 0.453 

Iowa .......................... 0.376 0.458 

Kansas ...................... 0.299 0.443 

Kentucky ................... 0.381 0.386 

Louisiana .................. 0.301 0.361 

Maine ........................ 0.496 0.457 

Maryland ................... 0.763 0.882 

Massachusetts .......... 0.476 ................

Michigan ................... 0.373 0.47 

Minnesota ................. 0.39 0.523 

Mississippi ................ 0.327 0.376 

Missouri .................... 0.329 0.381 

Montana .................... 0.427 0.497 

Nebraska .................. 0.365 0.477 

Nevada ..................... 0.229 0.455 

New Hampshire ........ 0.455 0.448 

New Jersey ............... 0.181 ................

New Mexico .............. 0.382 0.384 

New York .................. 0.362 0.526 

North Carolina .......... 0.441 0.43 

North Dakota ............ 0.438 0.456 

Ohio .......................... 0.372 0.543 

Oklahoma ................. 0.317 0.402 

Oregon ...................... 0.472 0.43 

Pennsylvania ............ 0.277 0.436 

Puerto Rico ............... 0.457 ................

Rhode Island ............ 0.409 ................

South Carolina .......... 0.291 0.298 

South Dakota ............ 0.354 0.447 

Tennessee ................ 0.317 0.383 

Texas ........................ 0.278 0.353 

Utah .......................... 0.423 0.588 

Vermont .................... 0.556 0.627 

Virginia ...................... 0.363 0.377 

Washington ............... 0.424 0.469 

West Virginia ............ 0.484 0.466 

Wisconsin ................. 0.431 0.48 

Wyoming ................... 0.4 0.562 

TABLE 8B.— STATEWIDE AVERAGE

CAPITAL COST-TO-CHARGE RATIOS— JULY 2006 

State Ratio 

Alabama ........................................ 0.025 

Alaska ........................................... 0.04 

Arizona .......................................... 0.025 

Arkansas ....................................... 0.026 

California ....................................... 0.016 

Colorado ....................................... 0.029 

Connecticut ................................... 0.031 

Delaware ....................................... 0.037 

District of Columbia ...................... 0.024 

TABLE 8B.— STATEWIDE AVERAGE

CAPITAL COST-TO-CHARGE RATIOS— JULY 2006—Continued 

State Ratio 

Florida ........................................... 0.023 

Georgia ......................................... 0.03 

Hawaii ........................................... 0.032 

Idaho ............................................. 0.036 

Illinois ............................................ 0.026 

Indiana .......................................... 0.037 

Iowa .............................................. 0.028 

Kansas .......................................... 0.032 

Kentucky ....................................... 0.03 

Louisiana ...................................... 0.029 

Maine ............................................ 0.035 

Maryland ....................................... 0.013 

Massachusetts .............................. 0.034 

Michigan ....................................... 0.031 

Minnesota ..................................... 0.029 

Mississippi .................................... 0.029 

Missouri ........................................ 0.028 

Montana ........................................ 0.036 

Nebraska ...................................... 0.039 

Nevada ......................................... 0.022 

New Hampshire ............................ 0.036 

New Jersey ................................... 0.013 

New Mexico .................................. 0.033 

New York ...................................... 0.03 

North Carolina .............................. 0.037 

North Dakota ................................ 0.041 

Ohio .............................................. 0.03 

Oklahoma ..................................... 0.03 

Oregon .......................................... 0.032 

Pennsylvania ................................ 0.023 

Puerto Rico ................................... 0.034 

Rhode Island ................................ 0.023 

South Carolina .............................. 0.026 

South Dakota ................................ 0.033 

Tennessee .................................... 0.032 

Texas ............................................ 0.027 

Utah .............................................. 0.038 

Vermont ........................................ 0.043 

Virginia .......................................... 0.037 

Washington ................................... 0.034 

West Virginia ................................ 0.034 

Wisconsin ..................................... 0.039 

Wyoming ....................................... 0.047 

TABLE 8C.—STATEWIDE AVERAGE

TOTAL COST-TO-CHARGE RATIOS

FOR LTCHS—JULY 2006 

State Urban Rural 

Alabama .................... 0.287 0.366 

Alaska ....................... 0.441 0.764 

Arizona ...................... 0.308 0.394 

Arkansas ................... 0.367 0.389 

California ................... 0.252 0.363 

Colorado ................... 0.332 0.573 

Connecticut ............... 0.458 0.540 

Delaware ................... 0.532 0.505 

District of Columbia* 0.388 ................

Florida ....................... 0.272 0.336 

Georgia ..................... 0.380 0.437 

Hawaii ....................... 0.397 0.484 

Idaho ......................... 0.510 0.582 

Illinois ........................ 0.351 0.456 

Indiana ...................... 0.454 0.499 

Iowa .......................... 0.397 0.497 

Kansas ...................... 0.326 0.486 

Kentucky ................... 0.411 0.418 

TABLE 8C.—STATEWIDE AVERAGE

TOTAL COST-TO-CHARGE RATIOS

FOR LTCHS—JULY 2006—Continued 

State Urban Rural 

Louisiana .................. 0.331 0.392 

Maine ........................ 0.533 0.473 

Maryland** ................ 0.450 0.360 

Massachusetts* ........ 0.505 ................

Michigan ................... 0.406 0.506 

Minnesota ................. 0.418 0.552 

Mississippi ................ 0.356 0.400 

Missouri .................... 0.355 0.415 

Montana .................... 0.459 0.543 

Nebraska .................. 0.400 0.526 

Nevada ..................... 0.250 0.525 

New Hampshire ........ 0.492 0.481 

New Jersey* ............. 0.194 ................

New Mexico .............. 0.415 0.417 

New York .................. 0.390 0.561 

North Carolina .......... 0.482 0.471 

North Dakota ............ 0.476 0.503 

Ohio .......................... 0.398 0.587 

Oklahoma ................. 0.345 0.439 

Oregon ...................... 0.504 0.454 

Pennsylvania ............ 0.296 0.469 

Puerto Rico* ............. 0.489 ................

Rhode Island* ........... 0.432 ................

South Carolina .......... 0.315 0.326 

South Dakota ............ 0.384 0.487 

Tennessee ................ 0.348 0.417 

Texas ........................ 0.303 0.384 

Utah .......................... 0.459 0.650 

Vermont .................... 0.601 0.667 

Virginia ...................... 0.398 0.415 

Washington ............... 0.459 0.516 

West Virginia ............ 0.517 0.499 

Wisconsin ................. 0.473 0.519 

Wyoming ................... 0.440 0.615 

* All counties in the State or Territory are 

classified as urban, with the exception of Massachusetts, which has areas designated as 

rural. However, no short-term acute care IPPS 

hospitals or LTCHs are located in those areas 

as of July 2006. 

** National average IPPS total cost-tocharge ratios, as discussed in section II.E. of 

this final rule. 

Note: The following Table 9A is a 

tentative table and does not reflect 

decisions that are yet to be made by 

CMS pending the final calculation of the 

occupationa l mix adjusted wage index. 

The information about reclassifie d 

CBSAs reflects the latest information 

available to CMS regarding MGCRB and 

Administrat or reclassific ation 

decisions for FY 2007. A revised Table 

9A reflecting CMS’ decisions on behalf 

of hospitals using occupationa l mix 

adjusted wage indices will be published 

in a subsequent Federal Register notice 

between August 1 and October 1, 2006, 

as well as on CMS’ Web site. Hospitals 

will then have 30 days from the date the 

data appears on the CMS Web site to 

revise a decision made by CMS on their 

behalf. (See section III.H. of the 

preamble (Revisions to the Wage Index 

Based on Hospital Redesignations).) 


bajohnson on PROD1PC67 with RULES2
48304 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 9A.—HOSPITAL RECLASSIFICATIONS AND REDESIGNATIONS BY INDIVIDUAL HOSPITALS AND CBSA—FY 2007 

Provider No. Geographic 

CBSA 

Reclassified 

CBSA 

10/1/2006–

3/31/2007 

Reclassified 

CBSA 

4/1/2007–

9/30/2007 

LUGAR 

010005 ........................................................................................................................ 01 13820 13820 

010008 ........................................................................................................................ 01 33860 33860 

010009 ........................................................................................................................ 19460 26620 26620 

010012 ........................................................................................................................ 01 16860 16860 

010022 ........................................................................................................................ 01 40660 40660 LUGAR 

010025 ........................................................................................................................ 01 17980 17980 

010029 ........................................................................................................................ 12220 17980 17980 

010035 ........................................................................................................................ 01 13820 13820 

010044 ........................................................................................................................ 01 13820 13820 

010045 ........................................................................................................................ 01 13820 13820 

010054 ........................................................................................................................ 19460 26620 26620 

010059 ........................................................................................................................ 19460 26620 26620 

010065 ........................................................................................................................ 01 33860 33860 

010072 ........................................................................................................................ 01 11500 11500 LUGAR 

010083 ........................................................................................................................ 01 37860 37860 

010085 ........................................................................................................................ 19460 26620 26620 

010100 ........................................................................................................................ 01 37860 37860 

010101 ........................................................................................................................ 01 11500 11500 LUGAR 

010118 ........................................................................................................................ 01 46220 46220 

010126 ........................................................................................................................ 01 33860 33860 

010143 ........................................................................................................................ 01 13820 13820 

010150 ........................................................................................................................ 01 33860 33860 

010158 ........................................................................................................................ 01 19460 19460 

010164 ........................................................................................................................ 01 11500 11500 LUGAR 

020008 ........................................................................................................................ 02 11260 11260 

030007 ........................................................................................................................ 03 22380 22380 

030033 ........................................................................................................................ 03 22380 22380 

040014 ........................................................................................................................ 04 30780 30780 

040017 ........................................................................................................................ 04 22220 22220 

040019 ........................................................................................................................ 04 32820 32820 

040020 ........................................................................................................................ 27860 32820 32820 

040027 ........................................................................................................................ 04 44180 44180 

040039 ........................................................................................................................ 04 26 26 

040041 ........................................................................................................................ 04 30780 30780 

040047 ........................................................................................................................ 04 26 26 

040069 ........................................................................................................................ 04 32820 32820 

040071 ........................................................................................................................ 38220 30780 30780 

040076 ........................................................................................................................ 04 30780 30780 

040078 ........................................................................................................................ 26300 30780 30780 

040080 ........................................................................................................................ 04 27860 27860 

040088 ........................................................................................................................ 04 43340 43340 

040091 ........................................................................................................................ 04 45500 45500 

040100 ........................................................................................................................ 04 30780 30780 

040119 ........................................................................................................................ 04 30780 30780 

050006 ........................................................................................................................ 05 39820 39820 

050009 ........................................................................................................................ 34900 46700 46700 

050013 ........................................................................................................................ 34900 46700 46700 

050014 ........................................................................................................................ 05 40900 40900 

050022 ........................................................................................................................ 40140 42044 42044 

050042 ........................................................................................................................ 05 39820 39820 

050046 ........................................................................................................................ 37100 ........................ 31084 

050054 ........................................................................................................................ 40140 42044 42044 

050065 ........................................................................................................................ 42044 31084 31084 

050069 ........................................................................................................................ 42044 31084 31084 

050071 ........................................................................................................................ 41940 36084 36084 

050073 ........................................................................................................................ 46700 36084 36084 

050076 ........................................................................................................................ 41884 36084 36084 

050082 ........................................................................................................................ 37100 ........................ 31084 

050089 ........................................................................................................................ 40140 31084 31084 

050090 ........................................................................................................................ 42220 41884 41884 

050099 ........................................................................................................................ 40140 31084 31084 

050101 ........................................................................................................................ 46700 36084 36084 

050102 ........................................................................................................................ 40140 42044 42044 

050118 ........................................................................................................................ 44700 33700 33700 

050129 ........................................................................................................................ 40140 31084 31084 

050136 ........................................................................................................................ 42220 41884 41884 

050140 ........................................................................................................................ 40140 31084 31084 

050150 ........................................................................................................................ 05 40900 40900 

050159 ........................................................................................................................ 37100 ........................ 31084 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48305 

TABLE 9A.—HOSPITAL RECLASSIFICATIONS AND REDESIGNATIONS BY INDIVIDUAL HOSPITALS AND CBSA—FY 2007—

Continued 

Provider No. Geographic 

CBSA 

Reclassified 

CBSA 

10/1/2006–

3/31/2007 

Reclassified 

CBSA 

4/1/2007–

9/30/2007 

LUGAR 

050168 ........................................................................................................................ 42044 31084 31084 

050173 ........................................................................................................................ 42044 31084 31084 

050174 ........................................................................................................................ 42220 41884 41884 

050193 ........................................................................................................................ 42044 31084 31084 

050197 ........................................................................................................................ 41884 36084 36084 

050224 ........................................................................................................................ 42044 31084 31084 

050226 ........................................................................................................................ 42044 31084 31084 

050228 ........................................................................................................................ 41884 36084 36084 

050230 ........................................................................................................................ 42044 31084 31084 

050236 ........................................................................................................................ 37100 ........................ 31084 

050243 ........................................................................................................................ 40140 42044 42044 

050245 ........................................................................................................................ 40140 31084 31084 

050251 ........................................................................................................................ 05 39900 39900 

050272 ........................................................................................................................ 40140 31084 31084 

050279 ........................................................................................................................ 40140 31084 31084 

050291 ........................................................................................................................ 42220 41884 41884 

050292 ........................................................................................................................ 40140 42044 42044 

050298 ........................................................................................................................ 40140 31084 31084 

050300 ........................................................................................................................ 40140 31084 31084 

050327 ........................................................................................................................ 40140 31084 31084 

050329 ........................................................................................................................ 40140 42044 42044 

050348 ........................................................................................................................ 42044 31084 31084 

050367 ........................................................................................................................ 46700 36084 36084 

050385 ........................................................................................................................ 42220 41884 41884 

050390 ........................................................................................................................ 40140 42044 42044 

050394 ........................................................................................................................ 37100 ........................ 31084 

050423 ........................................................................................................................ 40140 42044 42044 

050426 ........................................................................................................................ 42044 31084 31084 

050430 ........................................................................................................................ 05 39900 39900 

050510 ........................................................................................................................ 41884 36084 36084 

050517 ........................................................................................................................ 40140 31084 31084 

050526 ........................................................................................................................ 42044 31084 31084 

050534 ........................................................................................................................ 40140 42044 42044 

050535 ........................................................................................................................ 42044 31084 31084 

050541 ........................................................................................................................ 41884 36084 36084 

050543 ........................................................................................................................ 42044 31084 31084 

050547 ........................................................................................................................ 42220 41884 41884 

050548 ........................................................................................................................ 42044 31084 31084 

050549 ........................................................................................................................ 37100 ........................ 31084 

050550 ........................................................................................................................ 42044 31084 31084 

050551 ........................................................................................................................ 42044 31084 31084 

050567 ........................................................................................................................ 42044 31084 31084 

050569 ........................................................................................................................ 05 42220 42220 

050570 ........................................................................................................................ 42044 31084 31084 

050573 ........................................................................................................................ 40140 42044 42044 

050580 ........................................................................................................................ 42044 31084 31084 

050584 ........................................................................................................................ 40140 31084 31084 

050585 ........................................................................................................................ 42044 31084 31084 

050586 ........................................................................................................................ 40140 31084 31084 

050589 ........................................................................................................................ 42044 31084 31084 

050592 ........................................................................................................................ 42044 31084 31084 

050594 ........................................................................................................................ 42044 31084 31084 

050603 ........................................................................................................................ 42044 31084 31084 

050609 ........................................................................................................................ 42044 31084 31084 

050616 ........................................................................................................................ 37100 ........................ 31084 

050667 ........................................................................................................................ 34900 46700 46700 

050678 ........................................................................................................................ 42044 31084 31084 

050680 ........................................................................................................................ 46700 36084 36084 

050684 ........................................................................................................................ 40140 42044 42044 

050686 ........................................................................................................................ 40140 42044 42044 

050690 ........................................................................................................................ 42220 41884 41884 

050693 ........................................................................................................................ 42044 31084 31084 

050694 ........................................................................................................................ 40140 42044 42044 

050701 ........................................................................................................................ 40140 42044 42044 

050709 ........................................................................................................................ 40140 31084 31084 

050718 ........................................................................................................................ 40140 42044 42044 

050720 ........................................................................................................................ 42044 31084 31084 

050728 ........................................................................................................................ 42220 41884 41884 


bajohnson on PROD1PC67 with RULES2
48306 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 9A.—HOSPITAL RECLASSIFICATIONS AND REDESIGNATIONS BY INDIVIDUAL HOSPITALS AND CBSA—FY 2007—

Continued 

Provider No. Geographic 

CBSA 

Reclassified 

CBSA 

10/1/2006–

3/31/2007 

Reclassified 

CBSA 

4/1/2007–

9/30/2007 

LUGAR 

050749 ........................................................................................................................ 37100 ........................ 31084 

060001 ........................................................................................................................ 24540 19740 19740 

060003 ........................................................................................................................ 14500 19740 19740 

060023 ........................................................................................................................ 24300 19740 19740 

060027 ........................................................................................................................ 14500 19740 19740 

060044 ........................................................................................................................ 06 19740 19740 

060049 ........................................................................................................................ 06 22660 22660 

060075 ........................................................................................................................ 06 24300 24300 

060096 ........................................................................................................................ 06 19740 19740 

060103 ........................................................................................................................ 14500 19740 19740 

070001 ........................................................................................................................ 35300 ........................ 35004 

070003 ........................................................................................................................ 07 25540 25540 LUGAR 

070005 ........................................................................................................................ 35300 ........................ 35004 

070006 ........................................................................................................................ 14860 ........................ 35644 

070010 ........................................................................................................................ 14860 ........................ 35644 

070016 ........................................................................................................................ 35300 ........................ 35004 

070017 ........................................................................................................................ 35300 ........................ 35004 

070018 ........................................................................................................................ 14860 ........................ 35644 

070019 ........................................................................................................................ 35300 ........................ 35004 

070021 ........................................................................................................................ 07 25540 25540 LUGAR 

070022 ........................................................................................................................ 35300 ........................ 35004 

070028 ........................................................................................................................ 14860 ........................ 35644 

070031 ........................................................................................................................ 35300 ........................ 35004 

070033 ........................................................................................................................ 14860 35644 35644 

070034 ........................................................................................................................ 14860 ........................ 35644 

070036 ........................................................................................................................ 25540 35300 35300 

070038 ........................................................................................................................ 35300 ........................ 35004 

070039 ........................................................................................................................ 35300 ........................ 35004 

080004 ........................................................................................................................ 20100 48864 48864 

080006 ........................................................................................................................ 08 20100 20100 

080007 ........................................................................................................................ 08 36140 36140 

090001 ........................................................................................................................ 47894 13644 13644 

100022 ........................................................................................................................ 33124 22744 22744 

100023 ........................................................................................................................ 10 36740 36740 

100024 ........................................................................................................................ 10 33124 33124 

100045 ........................................................................................................................ 19660 36740 36740 

100049 ........................................................................................................................ 10 29460 29460 

100081 ........................................................................................................................ 10 23020 23020 LUGAR 

100109 ........................................................................................................................ 10 36740 36740 

100118 ........................................................................................................................ 10 27260 27260 

100139 ........................................................................................................................ 10 23540 23540 LUGAR 

100150 ........................................................................................................................ 10 33124 33124 

100157 ........................................................................................................................ 29460 45300 45300 

100176 ........................................................................................................................ 48424 38940 38940 

100217 ........................................................................................................................ 42680 38940 38940 

100232 ........................................................................................................................ 10 27260 27260 

100239 ........................................................................................................................ 45300 42260 42260 

100249 ........................................................................................................................ 10 45300 45300 

100252 ........................................................................................................................ 10 38940 38940 

100258 ........................................................................................................................ 48424 22744 22744 

100292 ........................................................................................................................ 10 23020 23020 LUGAR 

110001 ........................................................................................................................ 19140 12060 12060 

110002 ........................................................................................................................ 11 12060 12060 

110003 ........................................................................................................................ 11 27260 27260 

110023 ........................................................................................................................ 11 12060 12060 

110025 ........................................................................................................................ 15260 27260 27260 

110029 ........................................................................................................................ 23580 12060 12060 

110038 ........................................................................................................................ 11 46660 46660 

110040 ........................................................................................................................ 11 12060 12060 LUGAR 

110041 ........................................................................................................................ 11 12020 12020 

110052 ........................................................................................................................ 11 16860 16860 LUGAR 

110054 ........................................................................................................................ 40660 12060 12060 

110069 ........................................................................................................................ 47580 31420 31420 

110075 ........................................................................................................................ 11 42340 42340 

110088 ........................................................................................................................ 11 12060 12060 LUGAR 

110095 ........................................................................................................................ 11 46660 46660 

110117 ........................................................................................................................ 11 12060 12060 LUGAR 

110122 ........................................................................................................................ 46660 45220 45220 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48307 

TABLE 9A.—HOSPITAL RECLASSIFICATIONS AND REDESIGNATIONS BY INDIVIDUAL HOSPITALS AND CBSA—FY 2007—

Continued 

Provider No. Geographic 

CBSA 

Reclassified 

CBSA 

10/1/2006–

3/31/2007 

Reclassified 

CBSA 

4/1/2007–

9/30/2007 

LUGAR 

110125 ........................................................................................................................ 11 31420 31420 

110128 ........................................................................................................................ 11 42340 42340 

110150 ........................................................................................................................ 11 12060 12060 

110153 ........................................................................................................................ 47580 31420 31420 

110168 ........................................................................................................................ 40660 12060 12060 

110187 ........................................................................................................................ 11 12060 12060 LUGAR 

110189 ........................................................................................................................ 11 12060 12060 

110205 ........................................................................................................................ 11 12060 12060 

120028 ........................................................................................................................ 12 26180 26180 

130002 ........................................................................................................................ 13 29 29 

130003 ........................................................................................................................ 30300 28420 28420 

130018 ........................................................................................................................ 13 38540 38540 

130049 ........................................................................................................................ 17660 44060 44060 

130067 ........................................................................................................................ 13 26820 26820 LUGAR 

140012 ........................................................................................................................ 14 16974 16974 

140015 ........................................................................................................................ 14 41180 41180 

140032 ........................................................................................................................ 14 41180 41180 

140033 ........................................................................................................................ 29404 16974 16974 

140034 ........................................................................................................................ 14 41180 41180 

140040 ........................................................................................................................ 14 37900 37900 

140043 ........................................................................................................................ 14 40420 40420 

140046 ........................................................................................................................ 14 41180 41180 

140058 ........................................................................................................................ 14 41180 41180 

140064 ........................................................................................................................ 14 37900 37900 

140084 ........................................................................................................................ 29404 16974 16974 

140093 ........................................................................................................................ 19180 16580 16580 

140100 ........................................................................................................................ 29404 16974 16974 

140110 ........................................................................................................................ 14 16974 16974 

140130 ........................................................................................................................ 29404 16974 16974 

140143 ........................................................................................................................ 14 37900 37900 

140160 ........................................................................................................................ 14 40420 40420 

140161 ........................................................................................................................ 14 16974 16974 

140164 ........................................................................................................................ 14 41180 41180 

140189 ........................................................................................................................ 14 16580 16580 

140202 ........................................................................................................................ 29404 16974 16974 

140233 ........................................................................................................................ 40420 16974 16974 

140234 ........................................................................................................................ 14 37900 37900 

140236 ........................................................................................................................ 14 28100 28100 LUGAR 

140291 ........................................................................................................................ 29404 16974 16974 

150002 ........................................................................................................................ 23844 16974 16974 

150004 ........................................................................................................................ 23844 16974 16974 

150006 ........................................................................................................................ 33140 43780 43780 

150008 ........................................................................................................................ 23844 16974 16974 

150011 ........................................................................................................................ 15 26900 26900 

150015 ........................................................................................................................ 33140 16974 16974 

150030 ........................................................................................................................ 15 26900 26900 LUGAR 

150034 ........................................................................................................................ 23844 16974 16974 

150048 ........................................................................................................................ 15 17140 17140 

150051 ........................................................................................................................ 14020 26900 26900 

150065 ........................................................................................................................ 15 26900 26900 

150069 ........................................................................................................................ 15 17140 17140 

150076 ........................................................................................................................ 15 43780 43780 

150088 ........................................................................................................................ 11300 26900 26900 

150090 ........................................................................................................................ 23844 16974 16974 

150102 ........................................................................................................................ 15 23844 23844 LUGAR 

150112 ........................................................................................................................ 18020 26900 26900 

150113 ........................................................................................................................ 11300 26900 26900 

150122 ........................................................................................................................ 15 26900 26900 

150125 ........................................................................................................................ 23844 16974 16974 

150126 ........................................................................................................................ 23844 16974 16974 

150133 ........................................................................................................................ 15 23060 23060 

150146 ........................................................................................................................ 15 23060 23060 

150147 ........................................................................................................................ 23844 16974 16974 

160001 ........................................................................................................................ 16 19780 19780 

160016 ........................................................................................................................ 16 19780 19780 

160057 ........................................................................................................................ 16 26980 26980 

160064 ........................................................................................................................ 16 24 24 

160080 ........................................................................................................................ 16 19340 19340 


bajohnson on PROD1PC67 with RULES2
48308 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 9A.—HOSPITAL RECLASSIFICATIONS AND REDESIGNATIONS BY INDIVIDUAL HOSPITALS AND CBSA—FY 2007—

Continued 

Provider No. Geographic 

CBSA 

Reclassified 

CBSA 

10/1/2006–

3/31/2007 

Reclassified 

CBSA 

4/1/2007–

9/30/2007 

LUGAR 

160089 ........................................................................................................................ 16 19780 19780 

160147 ........................................................................................................................ 16 19780 19780 

170006 ........................................................................................................................ 17 27900 27900 

170010 ........................................................................................................................ 17 46140 46140 

170012 ........................................................................................................................ 17 48620 48620 

170013 ........................................................................................................................ 17 48620 48620 

170020 ........................................................................................................................ 17 48620 48620 

170023 ........................................................................................................................ 17 48620 48620 

170033 ........................................................................................................................ 17 48620 48620 

170058 ........................................................................................................................ 17 28140 28140 

170068 ........................................................................................................................ 17 11100 11100 

170120 ........................................................................................................................ 17 27900 27900 

170142 ........................................................................................................................ 17 45820 45820 

170175 ........................................................................................................................ 17 48620 48620 

170190 ........................................................................................................................ 17 45820 45820 

170193 ........................................................................................................................ 17 48620 48620 

180005 ........................................................................................................................ 18 26580 26580 

180011 ........................................................................................................................ 18 30460 30460 

180012 ........................................................................................................................ 21060 31140 31140 

180013 ........................................................................................................................ 14540 34980 34980 

180017 ........................................................................................................................ 18 21060 21060 

180018 ........................................................................................................................ 18 30460 30460 

180019 ........................................................................................................................ 18 17140 17140 

180024 ........................................................................................................................ 18 31140 31140 

180027 ........................................................................................................................ 18 17300 17300 

180029 ........................................................................................................................ 18 28700 28700 

180044 ........................................................................................................................ 18 26580 26580 

180048 ........................................................................................................................ 18 31140 31140 

180066 ........................................................................................................................ 18 34980 34980 

180069 ........................................................................................................................ 18 26580 26580 

180075 ........................................................................................................................ 18 14540 14540 LUGAR 

180078 ........................................................................................................................ 18 26580 26580 

180080 ........................................................................................................................ 18 28940 28940 

180093 ........................................................................................................................ 18 21780 21780 

180102 ........................................................................................................................ 18 17300 17300 

180104 ........................................................................................................................ 18 17300 17300 

180116 ........................................................................................................................ 18 14 14 

180124 ........................................................................................................................ 14540 34980 34980 

180127 ........................................................................................................................ 18 31140 31140 

180132 ........................................................................................................................ 18 30460 30460 

180139 ........................................................................................................................ 18 30460 30460 

190001 ........................................................................................................................ 19 35380 35380 

190003 ........................................................................................................................ 19 29180 29180 

190015 ........................................................................................................................ 19 35380 35380 

190086 ........................................................................................................................ 19 33740 33740 

190099 ........................................................................................................................ 19 12940 12940 

190106 ........................................................................................................................ 19 10780 10780 

190131 ........................................................................................................................ 12940 35380 35380 

190155 ........................................................................................................................ 19 12940 12940 LUGAR 

190164 ........................................................................................................................ 19 10780 10780 

190191 ........................................................................................................................ 19 12940 12940 

190208 ........................................................................................................................ 19 4 4 

190218 ........................................................................................................................ 19 43340 43340 

190223 ........................................................................................................................ 19 12940 12940 LUGAR 

200020 ........................................................................................................................ 38860 40484 40484 

200024 ........................................................................................................................ 30340 38860 38860 

200034 ........................................................................................................................ 30340 38860 38860 

200039 ........................................................................................................................ 20 38860 38860 

200050 ........................................................................................................................ 20 12620 12620 

200063 ........................................................................................................................ 20 38860 38860 

220001 ........................................................................................................................ 49340 14484 14484 

220002 ........................................................................................................................ 15764 14484 14484 

220008 ........................................................................................................................ 39300 14484 14484 

220010 ........................................................................................................................ 21604 14484 14484 

220011 ........................................................................................................................ 15764 14484 14484 

220019 ........................................................................................................................ 49340 14484 14484 

220020 ........................................................................................................................ 38860 40484 40484 

220025 ........................................................................................................................ 49340 14484 14484 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48309 

TABLE 9A.—HOSPITAL RECLASSIFICATIONS AND REDESIGNATIONS BY INDIVIDUAL HOSPITALS AND CBSA—FY 2007—

Continued 

Provider No. Geographic 

CBSA 

Reclassified 

CBSA 

10/1/2006–

3/31/2007 

Reclassified 

CBSA 

4/1/2007–

9/30/2007 

LUGAR 

220028 ........................................................................................................................ 49340 14484 14484 

220029 ........................................................................................................................ 21604 14484 14484 

220033 ........................................................................................................................ 21604 14484 14484 

220035 ........................................................................................................................ 21604 14484 14484 

220049 ........................................................................................................................ 15764 14484 14484 

220058 ........................................................................................................................ 49340 14484 14484 

220060 ........................................................................................................................ 14484 12700 12700 

220062 ........................................................................................................................ 49340 14484 14484 

220063 ........................................................................................................................ 15764 14484 14484 

220070 ........................................................................................................................ 15764 14484 14484 

220073 ........................................................................................................................ 39300 14484 14484 

220077 ........................................................................................................................ 44140 25540 25540 

220080 ........................................................................................................................ 21604 14484 14484 

220082 ........................................................................................................................ 15764 14484 14484 

220084 ........................................................................................................................ 15764 14484 14484 

220090 ........................................................................................................................ 49340 14484 14484 

220095 ........................................................................................................................ 49340 14484 14484 

220098 ........................................................................................................................ 15764 14484 14484 

220101 ........................................................................................................................ 15764 14484 14484 

220105 ........................................................................................................................ 15764 14484 14484 

220133 ........................................................................................................................ 15764 14484 14484 

220163 ........................................................................................................................ 49340 14484 14484 

220171 ........................................................................................................................ 15764 14484 14484 

220174 ........................................................................................................................ 21604 14484 14484 

230002 ........................................................................................................................ 19804 ........................ 11460 

230003 ........................................................................................................................ 26100 ........................ 34740 

230013 ........................................................................................................................ 47644 ........................ 19804 

230019 ........................................................................................................................ 47644 ........................ 19804 

230020 ........................................................................................................................ 19804 ........................ 11460 

230022 ........................................................................................................................ 23 29620 29620 

230024 ........................................................................................................................ 19804 ........................ 11460 

230029 ........................................................................................................................ 47644 ........................ 19804 

230030 ........................................................................................................................ 23 40980 40980 

230035 ........................................................................................................................ 23 24340 24340 LUGAR 

230036 ........................................................................................................................ 23 13020 13020 

230037 ........................................................................................................................ 23 11460 11460 

230047 ........................................................................................................................ 47644 19804 19804 

230053 ........................................................................................................................ 19804 ........................ 11460 

230054 ........................................................................................................................ 23 24580 24580 

230065 ........................................................................................................................ 19804 ........................ 11460 

230069 ........................................................................................................................ 47644 11460 11460 

230071 ........................................................................................................................ 47644 ........................ 19804 

230072 ........................................................................................................................ 26100 ........................ 34740 

230077 ........................................................................................................................ 40980 22420 22420 

230080 ........................................................................................................................ 23 40980 40980 

230089 ........................................................................................................................ 19804 ........................ 11460 

230092 ........................................................................................................................ 27100 29620 29620 

230093 ........................................................................................................................ 23 24340 24340 

230096 ........................................................................................................................ 23 28020 28020 

230097 ........................................................................................................................ 23 24340 24340 

230099 ........................................................................................................................ 33780 11460 11460 

230104 ........................................................................................................................ 19804 ........................ 11460 

230105 ........................................................................................................................ 23 13020 13020 

230119 ........................................................................................................................ 19804 ........................ 11460 

230121 ........................................................................................................................ 23 29620 29620 LUGAR 

230130 ........................................................................................................................ 47644 ........................ 19804 

230134 ........................................................................................................................ 23 26100 26100 LUGAR 

230135 ........................................................................................................................ 19804 ........................ 11460 

230142 ........................................................................................................................ 19804 ........................ 11460 

230146 ........................................................................................................................ 19804 ........................ 11460 

230151 ........................................................................................................................ 47644 ........................ 19804 

230165 ........................................................................................................................ 19804 ........................ 11460 

230174 ........................................................................................................................ 26100 ........................ 34740 

230176 ........................................................................................................................ 19804 ........................ 11460 

230195 ........................................................................................................................ 47644 19804 19804 

230204 ........................................................................................................................ 47644 19804 19804 

230207 ........................................................................................................................ 47644 ........................ 19804 

230208 ........................................................................................................................ 23 24340 24340 LUGAR 


bajohnson on PROD1PC67 with RULES2
48310 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 9A.—HOSPITAL RECLASSIFICATIONS AND REDESIGNATIONS BY INDIVIDUAL HOSPITALS AND CBSA—FY 2007—

Continued 

Provider No. Geographic 

CBSA 

Reclassified 

CBSA 

10/1/2006–

3/31/2007 

Reclassified 

CBSA 

4/1/2007–

9/30/2007 

LUGAR 

230217 ........................................................................................................................ 12980 29620 29620 

230223 ........................................................................................................................ 47644 ........................ 19804 

230227 ........................................................................................................................ 47644 19804 19804 

230244 ........................................................................................................................ 19804 ........................ 11460 

230254 ........................................................................................................................ 47644 ........................ 19804 

230257 ........................................................................................................................ 47644 19804 19804 

230264 ........................................................................................................................ 47644 19804 19804 

230269 ........................................................................................................................ 47644 ........................ 19804 

230270 ........................................................................................................................ 19804 ........................ 11460 

230273 ........................................................................................................................ 19804 ........................ 11460 

230277 ........................................................................................................................ 47644 ........................ 19804 

230279 ........................................................................................................................ 47644 11460 11460 

230293 ........................................................................................................................ 19804 ........................ 11460 

230295 ........................................................................................................................ 23 26100 26100 LUGAR 

240018 ........................................................................................................................ 24 33460 33460 

240030 ........................................................................................................................ 24 41060 41060 

240036 ........................................................................................................................ 41060 33460 33460 

240064 ........................................................................................................................ 24 20260 20260 

240069 ........................................................................................................................ 24 40340 40340 

240071 ........................................................................................................................ 24 40340 40340 

240075 ........................................................................................................................ 24 41060 41060 

240088 ........................................................................................................................ 24 41060 41060 

240093 ........................................................................................................................ 24 33460 33460 

240105 ........................................................................................................................ 24 40340 40340 LUGAR 

240150 ........................................................................................................................ 24 40340 40340 LUGAR 

240187 ........................................................................................................................ 24 33460 33460 

240211 ........................................................................................................................ 24 33460 33460 

250002 ........................................................................................................................ 25 22520 22520 

250004 ........................................................................................................................ 25 32820 32820 

250006 ........................................................................................................................ 25 32820 32820 

250009 ........................................................................................................................ 25 27180 27180 

250023 ........................................................................................................................ 25 25060 25060 LUGAR 

250031 ........................................................................................................................ 25 27140 27140 

250034 ........................................................................................................................ 25 32820 32820 

250040 ........................................................................................................................ 37700 25060 25060 

250042 ........................................................................................................................ 25 32820 32820 

250044 ........................................................................................................................ 25 22520 22520 

250069 ........................................................................................................................ 25 46220 46220 

250079 ........................................................................................................................ 25 27140 27140 

250081 ........................................................................................................................ 25 46220 46220 

250082 ........................................................................................................................ 25 38220 38220 

250094 ........................................................................................................................ 25620 25060 25060 

250097 ........................................................................................................................ 25 12940 12940 

250099 ........................................................................................................................ 25 27140 27140 

250100 ........................................................................................................................ 25 46220 46220 

250104 ........................................................................................................................ 25 27140 27140 

250117 ........................................................................................................................ 25 25060 25060 LUGAR 

260009 ........................................................................................................................ 26 28140 28140 

260011 ........................................................................................................................ 27620 17860 17860 

260015 ........................................................................................................................ 26 27860 27860 

260017 ........................................................................................................................ 26 41180 41180 

260022 ........................................................................................................................ 26 16 16 

260025 ........................................................................................................................ 26 41180 41180 

260049 ........................................................................................................................ 26 44180 44180 LUGAR 

260050 ........................................................................................................................ 26 41140 41140 

260064 ........................................................................................................................ 26 17860 17860 

260074 ........................................................................................................................ 26 17860 17860 

260094 ........................................................................................................................ 26 44180 44180 

260110 ........................................................................................................................ 26 41180 41180 

260113 ........................................................................................................................ 26 14 14 

260116 ........................................................................................................................ 26 14 14 

260119 ........................................................................................................................ 26 27860 27860 

260175 ........................................................................................................................ 26 28140 28140 

260183 ........................................................................................................................ 26 41180 41180 

260186 ........................................................................................................................ 26 17860 17860 

270003 ........................................................................................................................ 27 24500 24500 

270011 ........................................................................................................................ 27 24500 24500 

270017 ........................................................................................................................ 27 33540 33540 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48311 

TABLE 9A.—HOSPITAL RECLASSIFICATIONS AND REDESIGNATIONS BY INDIVIDUAL HOSPITALS AND CBSA—FY 2007—

Continued 

Provider No. Geographic 

CBSA 

Reclassified 

CBSA 

10/1/2006–

3/31/2007 

Reclassified 

CBSA 

4/1/2007–

9/30/2007 

LUGAR 

270051 ........................................................................................................................ 27 33540 33540 

280009 ........................................................................................................................ 28 30700 30700 

280023 ........................................................................................................................ 28 30700 30700 

280032 ........................................................................................................................ 28 30700 30700 

280061 ........................................................................................................................ 28 53 53 

280065 ........................................................................................................................ 28 24540 24540 

280077 ........................................................................................................................ 28 36540 36540 

280125 ........................................................................................................................ 28 43580 43580 

290002 ........................................................................................................................ 29 16180 16180 LUGAR 

290006 ........................................................................................................................ 29 39900 39900 

290008 ........................................................................................................................ 29 41620 41620 

290019 ........................................................................................................................ 16180 39900 39900 

300005 ........................................................................................................................ 30 31700 31700 

300011 ........................................................................................................................ 31700 15764 15764 

300012 ........................................................................................................................ 31700 15764 15764 

300014 ........................................................................................................................ 40484 31700 31700 

300017 ........................................................................................................................ 40484 21604 21604 

300018 ........................................................................................................................ 40484 31700 31700 

300019 ........................................................................................................................ 30 49340 49340 

300020 ........................................................................................................................ 31700 15764 15764 

300023 ........................................................................................................................ 40484 21604 21604 

300029 ........................................................................................................................ 40484 21604 21604 

300034 ........................................................................................................................ 31700 15764 15764 

310002 ........................................................................................................................ 35084 35644 35644 

310009 ........................................................................................................................ 35084 35644 35644 

310013 ........................................................................................................................ 35084 35644 35644 

310014 ........................................................................................................................ 15804 37964 37964 

310015 ........................................................................................................................ 35084 35644 35644 

310017 ........................................................................................................................ 35084 35644 35644 

310018 ........................................................................................................................ 35084 35644 35644 

310021 ........................................................................................................................ 45940 35084 35084 

310031 ........................................................................................................................ 15804 20764 20764 

310038 ........................................................................................................................ 20764 35644 35644 

310039 ........................................................................................................................ 20764 35644 35644 

310048 ........................................................................................................................ 20764 35084 35084 

310050 ........................................................................................................................ 35084 35644 35644 

310054 ........................................................................................................................ 35084 35644 35644 

310070 ........................................................................................................................ 20764 35644 35644 

310076 ........................................................................................................................ 35084 35644 35644 

310078 ........................................................................................................................ 35084 35644 35644 

310081 ........................................................................................................................ 15804 37964 37964 

310083 ........................................................................................................................ 35084 35644 35644 

310093 ........................................................................................................................ 35084 35644 35644 

310096 ........................................................................................................................ 35084 35644 35644 

310108 ........................................................................................................................ 20764 35644 35644 

310119 ........................................................................................................................ 35084 35644 35644 

320005 ........................................................................................................................ 22140 10740 10740 

320006 ........................................................................................................................ 32 42140 42140 

320013 ........................................................................................................................ 32 42140 42140 

320014 ........................................................................................................................ 32 29740 29740 

320033 ........................................................................................................................ 32 42140 42140 LUGAR 

320063 ........................................................................................................................ 32 36220 36220 

320065 ........................................................................................................................ 32 36220 36220 

330004 ........................................................................................................................ 28740 39100 39100 

330008 ........................................................................................................................ 33 15380 15380 LUGAR 

330027 ........................................................................................................................ 35004 35644 35644 

330038 ........................................................................................................................ 33 40380 40380 LUGAR 

330073 ........................................................................................................................ 33 40380 40380 LUGAR 

330079 ........................................................................................................................ 33 47 47 

330085 ........................................................................................................................ 33 45060 45060 

330094 ........................................................................................................................ 33 28740 28740 

330103 ........................................................................................................................ 33 39 39 

330106 ........................................................................................................................ 35004 ........................ 35644 

330136 ........................................................................................................................ 33 45060 45060 

330157 ........................................................................................................................ 33 45060 45060 

330167 ........................................................................................................................ 35004 ........................ 35644 

330181 ........................................................................................................................ 35004 ........................ 35644 

330182 ........................................................................................................................ 35004 35644 35644 


bajohnson on PROD1PC67 with RULES2
48312 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 9A.—HOSPITAL RECLASSIFICATIONS AND REDESIGNATIONS BY INDIVIDUAL HOSPITALS AND CBSA—FY 2007—

Continued 

Provider No. Geographic 

CBSA 

Reclassified 

CBSA 

10/1/2006–

3/31/2007 

Reclassified 

CBSA 

4/1/2007–

9/30/2007 

LUGAR 

330191 ........................................................................................................................ 24020 10580 10580 

330198 ........................................................................................................................ 35004 ........................ 35644 

330224 ........................................................................................................................ 28740 39100 39100 

330225 ........................................................................................................................ 35004 ........................ 35644 

330229 ........................................................................................................................ 27460 21500 21500 

330235 ........................................................................................................................ 33 45060 45060 LUGAR 

330239 ........................................................................................................................ 27460 21500 21500 

330250 ........................................................................................................................ 33 15540 15540 

330259 ........................................................................................................................ 35004 35644 

330277 ........................................................................................................................ 33 27060 27060 

330331 ........................................................................................................................ 35004 ........................ 35644 

330332 ........................................................................................................................ 35004 ........................ 35644 

330359 ........................................................................................................................ 33 39100 39100 LUGAR 

330372 ........................................................................................................................ 35004 ........................ 35644 

330386 ........................................................................................................................ 33 39100 39100 

340004 ........................................................................................................................ 24660 49180 49180 

340008 ........................................................................................................................ 34 16740 16740 

340010 ........................................................................................................................ 24140 39580 39580 

340013 ........................................................................................................................ 34 24860 24860 

340014 ........................................................................................................................ 49180 24660 24660 

340021 ........................................................................................................................ 34 16740 16740 

340023 ........................................................................................................................ 11700 24860 24860 

340027 ........................................................................................................................ 34 24780 24780 

340039 ........................................................................................................................ 34 16740 16740 

340047 ........................................................................................................................ 49180 24660 24660 

340050 ........................................................................................................................ 34 22180 22180 

340051 ........................................................................................................................ 34 25860 25860 

340068 ........................................................................................................................ 34 48900 48900 

340069 ........................................................................................................................ 39580 20500 20500 

340070 ........................................................................................................................ 15500 24660 24660 

340071 ........................................................................................................................ 34 39580 39580 LUGAR 

340073 ........................................................................................................................ 39580 20500 20500 

340091 ........................................................................................................................ 24660 49180 49180 

340109 ........................................................................................................................ 34 47260 47260 

340114 ........................................................................................................................ 39580 20500 20500 

340115 ........................................................................................................................ 34 20500 20500 

340124 ........................................................................................................................ 34 39580 39580 LUGAR 

340126 ........................................................................................................................ 34 39580 39580 

340127 ........................................................................................................................ 34 20500 20500 

340129 ........................................................................................................................ 34 16740 16740 

340131 ........................................................................................................................ 34 24780 24780 

340136 ........................................................................................................................ 34 20500 20500 LUGAR 

340138 ........................................................................................................................ 39580 20500 20500 

340144 ........................................................................................................................ 34 16740 16740 

340145 ........................................................................................................................ 34 16740 16740 LUGAR 

340147 ........................................................................................................................ 40580 39580 39580 

340148 ........................................................................................................................ 49180 24660 24660 

340173 ........................................................................................................................ 39580 20500 20500 

350003 ........................................................................................................................ 35 13900 13900 

350006 ........................................................................................................................ 35 13900 13900 

350009 ........................................................................................................................ 35 22020 22020 

360008 ........................................................................................................................ 36 26580 26580 

360010 ........................................................................................................................ 36 10420 10420 

360011 ........................................................................................................................ 36 18140 18140 

360013 ........................................................................................................................ 36 30620 30620 

360014 ........................................................................................................................ 36 18140 18140 

360019 ........................................................................................................................ 10420 17460 17460 

360020 ........................................................................................................................ 10420 17460 17460 

360025 ........................................................................................................................ 41780 17460 17460 

360027 ........................................................................................................................ 10420 17460 17460 

360036 ........................................................................................................................ 36 17460 17460 

360039 ........................................................................................................................ 36 18140 18140 

360054 ........................................................................................................................ 36 26580 26580 

360065 ........................................................................................................................ 36 17460 17460 

360078 ........................................................................................................................ 10420 17460 17460 

360079 ........................................................................................................................ 19380 17140 17140 

360084 ........................................................................................................................ 15940 10420 10420 

360086 ........................................................................................................................ 44220 19380 19380 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48313 

TABLE 9A.—HOSPITAL RECLASSIFICATIONS AND REDESIGNATIONS BY INDIVIDUAL HOSPITALS AND CBSA—FY 2007—

Continued 

Provider No. Geographic 

CBSA 

Reclassified 

CBSA 

10/1/2006–

3/31/2007 

Reclassified 

CBSA 

4/1/2007–

9/30/2007 

LUGAR 

360095 ........................................................................................................................ 36 45780 45780 

360096 ........................................................................................................................ 36 49660 49660 LUGAR 

360107 ........................................................................................................................ 36 45780 45780 

360121 ........................................................................................................................ 36 11460 11460 

360150 ........................................................................................................................ 10420 17460 17460 

360159 ........................................................................................................................ 36 18140 18140 

360175 ........................................................................................................................ 36 18140 18140 

360185 ........................................................................................................................ 36 49660 49660 LUGAR 

360187 ........................................................................................................................ 44220 19380 19380 

360197 ........................................................................................................................ 36 18140 18140 

360211 ........................................................................................................................ 48260 38300 38300 

360238 ........................................................................................................................ 36 49660 49660 LUGAR 

360241 ........................................................................................................................ 10420 17460 17460 

360245 ........................................................................................................................ 36 17460 17460 LUGAR 

360253 ........................................................................................................................ 19380 17140 17140 

370004 ........................................................................................................................ 37 27900 27900 

370006 ........................................................................................................................ 37 17 17 

370014 ........................................................................................................................ 37 43300 43300 

370015 ........................................................................................................................ 37 46140 46140 

370016 ........................................................................................................................ 37 36420 36420 

370018 ........................................................................................................................ 37 46140 46140 

370022 ........................................................................................................................ 37 30020 30020 

370025 ........................................................................................................................ 37 46140 46140 

370026 ........................................................................................................................ 37 36420 36420 

370034 ........................................................................................................................ 37 22900 22900 

370047 ........................................................................................................................ 37 43300 43300 

370049 ........................................................................................................................ 37 36420 36420 

370099 ........................................................................................................................ 37 46140 46140 

370103 ........................................................................................................................ 37 45 45 

370113 ........................................................................................................................ 37 22220 22220 

380001 ........................................................................................................................ 38 38900 38900 

380022 ........................................................................................................................ 38 18700 18700 LUGAR 

380027 ........................................................................................................................ 38 21660 21660 

380050 ........................................................................................................................ 38 32780 32780 

380090 ........................................................................................................................ 38 21660 21660 

390006 ........................................................................................................................ 39 25420 25420 

390013 ........................................................................................................................ 39 25420 25420 

390030 ........................................................................................................................ 39 10900 10900 

390031 ........................................................................................................................ 39 39740 39740 LUGAR 

390046 ........................................................................................................................ 49620 29540 29540 

390048 ........................................................................................................................ 39 25420 25420 

390052 ........................................................................................................................ 39 11020 11020 

390065 ........................................................................................................................ 39 47894 47894 

390066 ........................................................................................................................ 30140 25420 25420 

390071 ........................................................................................................................ 39 48700 48700 LUGAR 

390079 ........................................................................................................................ 39 13780 13780 

390081 ........................................................................................................................ 37964 48864 48864 

390086 ........................................................................................................................ 39 44300 44300 

390091 ........................................................................................................................ 39 38300 38300 

390093 ........................................................................................................................ 39 38300 38300 

390110 ........................................................................................................................ 27780 38300 38300 

390113 ........................................................................................................................ 39 36 36 

390133 ........................................................................................................................ 10900 37964 37964 

390138 ........................................................................................................................ 39 47894 47894 

390150 ........................................................................................................................ 39 38300 38300 LUGAR 

390151 ........................................................................................................................ 39 13644 13644 

390156 ........................................................................................................................ 37964 48864 48864 

390180 ........................................................................................................................ 37964 48864 48864 

390222 ........................................................................................................................ 37964 48864 48864 

390246 ........................................................................................................................ 39 48700 48700 

400048 ........................................................................................................................ 25020 41980 41980 

410010 ........................................................................................................................ 39300 14484 14484 

410012 ........................................................................................................................ 39300 14484 14484 

410013 ........................................................................................................................ 39300 35980 35980 

420007 ........................................................................................................................ 43900 24860 24860 

420009 ........................................................................................................................ 42 24860 24860 LUGAR 

420020 ........................................................................................................................ 42 16700 16700 

420027 ........................................................................................................................ 11340 24860 24860 


bajohnson on PROD1PC67 with RULES2
48314 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 9A.—HOSPITAL RECLASSIFICATIONS AND REDESIGNATIONS BY INDIVIDUAL HOSPITALS AND CBSA—FY 2007—

Continued 

Provider No. Geographic 

CBSA 

Reclassified 

CBSA 

10/1/2006–

3/31/2007 

Reclassified 

CBSA 

4/1/2007–

9/30/2007 

LUGAR 

420028 ........................................................................................................................ 42 44940 44940 LUGAR 

420030 ........................................................................................................................ 42 16700 16700 

420036 ........................................................................................................................ 42 16740 16740 

420039 ........................................................................................................................ 42 43900 43900 LUGAR 

420067 ........................................................................................................................ 42 42340 42340 

420068 ........................................................................................................................ 42 12260 12260 

420069 ........................................................................................................................ 42 44940 44940 LUGAR 

420070 ........................................................................................................................ 44940 17900 17900 

420071 ........................................................................................................................ 42 24860 24860 

420080 ........................................................................................................................ 42 42340 42340 

420083 ........................................................................................................................ 43900 24860 24860 

420085 ........................................................................................................................ 34820 48900 48900 

430012 ........................................................................................................................ 43 43620 43620 

430014 ........................................................................................................................ 43 22020 22020 

430094 ........................................................................................................................ 43 53 53 

440002 ........................................................................................................................ 27180 32820 32820 

440008 ........................................................................................................................ 44 27180 27180 

440020 ........................................................................................................................ 44 26620 26620 

440024 ........................................................................................................................ 17420 16860 16860 

440025 ........................................................................................................................ 44 34 34 

440035 ........................................................................................................................ 17300 34980 34980 

440050 ........................................................................................................................ 44 11700 11700 

440056 ........................................................................................................................ 34100 28940 28940 

440058 ........................................................................................................................ 44 16860 16860 

440059 ........................................................................................................................ 44 34980 34980 

440060 ........................................................................................................................ 44 27180 27180 

440067 ........................................................................................................................ 34100 28940 28940 

440068 ........................................................................................................................ 44 16860 16860 

440072 ........................................................................................................................ 44 32820 32820 

440073 ........................................................................................................................ 44 34980 34980 

440148 ........................................................................................................................ 44 34980 34980 

440151 ........................................................................................................................ 44 34980 34980 

440175 ........................................................................................................................ 44 34980 34980 

440180 ........................................................................................................................ 44 28940 28940 

440185 ........................................................................................................................ 17420 16860 16860 

440192 ........................................................................................................................ 44 34980 34980 

450007 ........................................................................................................................ 45 41700 41700 

450032 ........................................................................................................................ 45 43340 43340 

450039 ........................................................................................................................ 23104 19124 19124 

450059 ........................................................................................................................ 41700 12420 12420 

450064 ........................................................................................................................ 23104 19124 19124 

450073 ........................................................................................................................ 45 10180 10180 

450080 ........................................................................................................................ 45 30980 30980 

450087 ........................................................................................................................ 23104 19124 19124 

450099 ........................................................................................................................ 45 11100 11100 

450121 ........................................................................................................................ 23104 19124 19124 

450135 ........................................................................................................................ 23104 19124 19124 

450137 ........................................................................................................................ 23104 19124 19124 

450144 ........................................................................................................................ 45 36220 36220 

450148 ........................................................................................................................ 23104 19124 19124 

450187 ........................................................................................................................ 45 26420 26420 

450192 ........................................................................................................................ 45 19124 19124 

450194 ........................................................................................................................ 45 19124 19124 

450196 ........................................................................................................................ 45 19124 19124 

450211 ........................................................................................................................ 45 26420 26420 

450214 ........................................................................................................................ 45 26420 26420 

450224 ........................................................................................................................ 45 46340 46340 

450283 ........................................................................................................................ 45 19124 19124 LUGAR 

450286 ........................................................................................................................ 45 17780 17780 LUGAR 

450324 ........................................................................................................................ 43300 19124 19124 

450347 ........................................................................................................................ 45 26420 26420 

450351 ........................................................................................................................ 45 23104 23104 

450389 ........................................................................................................................ 45 19124 19124 LUGAR 

450393 ........................................................................................................................ 43300 19124 19124 

450395 ........................................................................................................................ 45 26420 26420 

450400 ........................................................................................................................ 45 47380 47380 

450419 ........................................................................................................................ 23104 19124 19124 

450438 ........................................................................................................................ 45 26420 26420 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48315 

TABLE 9A.—HOSPITAL RECLASSIFICATIONS AND REDESIGNATIONS BY INDIVIDUAL HOSPITALS AND CBSA—FY 2007—

Continued 

Provider No. Geographic 

CBSA 

Reclassified 

CBSA 

10/1/2006–

3/31/2007 

Reclassified 

CBSA 

4/1/2007–

9/30/2007 

LUGAR 

450447 ........................................................................................................................ 45 19124 19124 

450451 ........................................................................................................................ 45 23104 23104 

450469 ........................................................................................................................ 43300 19124 19124 

450484 ........................................................................................................................ 45 30980 30980 

450508 ........................................................................................................................ 45 46340 46340 

450547 ........................................................................................................................ 45 19124 19124 

450563 ........................................................................................................................ 23104 19124 19124 

450639 ........................................................................................................................ 23104 19124 19124 

450653 ........................................................................................................................ 45 33260 33260 

450656 ........................................................................................................................ 45 46340 46340 

450672 ........................................................................................................................ 23104 19124 19124 

450675 ........................................................................................................................ 23104 19124 19124 

450677 ........................................................................................................................ 23104 19124 19124 

450694 ........................................................................................................................ 45 26420 26420 

450747 ........................................................................................................................ 45 19124 19124 

450755 ........................................................................................................................ 45 31180 31180 

450770 ........................................................................................................................ 45 12420 12420 LUGAR 

450779 ........................................................................................................................ 23104 19124 19124 

450813 ........................................................................................................................ 45 41700 41700 

450830 ........................................................................................................................ 45 36220 36220 

450839 ........................................................................................................................ 45 43340 43340 

450858 ........................................................................................................................ 23104 19124 19124 

450872 ........................................................................................................................ 23104 19124 19124 

450880 ........................................................................................................................ 23104 19124 19124 

460004 ........................................................................................................................ 36260 41620 41620 

460005 ........................................................................................................................ 36260 41620 41620 

460007 ........................................................................................................................ 46 41100 41100 

460011 ........................................................................................................................ 46 39340 39340 

460021 ........................................................................................................................ 41100 29820 29820 

460039 ........................................................................................................................ 46 36260 36260 

460041 ........................................................................................................................ 36260 41620 41620 

460042 ........................................................................................................................ 36260 41620 41620 

470001 ........................................................................................................................ 47 30 30 

470011 ........................................................................................................................ 47 15764 15764 

470012 ........................................................................................................................ 47 38340 38340 

490004 ........................................................................................................................ 25500 16820 16820 

490005 ........................................................................................................................ 49020 47894 47894 

490013 ........................................................................................................................ 49 31340 31340 

490018 ........................................................................................................................ 49 16820 16820 

490042 ........................................................................................................................ 13980 40220 40220 

490048 ........................................................................................................................ 40220 31340 31340 

490079 ........................................................................................................................ 49 24660 24660 

490092 ........................................................................................................................ 49 40060 40060 

490105 ........................................................................................................................ 49 28700 28700 

490106 ........................................................................................................................ 49 16820 16820 

490109 ........................................................................................................................ 47260 40060 40060 

500002 ........................................................................................................................ 50 28420 28420 

500003 ........................................................................................................................ 34580 42644 42644 

500016 ........................................................................................................................ 48300 42644 42644 

500021 ........................................................................................................................ 45104 42644 42644 

500024 ........................................................................................................................ 36500 45104 45104 

500039 ........................................................................................................................ 14740 42644 42644 

500041 ........................................................................................................................ 31020 38900 38900 

500072 ........................................................................................................................ 50 42644 42644 

500079 ........................................................................................................................ 45104 42644 42644 

500108 ........................................................................................................................ 45104 42644 42644 

500129 ........................................................................................................................ 45104 42644 42644 

500139 ........................................................................................................................ 36500 45104 45104 

500143 ........................................................................................................................ 36500 45104 45104 

510001 ........................................................................................................................ 34060 38300 38300 

510002 ........................................................................................................................ 51 40220 40220 

510006 ........................................................................................................................ 51 38300 38300 

510018 ........................................................................................................................ 51 16620 16620 LUGAR 

510024 ........................................................................................................................ 34060 38300 38300 

510030 ........................................................................................................................ 51 34060 34060 

510046 ........................................................................................................................ 51 16620 16620 

510047 ........................................................................................................................ 51 38300 38300 

510062 ........................................................................................................................ 51 16620 16620 


bajohnson on PROD1PC67 with RULES2
48316 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 9A.—HOSPITAL RECLASSIFICATIONS AND REDESIGNATIONS BY INDIVIDUAL HOSPITALS AND CBSA—FY 2007—

Continued 

Provider No. Geographic 

CBSA 

Reclassified 

CBSA 

10/1/2006–

3/31/2007 

Reclassified 

CBSA 

4/1/2007–

9/30/2007 

LUGAR 

510070 ........................................................................................................................ 51 16620 16620 

510071 ........................................................................................................................ 51 16620 16620 

510077 ........................................................................................................................ 51 26580 26580 

520002 ........................................................................................................................ 52 48140 48140 

520021 ........................................................................................................................ 29404 16974 16974 

520028 ........................................................................................................................ 52 31540 31540 

520037 ........................................................................................................................ 52 48140 48140 

520059 ........................................................................................................................ 39540 29404 29404 

520060 ........................................................................................................................ 52 22540 22540 LUGAR 

520066 ........................................................................................................................ 27500 31540 31540 

520071 ........................................................................................................................ 52 33340 33340 LUGAR 

520076 ........................................................................................................................ 52 31540 31540 

520088 ........................................................................................................................ 22540 33340 33340 

520094 ........................................................................................................................ 39540 33340 33340 

520095 ........................................................................................................................ 52 31540 31540 

520096 ........................................................................................................................ 39540 33340 33340 

520102 ........................................................................................................................ 52 33340 33340 LUGAR 

520107 ........................................................................................................................ 52 24580 24580 

520113 ........................................................................................................................ 52 24580 24580 

520116 ........................................................................................................................ 52 33340 33340 LUGAR 

520173 ........................................................................................................................ 52 20260 20260 

520189 ........................................................................................................................ 29404 16974 16974 

530015 ........................................................................................................................ 53 26820 26820 

530025 ........................................................................................................................ 53 22660 22660 

Note: The following Table 9B is a 

tentative table and does not reflect 

decisions that are yet to be made by 

CMS pending the final calculation of the 

occupational mix adjusted wage index. 

The information about reclassified 

CBSAs reflects the latest information 

available to CMS regarding MGCRB and 

Administrator reclassification decisions 

for FY 2007. A revised Table 9B 

reflecting CMS’ decisions on behalf of 

hospitals using occupational mix 

adjusted wage indices will be published 

in a subsequent Federal Register notice 

between August 1 and October 1, 2006, 

as well as on CMS’ Web site. Hospitals 

will then have 30 days from the date the 

data appears on the CMS Web site to 

revise a decision made by CMS on their 

behalf. (See section III.H. of the 

preamble (Revisions to the Wage Index 

Based on Hospital Redesignations)). 

TABLE 9B.—HOSPITAL RECLASSIFICATIONS AND REDESIGNATIONS BY INDIVIDUAL HOSPITAL UNDER SECTION 508 OF PUB. 

L. 108–173—FY 2007 

Provider No. Note Geograraphic 

CBSA 

Wage index 

CBSA—

10/1/06–

3/31/07 

Wage Index 

CBSA—

4/1/07–

9/30/07* 

Own wage index—

10/1/06–3/31/07 

050494 .......................................................................... ..................... 05 42220 

050549 .......................................................................... ..................... 37100 42220 

070001 .......................................................................... ..................... 35300 35004 

070005 .......................................................................... ..................... 35300 35004 

070006 .......................................................................... * 14860 35644 

070010 .......................................................................... ..................... 14860 35644 

070016 .......................................................................... ..................... 35300 35004 

070017 .......................................................................... ..................... 35300 35004 

070018 .......................................................................... * 14860 35644 

070019 .......................................................................... ..................... 35300 35004 

070022 .......................................................................... ..................... 35300 35004 

070028 .......................................................................... ..................... 14860 35644 

070031 .......................................................................... ..................... 35300 35004 

070034 .......................................................................... * 14860 35644 

070039 .......................................................................... ..................... 35300 35004 

140155 .......................................................................... * 28100 16974 16974 

140186 .......................................................................... * 28100 16974 16974 

160040 .......................................................................... ..................... 47940 16300 

160067 .......................................................................... ..................... 47940 16300 

160110 .......................................................................... ..................... 47940 16300 

220046 .......................................................................... ..................... 38340 14484 

230003 .......................................................................... ..................... 26100 28020 

230004 .......................................................................... ..................... 34740 28020 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48317 

TABLE 9B.—HOSPITAL RECLASSIFICATIONS AND REDESIGNATIONS BY INDIVIDUAL HOSPITAL UNDER SECTION 508 OF PUB. 

L. 108–173—FY 2007—Continued 

Provider No. Note Geograraphic 

CBSA 

Wage index 

CBSA—

10/1/06–

3/31/07 

Wage Index 

CBSA—

4/1/07–

9/30/07* 

Own wage index—

10/1/06–3/31/07 

230013 .......................................................................... ..................... 47644 22420 

230019 .......................................................................... ..................... 47644 22420 

230020 .......................................................................... ..................... 19804 11460 

230024 .......................................................................... ..................... 19804 11460 

230029 .......................................................................... ..................... 47644 22420 

230038 .......................................................................... ..................... 24340 28020 

230053 .......................................................................... ..................... 19804 11460 

230059 .......................................................................... ..................... 24340 28020 

230066 .......................................................................... ..................... 34740 28020 

230071 .......................................................................... ..................... 47644 22420 

230072 .......................................................................... ..................... 26100 28020 

230089 .......................................................................... ..................... 19804 11460 

230104 .......................................................................... ..................... 19804 11460 

230106 .......................................................................... ..................... 24340 28020 

230119 .......................................................................... ..................... 19804 11460 

230130 .......................................................................... ..................... 47644 22420 

230135 .......................................................................... ..................... 19804 11460 

230146 .......................................................................... ..................... 19804 11460 

230151 .......................................................................... ..................... 47644 22420 

230165 .......................................................................... ..................... 19804 11460 

230174 .......................................................................... ..................... 26100 28020 

230176 .......................................................................... ..................... 19804 11460 

230207 .......................................................................... ..................... 47644 22420 

230223 .......................................................................... ..................... 47644 22420 

230236 .......................................................................... ..................... 24340 28020 

230254 .......................................................................... ..................... 47644 22420 

230269 .......................................................................... ..................... 47644 22420 

230270 .......................................................................... ..................... 19804 11460 

230273 .......................................................................... ..................... 19804 11460 

230277 .......................................................................... ..................... 47644 22420 

250078 .......................................................................... * 25620 25060 25060 

250122 .......................................................................... ..................... 25 25060 

270002 .......................................................................... * 27 33540 33540 

270012 .......................................................................... * 24500 33540 33540 

270023 .......................................................................... ..................... 33540 13740 

270032 .......................................................................... ..................... 27 13740 

270057 .......................................................................... ..................... 27 13740 

310028 .......................................................................... ..................... 35084 35644 

310051 .......................................................................... ..................... 35084 35644 

310060 .......................................................................... ..................... 10900 35644 

310115 .......................................................................... ..................... 10900 35644 

310120 .......................................................................... ..................... 35084 35644 

330023 .......................................................................... * 39100 35644 35644 

330049 .......................................................................... ..................... 39100 35644 

330067 .......................................................................... * 39100 35644 35644 

330106 .......................................................................... ..................... 35004 ........................ ........................ To be determined 

330126 .......................................................................... ..................... 39100 35644 

330135 .......................................................................... ..................... 39100 35644 

330205 .......................................................................... ..................... 39100 35644 

330209 .......................................................................... ..................... 39100 35004 

330264 .......................................................................... ..................... 39100 35004 

340002 .......................................................................... ..................... 11700 16740 

350002 .......................................................................... ..................... 13900 22020 

350010 .......................................................................... ..................... 35 22020 

350014 .......................................................................... ..................... 35 22020 

350015 .......................................................................... ..................... 13900 22020 

350017 .......................................................................... ..................... 35 22020 

350019 .......................................................................... * 24220 22020 22020 

350030 .......................................................................... ..................... 35 22020 

390001 .......................................................................... ..................... 42540 10900 

390003 .......................................................................... ..................... 39 10900 

390044 .......................................................................... *** 39 37964 37964 

390045 .......................................................................... ** 39 10900 

390096 .......................................................................... *** 39 37964 37964 

390054 .......................................................................... ..................... 42540 29540 

390072 .......................................................................... ..................... 39 10900 

390095 .......................................................................... ..................... 42540 10900 

390119 .......................................................................... ..................... 42540 10900 


bajohnson on PROD1PC67 with RULES2
48318 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 9B.—HOSPITAL RECLASSIFICATIONS AND REDESIGNATIONS BY INDIVIDUAL HOSPITAL UNDER SECTION 508 OF PUB. 

L. 108–173—FY 2007—Continued 

Provider No. Note Geograraphic 

CBSA 

Wage index 

CBSA—

10/1/06–

3/31/07 

Wage Index 

CBSA—

4/1/07–

9/30/07* 

Own wage index—

10/1/06–3/31/07 

390137 .......................................................................... ..................... 42540 10900 

390169 .......................................................................... ..................... 42540 10900 

390185 .......................................................................... ..................... 42540 29540 

390192 .......................................................................... ..................... 42540 10900 

390237 .......................................................................... ..................... 42540 10900 

390270 .......................................................................... ..................... 42540 29540 

430005 .......................................................................... ..................... 43 39660 

430008 .......................................................................... * 43 43620 43620 

430013 .......................................................................... * 43 43620 43620 

430015 .......................................................................... ..................... 43 43620 

430048 .......................................................................... ..................... 43 43620 

430060 .......................................................................... ..................... 43 43620 

430064 .......................................................................... ..................... 43 43620 

430077 .......................................................................... ..................... 39660 43620 

430091 .......................................................................... ..................... 39660 43620 

450010 .......................................................................... ..................... 48660 32580 

450072 .......................................................................... ..................... 26420 26420 

450591 .......................................................................... ..................... 26420 26420 

470003 .......................................................................... ..................... 15540 14484 

490001 .......................................................................... ..................... 49 31340 

490024 .......................................................................... ..................... 40220 19260 

530008 .......................................................................... * 53 16220 16220 

530010 .......................................................................... * 53 16220 16220 

* These hospitals are assigned a wage index value under a special exceptions policy (see the FY 2005 IPPS final rule, 69 FR 49105). 

** This hospital has been assigned a wage index for the 1st half of FY 2007 under a special exceptions policy. (See section IV.G.6. of the preamble). 

*** These hospitals are receiving the same wage index for FY 2007 as hospitals reclassified to the wage index CBSA under a special exceptions policy. (See section IV.G.7. of the preamble). NOTE: The following Table 9C is a tentative table. The final Table 9C will be published in a 

subsequent Federal Register notice. 

TABLE 9C.—HOSPITALS REDESIGNATED AS RURAL UNDER SECTION

1886(D)(8)(E) OF THE ACT—FY 

2007 

Provider 

No. 

Geographic 

CBSA 

Redesignated 

rural area 

050192 23420 05 

050469 40140 05 

050528 32900 05 

050618 40140 05 

070004 25540 07 

100048 37860 10 

100134 27260 10 

140167 14 14 

170137 29940 17 

230078 35660 23 

250126 32820 25 

260006 41140 26 

260047 27620 26 

260195 44180 26 

330044 46540 33 

330245 46540 33 

330268 10580 33 

360125 36 36 

370054 36420 37 

380040 13460 38 

390181 39 39 

390183 39 39 

390201 39 39 

440135 34980 44 

440144 44 44 

450052 45 45 

450078 10180 45 

450243 10180 45 

450348 45 45 

TABLE 9C.—HOSPITALS REDESIGNATED AS RURAL UNDER SECTION

1886(D)(8)(E) OF THE ACT—FY 

2007—Continued 

Provider 

No. 

Geographic 

CBSA 

Redesignated 

rural area 

500148 48300 50 

520060 52 52 

TABLE 10.—*TENTATIVE 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 DIAGNOSIS-RELATED

GROUP (DRG) JULY 20061

DRG Number of 

cases Threshold 

1 ................ 24,393 $53,859 

2 ................ 10,183 $37,071 

3 ................ 3 $58,210 

6 ................ 288 $16,764 

7 ................ 15,032 $41,272 

8 ................ 3,441 $31,202 

9 ................ 1,775 $25,427 

10 .............. 19,625 $25,060 

11 .............. 3,083 $18,954 

TABLE 10.—*TENTATIVE 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 DIAGNOSIS-RELATED

GROUP (DRG) JULY 20061—Continued 

DRG Number of 

cases Threshold 

12 .............. 55,941 $18,864 

13 .............. 7,525 $17,686 

14 .............. 278,664 $24,952 

15 .............. 19,988 $20,852 

16 .............. 17,297 $26,470 

17 .............. 2,973 $15,671 

18 .............. 33,442 $21,265 

19 .............. 8,461 $15,788 

21 .............. 2,220 $26,884 

22 .............. 3,168 $23,889 

23 .............. 10,670 $17,034 

26 .............. 25 $20,742 

27 .............. 5,971 $25,126 

28 .............. 19,909 $25,472 

29 .............. 6,522 $15,804 

31 .............. 5,039 $21,114 

32 .............. 1,903 $14,176 

34 .............. 27,626 $21,155 

35 .............. 7,908 $14,353 

36 .............. 307 $17,756 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48319 

TABLE 10.—*TENTATIVE 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 DIAGNOSIS-RELATED

GROUP (DRG) JULY 20061—Continued 

DRG Number of 

cases Threshold 

37 .............. 1,219 $24,755 

38 .............. 50 $12,318 

39 .............. 328 $14,729 

40 .............. 1,187 $22,468 

42 .............. 1,636 $17,058 

43 .............. 125 $12,886 

44 .............. 1,290 $14,781 

45 .............. 2,770 $16,499 

46 .............. 3,929 $16,766 

47 .............. 1,309 $12,103 

49 .............. 2,415 $31,272 

50 .............. 2,024 $19,196 

51 .............. 193 $19,075 

52 .............. 234 $14,080 

53 .............. 2,145 $26,675 

55 .............. 1,368 $20,084 

56 .............. 451 $19,390 

57 .............. 742 $20,308 

59 .............. 126 $14,929 

60 .............. 3 $18,786 

61 .............. 222 $28,823 

62 .............. 4 $7,163 

63 .............. 2,827 $26,792 

64 .............. 3,234 $23,219 

65 .............. 40,485 $13,493 

66 .............. 8,195 $12,916 

67 .............. 379 $17,186 

68 .............. 18,914 $14,138 

69 .............. 5,147 $10,697 

70 .............. 25 $7,437 

71 .............. 70 $15,616 

72 .............. 1,326 $16,659 

73 .............. 9,957 $18,043 

74 .............. 3 $8,024 

75 .............. 46,851 $48,022 

76 .............. 48,157 $43,553 

77 .............. 2,111 $25,956 

78 .............. 49,690 $26,233 

79 .............. 160,369 $29,354 

80 .............. 7,158 $18,880 

81 .............. 6 $25,916 

82 .............. 63,189 $26,608 

83 .............. 7,153 $21,595 

84 .............. 1,403 $12,778 

85 .............. 22,221 $25,180 

86 .............. 1,717 $15,470 

87 .............. 96,689 $26,951 

88 .............. 427,043 $19,077 

89 .............. 553,984 $21,998 

90 .............. 43,488 $13,140 

91 .............. 53 $11,541 

92 .............. 16,513 $24,878 

93 .............. 1,440 $16,320 

94 .............. 13,655 $23,750 

95 .............. 1,577 $12,584 

96 .............. 59,616 $15,882 

97 .............. 26,688 $11,788 

98 .............. 13 $12,310 

99 .............. 21,386 $15,711 

TABLE 10.—*TENTATIVE 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 DIAGNOSIS-RELATED

GROUP (DRG) JULY 20061—Continued 

DRG Number of 

cases Threshold 

100 ............ 6,410 $12,191 

101 ............ 23,368 $18,513 

102 ............ 4,930 $12,459 

103 ............ 886 $234,602 

104 ............ 20,120 $123,729 

105 ............ 32,625 $93,408 

106 ............ 3,440 $110,994 

108 ............ 8,757 $89,200 

110 ............ 57,708 $59,122 

111 ............ 10,783 $45,058 

113 ............ 34,727 $45,309 

114 ............ 7,959 $30,170 

117 ............ 5,349 $25,612 

118 ............ 7,618 $33,293 

119 ............ 963 $25,956 

120 ............ 33,555 $36,437 

121 ............ 150,046 $29,682 

122 ............ 54,522 $20,932 

123 ............ 29,562 $25,715 

124 ............ 120,510 $29,669 

125 ............ 92,404 $23,736 

126 ............ 5,422 $40,901 

127 ............ 667,290 $21,942 

128 ............ 4,210 $15,608 

129 ............ 3,521 $21,829 

130 ............ 87,465 $20,048 

131 ............ 22,952 $12,056 

132 ............ 101,372 $13,633 

133 ............ 5,853 $12,293 

134 ............ 39,815 $13,564 

135 ............ 7,164 $19,603 

136 ............ 943 $14,059 

138 ............ 206,126 $17,760 

139 ............ 74,038 $11,503 

140 ............ 31,103 $11,146 

141 ............ 123,082 $16,534 

142 ............ 49,143 $13,230 

143 ............ 237,807 $12,604 

144 ............ 104,877 $24,605 

145 ............ 5,742 $12,881 

146 ............ 10,269 $45,041 

147 ............ 2,614 $31,225 

149 ............ 19,523 $30,188 

150 ............ 22,971 $44,974 

151 ............ 5,403 $27,702 

152 ............ 5,011 $33,350 

153 ............ 1,951 $23,250 

155 ............ 6,015 $27,694 

156 ............ 4 $42,508 

157 ............ 8,316 $25,981 

158 ............ 3,718 $14,389 

159 ............ 19,221 $28,296 

160 ............ 11,939 $18,822 

161 ............ 10,145 $25,544 

162 ............ 4,950 $15,299 

163 ............ 5 $14,048 

164 ............ 5,996 $38,818 

165 ............ 2,457 $25,554 

166 ............ 5,154 $29,280 

TABLE 10.—*TENTATIVE 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 DIAGNOSIS-RELATED

GROUP (DRG) JULY 20061—Continued 

DRG Number of 

cases Threshold 

167 ............ 4,909 $19,591 

168 ............ 1,640 $25,296 

169 ............ 895 $16,736 

170 ............ 17,929 $44,476 

171 ............ 1,408 $26,705 

172 ............ 33,047 $26,380 

173 ............ 2,225 $17,045 

174 ............ 253,126 $21,911 

175 ............ 29,235 $12,602 

176 ............ 14,648 $23,944 

177 ............ 7,654 $20,572 

178 ............ 2,557 $15,461 

179 ............ 14,727 $22,980 

180 ............ 91,335 $20,871 

181 ............ 25,350 $12,528 

182 ............ 255,693 $17,100 

183 ............ 79,005 $13,059 

184 ............ 72 $12,775 

185 ............ 6,251 $18,862 

186 ............ 7 $5,729 

187 ............ 646 $18,324 

188 ............ 87,004 $22,789 

189 ............ 12,389 $12,993 

190 ............ 10 $13,793 

191 ............ 10,586 $54,694 

192 ............ 1,379 $32,567 

193 ............ 4,040 $51,607 

194 ............ 461 $32,138 

195 ............ 2,846 $50,174 

196 ............ 594 $32,425 

197 ............ 16,420 $41,918 

198 ............ 4,109 $26,021 

199 ............ 1,481 $37,144 

200 ............ 1,017 $39,787 

201 ............ 2,717 $52,741 

202 ............ 27,495 $25,140 

203 ............ 32,423 $26,174 

204 ............ 69,425 $23,010 

205 ............ 32,781 $23,351 

206 ............ 2,069 $16,166 

207 ............ 38,288 $24,720 

208 ............ 9,444 $15,527 

210 ............ 126,728 $36,053 

211 ............ 25,766 $26,659 

212 ............ 10 $18,683 

213 ............ 9,549 $33,765 

216 ............ 19,882 $35,362 

217 ............ 15,719 $41,753 

218 ............ 30,181 $32,729 

219 ............ 21,168 $23,440 

220 ............ 2 $23,903 

223 ............ 12,681 $25,312 

224 ............ 9,900 $18,601 

225 ............ 6,275 $26,110 

226 ............ 6,770 $29,333 

227 ............ 4,857 $18,593 

228 ............ 2,678 $24,524 

229 ............ 1,121 $15,634 

230 ............ 2,473 $26,447 


bajohnson on PROD1PC67 with RULES2
48320 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 10.—*TENTATIVE 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 DIAGNOSIS-RELATED

GROUP (DRG) JULY 20061—Continued 

DRG Number of 

cases Threshold 

232 ............ 570 $20,883 

233 ............ 18,488 $34,629 

234 ............ 9,054 $27,553 

235 ............ 4,763 $16,190 

236 ............ 41,769 $15,355 

237 ............ 1,924 $13,823 

238 ............ 9,693 $26,230 

239 ............ 40,335 $23,007 

240 ............ 12,890 $24,447 

241 ............ 2,848 $14,324 

242 ............ 2,722 $22,524 

243 ............ 100,967 $16,980 

244 ............ 16,921 $15,376 

245 ............ 5,808 $10,439 

246 ............ 1,393 $13,417 

247 ............ 21,347 $12,715 

248 ............ 16,397 $18,868 

249 ............ 13,487 $15,452 

250 ............ 4,164 $15,019 

251 ............ 2,060 $10,708 

253 ............ 24,800 $16,458 

254 ............ 10,027 $10,209 

256 ............ 7,605 $17,958 

257 ............ 13,112 $19,571 

258 ............ 11,381 $15,394 

259 ............ 2,660 $21,525 

260 ............ 2,419 $15,097 

261 ............ 1,569 $20,644 

262 ............ 602 $20,936 

263 ............ 22,523 $32,381 

264 ............ 3,924 $22,357 

265 ............ 4,035 $28,309 

266 ............ 2,229 $19,597 

267 ............ 276 $20,106 

268 ............ 1,007 $25,612 

269 ............ 11,061 $30,462 

270 ............ 2,581 $17,761 

271 ............ 21,573 $21,481 

272 ............ 6,062 $20,880 

273 ............ 1,268 $12,695 

274 ............ 2,214 $22,743 

275 ............ 181 $13,374 

276 ............ 1,611 $15,518 

277 ............ 118,989 $18,380 

278 ............ 33,858 $11,743 

279 ............ 6 $9,028 

280 ............ 19,325 $16,053 

281 ............ 6,587 $11,088 

283 ............ 6,751 $15,599 

284 ............ 1,860 $9,705 

285 ............ 8,075 $35,308 

286 ............ 2,868 $34,849 

287 ............ 5,460 $31,315 

288 ............ 11,449 $36,434 

289 ............ 6,342 $19,683 

290 ............ 11,870 $18,835 

291 ............ 60 $12,847 

292 ............ 7,589 $41,562 

293 ............ 318 $27,393 

TABLE 10.—*TENTATIVE 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 DIAGNOSIS-RELATED

GROUP (DRG) JULY 20061—Continued 

DRG Number of 

cases Threshold 

294 ............ 96,811 $16,300 

295 ............ 4,383 $16,230 

296 ............ 247,069 $17,299 

297 ............ 42,864 $10,800 

298 ............ 111 $11,190 

299 ............ 1,529 $21,390 

300 ............ 21,669 $23,232 

301 ............ 3,928 $13,530 

302 ............ 10,492 $53,266 

303 ............ 19,976 $35,819 

304 ............ 13,647 $37,422 

305 ............ 2,957 $25,305 

306 ............ 5,818 $25,921 

307 ............ 1,947 $13,760 

308 ............ 5,453 $27,129 

309 ............ 2,964 $19,731 

310 ............ 25,376 $25,322 

311 ............ 5,889 $14,252 

312 ............ 1,328 $24,325 

313 ............ 505 $16,679 

314 ............ 2 $63,693 

315 ............ 34,913 $34,732 

316 ............ 205,567 $24,393 

317 ............ 2,713 $17,231 

318 ............ 5,910 $24,031 

319 ............ 386 $13,806 

320 ............ 224,861 $18,200 

321 ............ 31,967 $12,268 

322 ............ 67 $13,265 

323 ............ 20,412 $18,194 

324 ............ 4,635 $11,389 

325 ............ 9,919 $14,495 

326 ............ 2,592 $9,794 

327 ............ 11 $4,294 

328 ............ 574 $15,404 

329 ............ 54 $11,795 

331 ............ 56,121 $22,457 

332 ............ 3,962 $13,793 

333 ............ 244 $18,788 

334 ............ 9,525 $29,865 

335 ............ 12,194 $23,947 

336 ............ 28,187 $18,026 

337 ............ 21,481 $12,476 

338 ............ 674 $26,938 

339 ............ 1,237 $24,409 

341 ............ 3,131 $26,307 

342 ............ 457 $16,760 

344 ............ 2,341 $26,248 

345 ............ 1,390 $24,261 

346 ............ 3,961 $22,447 

347 ............ 235 $12,285 

348 ............ 4,262 $15,649 

349 ............ 554 $10,003 

350 ............ 7,277 $16,400 

352 ............ 1,177 $16,558 

353 ............ 3,089 $31,178 

354 ............ 7,566 $29,684 

355 ............ 4,987 $19,221 

356 ............ 22,033 $16,309 

TABLE 10.—*TENTATIVE 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 DIAGNOSIS-RELATED

GROUP (DRG) JULY 20061—Continued 

DRG Number of 

cases Threshold 

357 ............ 5,537 $37,740 

358 ............ 20,928 $24,238 

359 ............ 28,580 $17,269 

360 ............ 13,854 $18,919 

361 ............ 287 $23,680 

362 ............ 2 $6,876 

363 ............ 2,155 $23,016 

364 ............ 1,799 $19,187 

365 ............ 1,617 $32,690 

366 ............ 4,645 $23,871 

367 ............ 446 $12,997 

368 ............ 4,145 $23,493 

369 ............ 3,723 $14,329 

370 ............ 2,249 $17,536 

371 ............ 2,705 $12,708 

372 ............ 1,376 $10,820 

373 ............ 5,273 $7,551 

374 ............ 153 $13,095 

375 ............ 12 $22,605 

376 ............ 476 $12,906 

377 ............ 109 $24,239 

378 ............ 201 $16,324 

379 ............ 499 $8,220 

380 ............ 111 $9,315 

381 ............ 169 $15,169 

382 ............ 48 $3,953 

383 ............ 2,806 $10,556 

384 ............ 151 $7,391 

389 ............ 3 $46,615 

392 ............ 2,139 $45,751 

394 ............ 2,759 $31,094 

395 ............ 101,471 $16,872 

396 ............ 18 $13,668 

397 ............ 16,393 $23,048 

398 ............ 6,706 $23,192 

399 ............ 1,080 $14,880 

401 ............ 6,450 $43,894 

402 ............ 1,356 $25,221 

403 ............ 31,326 $29,940 

404 ............ 3,820 $20,305 

406 ............ 2,303 $42,371 

407 ............ 615 $24,760 

408 ............ 1,948 $33,871 

409 ............ 1,748 $25,028 

410 ............ 29,054 $23,858 

411 ............ 5 $9,758 

412 ............ 9 $9,301 

413 ............ 5,741 $25,510 

414 ............ 487 $16,429 

417 ............ 33 $28,208 

418 ............ 29,977 $22,175 

419 ............ 17,634 $18,485 

420 ............ 3,099 $12,971 

421 ............ 13,255 $16,146 

422 ............ 79 $11,674 

423 ............ 8,963 $28,718 

424 ............ 1,041 $36,310 

425 ............ 13,096 $13,576 

426 ............ 4,235 $10,358 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48321 

TABLE 10.—*TENTATIVE 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 DIAGNOSIS-RELATED

GROUP (DRG) JULY 20061—Continued 

DRG Number of 

cases Threshold 

427 ............ 1,579 $11,150 

428 ............ 845 $13,754 

429 ............ 23,937 $16,826 

430 ............ 75,524 $13,556 

431 ............ 333 $12,627 

432 ............ 402 $13,998 

433 ............ 4,471 $6,847 

439 ............ 1,759 $29,659 

440 ............ 5,216 $29,541 

441 ............ 686 $20,435 

442 ............ 18,596 $37,577 

443 ............ 3,589 $22,629 

444 ............ 6,012 $16,302 

445 ............ 2,242 $11,469 

447 ............ 6,323 $11,513 

449 ............ 40,846 $18,238 

450 ............ 7,446 $9,442 

451 ............ 2 $19,193 

452 ............ 28,815 $21,741 

453 ............ 5,394 $11,421 

454 ............ 4,738 $17,849 

455 ............ 887 $10,666 

461 ............ 2,290 $27,945 

462 ............ 7,872 $17,133 

463 ............ 32,884 $15,084 

464 ............ 7,661 $11,312 

465 ............ 163 $12,726 

466 ............ 1,204 $14,603 

467 ............ 1,026 $10,034 

468 ............ 52,034 $57,083 

470 ............ 128 $25,336 

471 ............ 15,629 $55,462 

473 ............ 8,578 $38,317 

476 ............ 2,850 $35,279 

477 ............ 28,196 $34,210 

479 ............ 27,646 $30,664 

480 ............ 908 $128,168 

481 ............ 1,198 $88,802 

482 ............ 5,081 $49,179 

484 ............ 472 $75,098 

485 ............ 3,713 $51,983 

486 ............ 2,712 $69,277 

487 ............ 5,016 $32,011 

488 ............ 828 $63,276 

489 ............ 13,547 $28,578 

490 ............ 5,252 $21,783 

TABLE 10.—*TENTATIVE 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 DIAGNOSIS-RELATED

GROUP (DRG) JULY 20061—Continued 

DRG Number of 

cases Threshold 

491 ............ 22,663 $35,757 

492 ............ 3,924 $44,444 

493 ............ 61,082 $34,552 

494 ............ 24,547 $22,715 

495 ............ 342 $121,068 

496 ............ 3,726 $96,376 

497 ............ 31,199 $62,663 

498 ............ 21,280 $52,014 

499 ............ 35,237 $28,340 

500 ............ 46,422 $19,794 

501 ............ 3,200 $42,436 

502 ............ 764 $29,393 

503 ............ 5,910 $26,641 

504 ............ 192 $146,326 

505 ............ 180 $28,322 

506 ............ 963 $50,293 

507 ............ 323 $31,953 

508 ............ 654 $23,720 

509 ............ 155 $16,128 

510 ............ 1,782 $21,239 

511 ............ 627 $13,459 

512 ............ 550 $90,167 

513 ............ 226 $67,279 

515 ............ 58,660 $86,655 

518 ............ 23,763 $34,494 

519 ............ 12,586 $44,219 

520 ............ 16,525 $35,867 

521 ............ 29,364 $15,459 

522 ............ 3,423 $12,513 

523 ............ 14,462 $8,492 

524 ............ 109,013 $16,146 

525 ............ 205 $156,053 

528 ............ 1,845 $107,773 

529 ............ 5,026 $36,123 

530 ............ 3,360 $25,556 

531 ............ 4,993 $45,570 

532 ............ 2,882 $28,122 

533 ............ 43,711 $29,882 

534 ............ 40,198 $21,414 

535 ............ 8,826 $119,398 

536 ............ 8,259 $108,963 

537 ............ 8,983 $32,586 

538 ............ 5,459 $22,310 

539 ............ 4,973 $44,568 

540 ............ 1,504 $25,469 

541 ............ 25,104 $250,678 

TABLE 10.—*TENTATIVE 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 DIAGNOSIS-RELATED

GROUP (DRG) JULY 20061—Continued 

DRG Number of 

cases Threshold 

542 ............ 23,115 $151,096 

543 ............ 5,718 $64,315 

544 ............ 445,785 $39,430 

545 ............ 44,802 $44,809 

546 ............ 2,360 $83,370 

547 ............ 32,709 $97,710 

548 ............ 32,245 $79,387 

549 ............ 13,141 $80,448 

550 ............ 34,565 $63,344 

551 ............ 53,869 $51,334 

552 ............ 82,060 $40,475 

553 ............ 39,292 $46,776 

554 ............ 77,351 $36,869 

555 ............ 37,378 $42,650 

556 ............ 18,974 $37,645 

557 ............ 124,154 $51,129 

558 ............ 192,632 $42,278 

559 ............ 2,894 $40,715 

560 ............ 3,457 $44,371 

561 ............ 2,952 $35,689 

562 ............ 52,955 $22,123 

563 ............ 21,145 $13,990 

564 ............ 16,327 $15,294 

565 ............ 46,822 $78,211 

566 ............ 73,082 $39,116 

567 ............ 10,363 $72,688 

568 ............ 16,695 $48,792 

569 ............ 60,815 $63,221 

570 ............ 72,246 $44,142 

571 ............ 11,153 $23,679 

572 ............ 48,982 $25,169 

573 ............ 6,682 $51,652 

574 ............ 26,619 $24,475 

575 ............ 10,977 $85,769 

576 ............ 277,472 $28,296 

577 ............ 5,596 $35,303 

578 ............ 35,311 $64,885 

579 ............ 20,665 $39,571 

* As noted in section II.G.5 of the preamble 

to this final rule, the final national adjusted operating standardized amounts as well as the 

final version of this table will be published in a 

subsequent FEDERAL REGISTER notice between 

August 1 and October 1, 2006. 1 Cases taken from the FY 2005 MedPAR 

file; DRGs are from GROUPER Version 24.0. 

TABLE 11.—FY 2007 LTC–DRGS, RELATIVE WEIGHTS, GEOMETRIC AVERAGE LENGTH OF STAY, AND 5⁄6THS OF THE

GEOMETRIC AVERAGE LENGTH OF STAY

LTC–DRG Description Relative 

weight 

Geometric 

average length 

of stay 

5⁄6ths of the 

geometric 

average length 

of stay 

1 ............... 5 CRANIOTOMY AGE >17 W CC ......................................................................... 1.6835 37.1 30.9 

2 ............... 6 CRANIOTOMY AGE >17 W/O CC ..................................................................... 1.6835 37.1 30.9 

3 ............... 6 CRANIOTOMY AGE 0–17 .................................................................................. 1.6835 37.1 30.9 


bajohnson on PROD1PC67 with RULES2
48322 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 11.—FY 2007 LTC–DRGS, RELATIVE WEIGHTS, GEOMETRIC AVERAGE LENGTH OF STAY, AND 5⁄6THS OF THE

GEOMETRIC AVERAGE LENGTH OF STAY—Continued 

LTC–DRG Description Relative 

weight 

Geometric 

average length 

of stay 

5⁄6ths of the 

geometric 

average length 

of stay 

6 ............... 6 CARPAL TUNNEL RELEASE ............................................................................. 0.4175 17.0 14.2 

7 ............... PERIPH & CRANIAL NERVE & OTHER NERV SYST PROC W CC .................. 1.2052 36.1 30.1 

8 ............... 2PERIPH & CRANIAL NERVE & OTHER NERV SYST PROC W/O CC ............ 0.5594 21.0 17.5 

9 ............... SPINAL DISORDERS & INJURIES ...................................................................... 1.0424 34.0 28.3 

10 ............. NERVOUS SYSTEM NEOPLASMS W CC .......................................................... 0.6971 22.1 18.4 

11 ............. 2 NERVOUS SYSTEM NEOPLASMS W/O CC .................................................... 0.5594 21.0 17.5 

12 ............. DEGENERATIVE NERVOUS SYSTEM DISORDERS ......................................... 0.6788 25.1 20.9 

13 ............. MULTIPLE SCLEROSIS & CEREBELLAR ATAXIA ............................................. 0.6003 23.1 19.3 

14 ............. INTRACRANIAL HEMORRHAGE OR CEREBRAL INFARCTION ....................... 0.6772 24.9 20.8 

15 ............. NONSPECIFIC CVA & PRECEREBRAL OCCLUSION W/O INFARCT .............. 0.7705 26.1 21.8 

16 ............. NONSPECIFIC CEREBROVASCULAR DISORDERS W CC .............................. 0.6978 23.1 19.3 

17 ............. 2 NONSPECIFIC CEREBROVASCULAR DISORDERS W/O CC ........................ 0.5594 21.0 17.5 

18 ............. CRANIAL & PERIPHERAL NERVEDISORDERS W CC ...................................... 0.7503 25.4 21.2 

19 ............. CRANIAL & PERIPHERAL NERVEDISORDERS W/O CC .................................. 0.4512 19.5 16.3 

21 ............. 3VIRAL MENINGITIS ............................................................................................ 0.7819 23.9 19.9 

22 ............. 3 HYPERTENSIVE ENCEPHALOPATHY ............................................................. 0.7819 23.9 19.9 

23 ............. NONTRAUMATIC STUPOR & COMA .................................................................. 1.0118 29.4 24.5 

26 ............. 6SEIZURE & HEADACHE AGE 0–17 .................................................................. 0.5594 21.0 17.5 

27 ............. TRAUMATIC STUPOR & COMA, COMA >1 HR ................................................. 0.9978 30.6 25.5 

28 ............. TRAUMATIC STUPOR & COMA, COMA <1 HR AGE >17 W CC ...................... 0.7983 25.8 21.5 

29 ............. 1TRAUMATIC STUPOR & COMA, COMA <1 HR AGE >17 W/O CC ................ 0.4175 17.0 14.2 

30 ............. 6TRAUMATIC STUPOR & COMA, COMA <1 HR AGE 0–17 ............................. 0.4175 17.0 14.2 

31 ............. 1 CONCUSSION AGE >17 W CC ......................................................................... 0.4175 17.0 14.2 

32 ............. 6 CONCUSSION AGE >17 W/O CC ..................................................................... 0.4175 17.0 14.2 

33 ............. 6 CONCUSSION AGE 0–17 .................................................................................. 0.4175 17.0 14.2 

34 ............. OTHER DISORDERS OF NERVOUS SYSTEM W CC ....................................... 0.7029 23.4 19.5 

35 ............. OTHER DISORDERS OF NERVOUS SYSTEMW/O CC ..................................... 0.5080 21.1 17.6 

36 ............. 6 RETINAL PROCEDURES ................................................................................... 0.5594 21.0 17.5 

37 ............. 6ORBITAL PROCEDURES ................................................................................... 0.5594 21.0 17.5 

38 ............. 6PRIMARY IRIS PROCEDURES ......................................................................... 0.5594 21.0 17.5 

39 ............. 6 LENS PROCEDURES WITH OR WITHOUT VITRECTOMY ............................. 0.5594 21.0 17.5 

40 ............. 6EXTRAOCULAR PROCEDURES EXCEPT ORBIT AGE >17 ........................... 0.5594 21.0 17.5 

41 ............. 6EXTRAOCULAR PROCEDURES EXCEPT ORBIT AGE 0–17 ......................... 0.5594 21.0 17.5 

42 ............. 6 INTRAOCULAR PROCEDURES EXCEPT RETINA, IRIS & LENS ................... 0.5594 21.0 17.5 

43 ............. 6 HYPHEMA ........................................................................................................... 0.4175 17.0 14.2 

44 ............. 3ACUTE MAJOR EYE INFECTIONS ................................................................... 0.7819 23.9 19.9 

45 ............. 1 NEUROLOGICAL EYE DISORDERS ................................................................. 0.4175 17.0 14.2 

46 ............. 2OTHER DISORDERS OF THE EYE AGE >17 W CC ....................................... 0.5594 21.0 17.5 

47 ............. 6OTHER DISORDERS OF THE EYE AGE >17 W/O CC ................................... 0.4175 17.0 14.2 

48 ............. 6OTHER DISORDERS OF THE EYE AGE 0–17 ................................................ 0.4175 17.0 14.2 

49 ............. 6 MAJOR HEAD & NECK PROCEDURES ........................................................... 1.1625 29.5 24.6 

50 ............. 6SIALOADENECTOMY ......................................................................................... 1.1625 29.5 24.6 

51 ............. 6SALIVARY GLAND PROCEDURES EXCEPT SIALOADENECTOMY .............. 1.1625 29.5 24.6 

52 ............. 6 CLEFT LIP & PALATE REPAIR ......................................................................... 1.1625 29.5 24.6 

53 ............. 6SINUS & MASTOID PROCEDURES AGE >17 .................................................. 1.1625 29.5 24.6 

54 ............. 6SINUS & MASTOID PROCEDURES AGE 0–17 ................................................ 1.1625 29.5 24.6 

55 ............. 4 MISCELLANEOUS EAR, NOSE, MOUTH & THROAT PROCEDURES ........... 1.1625 29.5 24.6 

56 ............. 6 RHINOPLASTY ................................................................................................... 1.1625 29.5 24.6 

57 ............. 6T&A PROC, EXCEPT TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, 

AGE >17.

0.4175 17.0 14.2 

58 ............. 6T&A PROC, EXCEPT TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, 

AGE 0–17.

0.4175 17.0 14.2 

59 ............. 6TONSILLECTOMY &/OR ADENOIDECTOMY ONLY, AGE >17 ....................... 0.4175 17.0 14.2 

60 ............. 6TONSILLECTOMY &/OR ADENOIDECTOMYONLY, AGE 0–17 ...................... 0.4175 17.0 14.2 

61 ............. 6 MYRINGOTOMY W TUBE INSERTION AGE >17 ............................................. 0.4175 17.0 14.2 

62 ............. 6 MYRINGOTOMY W TUBE INSERTION AGE 0–17 ........................................... 0.4175 17.0 14.2 

63 ............. 4OTHER EAR, NOSE, MOUTH & THROATO.R. PROCEDURES ...................... 1.1625 29.5 24.6 

64 ............. EAR, NOSE, MOUTH & THROAT MALIGNANCY ............................................... 1.1797 26.2 21.8 

65 ............. 1 DYSEQUILIBRIUM .............................................................................................. 0.4175 17.0 14.2 

66 ............. 6EPISTAXIS .......................................................................................................... 0.4175 17.0 14.2 

67 ............. 3EPIGLOTTITIS .................................................................................................... 0.7819 23.9 19.9 

68 ............. OTITIS MEDIA & URI AGE >17 W CC ................................................................ 0.6211 20.3 16.9 

69 ............. 1OTITIS MEDIA & URI AGE >17 W/O CC .......................................................... 0.4175 17.0 14.2 

70 ............. 6OTITIS MEDIA & URI AGE 0–17 ....................................................................... 0.4175 17.0 14.2 

71 ............. 6 LARYNGOTRACHEITIS ...................................................................................... 0.5594 21.0 17.5 

72 ............. 3 NASAL TRAUMA & DEFORMITY ...................................................................... 0.7819 23.9 19.9 

73 ............. OTHER EAR, NOSE, MOUTH & THROAT DIAGNOSES AGE >17 ................... 0.7745 22.9 19.1 

74 ............. 6OTHER EAR, NOSE, MOUTH & THROAT DIAGNOSES AGE 0–17 ............... 0.4175 17.0 14.2 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48323 

TABLE 11.—FY 2007 LTC–DRGS, RELATIVE WEIGHTS, GEOMETRIC AVERAGE LENGTH OF STAY, AND 5⁄6THS OF THE

GEOMETRIC AVERAGE LENGTH OF STAY—Continued 

LTC–DRG Description Relative 

weight 

Geometric 

average length 

of stay 

5⁄6ths of the 

geometric 

average length 

of stay 

75 ............. MAJOR CHEST PROCEDURES .......................................................................... 1.9944 33.5 27.9

76 ............. OTHER RESP SYSTEM O.R. PROCEDURES W CC ......................................... 2.3982 42.5 35.4 

77 ............. 2OTHER RESP SYSTEM O.R. PROCEDURES W/O CC ................................... 0.5594 21.0 17.5 

78 ............. PULMONARY EMBOLISM .................................................................................... 0.6746 22.6 18.8 

79 ............. RESPIRATORY INFECTIONS & INFLAMMATIONS AGE >17 W CC ................ 0.8182 22.8 19.0 

80 ............. RESPIRATORY INFECTIONS & INFLAMMATIONS AGE >17 W/O CC ............. 0.6485 20.9 17.4 

81 ............. 6 RESPIRATORY INFECTIONS & INFLAMMATIONS AGE 0–17 ....................... 0.4175 17.0 14.2 

82 ............. RESPIRATORY NEOPLASMS ............................................................................. 0.8242 21.4 17.8 

83 ............. 1 MAJOR CHEST TRAUMA W CC ....................................................................... 0.4175 17.0 14.2 

84 ............. 6 MAJOR CHEST TRAUMA W/O CC ................................................................... 0.4175 17.0 14.2 

85 ............. PLEURAL EFFUSION W CC ................................................................................ 0.6956 21.4 17.8 

86 ............. 6PLEURAL EFFUSION W/O CC .......................................................................... 0.4175 17.0 14.2 

87 ............. PULMONARY EDEMA & RESPIRATORY FAILURE ........................................... 1.0295 24.8 20.7 

88 ............. CHRONIC OBSTRUCTIVE PULMONARY DISEASE .......................................... 0.6411 19.3 16.1 

89 ............. SIMPLE PNEUMONIA & PLEURISY AGE >17 W CC ......................................... 0.6802 20.6 17.2 

90 ............. SIMPLE PNEUMONIA & PLEURISY AGE >17 W/O CC ..................................... 0.4958 17.8 14.8 

91 ............. 6SIMPLE PNEUMONIA & PLEURISY AGE 0–17 ................................................ 0.5594 21.0 17.5 

92 ............. INTERSTITIAL LUNG DISEASE W CC ................................................................ 0.6638 19.6 16.3 

93 ............. 1 INTERSTITIAL LUNG DISEASE W/O CC .......................................................... 0.4175 17.0 14.2 

94 ............. PNEUMOTHORAX W CC ..................................................................................... 0.6785 21.3 17.8 

95 ............. 8PNEUMOTHORAX W/O CC ............................................................................... 0.6785 21.3 17.8 

96 ............. BRONCHITIS & ASTHMA AGE >17 W CC .......................................................... 0.6230 18.9 15.8 

97 ............. 8BRONCHITIS & ASTHMA AGE >17 W/O CC .................................................... 0.6230 18.9 15.8 

98 ............. 6BRONCHITIS & ASTHMA AGE 0–17 ................................................................. 0.5594 21.0 17.5 

99 ............. RESPIRATORY SIGNS & SYMPTOMS W CC .................................................... 0.9381 24.6 20.5 

100 ........... 3 RESPIRATORY SIGNS & SYMPTOMS W/O CC .............................................. 0.7819 23.9 19.9 

101 ........... OTHER RESPIRATORY SYSTEM DIAGNOSES W CC ...................................... 0.8147 22.2 18.5 

102 ........... ,1OTHER RESPIRATORY SYSTEM DIAGNOSES W/O CC .................... 0.4175 17.0 14.2 

103 ........... 7 HEART TRANSPLANT OR IMPLANT OF HEART ASSIST SYSTEM .............. 0.0000 0.0 0.0 

104 ........... ,6 CARDIAC VALVE & OTHER MAJOR CARDIOTHORACIC PROC W 

CARDIAC CATH.

1.1625 29.5 24.6 

105 ........... 6 CARDIAC VALVE & OTHER MAJOR CARDIOTHORACIC PROC W/O CARDIAC CATH.1.1625 29.5 24.6 

106 ........... 6 CORONARY BYPASS W PTCA ......................................................................... 1.1625 29.5 24.6 

108 ........... 6OTHER CARDIOTHORACIC PROCEDURES ................................................... 1.1625 29.5 24.6 

110 ........... 4 MAJOR CARDIOVASCULAR PROCEDURES W CC ........................................ 1.1625 29.5 24.6 

111 ........... 6 MAJOR CARDIOVASCULAR PROCEDURES W/O CC .................................... 1.1625 29.5 24.6 

113 ........... AMPUTATION FOR CIRC SYSTEM DISORDERS EXCEPT UPPER LIMB & 

TOE.

1.3942 36.1 30.1 

114 ........... UPPER LIMB & TOE AMPUTATION FOR CIRC SYSTEM DISORDERS .......... 1.2425 33.0 27.5 

117 ........... 2 CARDIAC PACEMAKER REVISION EXCEPT DEVICE REPLACEMENT ........ 0.5594 21.0 17.5 

118 ........... 3 CARDIAC PACEMAKER DEVICE REPLACEMENT .......................................... 0.7819 23.9 19.9 

119 ........... 3VEIN LIGATION & STRIPPING .......................................................................... 0.7819 23.9 19.9 

120 ........... OTHER CIRCULATORY SYSTEM O.R. PROCEDURES .................................... 1.0893 31.4 26.2 

121 ........... CIRCULATORY DISORDERS W AMI & MAJOR COMP, DISCHARGED ALIVE 0.7451 22.4 18.7 

122 ........... 2 CIRCULATORY DISORDERS W AMI W/O MAJOR COMP, DISCHARGED 

ALIVE.

0.5594 21.0 17.5 

123 ........... CIRCULATORY DISORDERS W AMI, EXPIRED ................................................ 0.7858 17.0 14.2 

124 ........... 4 CIRCULATORY DISORDERS EXCEPT AMI, W CARD CATH & COMPLEX 

DIAG.

1.1625 29.5 24.6 

125 ........... 1 CIRCULATORY DISORDERS EXCEPT AMI, W CARD CATH W/O COMPLEX DIAG.0.4175 17.0 14.2 

126 ........... ACUTE & SUBACUTE ENDOCARDITIS .............................................................. 0.8867 26.3 21.9 

127 ........... HEART FAILURE & SHOCK ................................................................................. 0.6832 21.2 17.7 

128 ........... 2 DEEP VEIN THROMBOPHLEBITIS ................................................................... 0.5594 21.0 17.5 

129 ........... 1 CARDIAC ARREST, UNEXPLAINED ................................................................. 0.4175 17.0 14.2 

130 ........... PERIPHERAL VASCULAR DISORDERS W CC .................................................. 0.6484 22.8 19.0 

131 ........... PERIPHERAL VASCULAR DISORDERS W/O CC .............................................. 0.5267 21.0 17.5 

132 ........... ATHEROSCLEROSIS W CC ................................................................................ 0.6621 20.7 17.3 

133 ........... 2ATHEROSCLEROSIS W/O CC .......................................................................... 0.5594 21.0 17.5 

134 ........... HYPERTENSION .................................................................................................. 0.4909 21.7 18.1 

135 ........... CARDIAC CONGENITAL & VALVULAR DISORDERS AGE >17 W CC ............. 0.8014 23.8 19.8 

136 ........... 1 CARDIAC CONGENITAL & VALVULAR DISORDERS AGE >17 W/O CC ....... 0.4175 17.0 14.2 

137 ........... 6 CARDIAC CONGENITAL & VALVULAR DISORDERS AGE 0–17 .................... 0.4175 17.0 14.2 

138 ........... CARDIAC ARRHYTHMIA & CONDUCTION DISORDERS W CC ....................... 0.6618 21.9 18.3 

139 ........... 2 CARDIAC ARRHYTHMIA & CONDUCTION DISORDERS W/O CC ................. 0.5594 21.0 17.5 

140 ........... 1ANGINA PECTORIS ........................................................................................... 0.4175 17.0 14.2 

141 ........... SYNCOPE & COLLAPSE W CC .......................................................................... 0.5891 22.1 18.4


bajohnson on PROD1PC67 with RULES2
48324 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 11.—FY 2007 LTC–DRGS, RELATIVE WEIGHTS, GEOMETRIC AVERAGE LENGTH OF STAY, AND 5⁄6THS OF THE

GEOMETRIC AVERAGE LENGTH OF STAY—Continued 

LTC–DRG Description Relative 

weight 

Geometric 

average length 

of stay 

5⁄6ths of the 

geometric 

average length 

of stay 

142 ........... 8SYNCOPE & COLLAPSE W/O CC .................................................................... 0.5891 22.1 18.4 

143 ........... 1 CHEST PAIN ....................................................................................................... 0.4175 17.0 14.2 

144 ........... OTHER CIRCULATORY SYSTEM DIAGNOSESW CC ....................................... 0.7715 22.1 18.4 

145 ........... OTHER CIRCULATORY SYSTEM DIAGNOSES W/O CC .................................. 0.4292 17.0 14.2 

146 ........... 5 RECTAL RESECTION W CC ............................................................................. 1.6835 37.1 30.9 

147 ........... 6 RECTAL RESECTION W/O CC ......................................................................... 0.7819 23.9 19.9 

149 ........... 6 MAJOR SMALL & LARGE BOWEL PROCEDURES W/O CC .......................... 0.7819 23.9 19.9 

150 ........... 5PERITONEAL ADHESIOLYSIS W CC ............................................................... 1.6835 37.1 30.9 

151 ........... 6PERITONEAL ADHESIOLYSIS W/O CC ........................................................... 0.4175 17.0 14.2 

152 ........... 5 MINOR SMALL & LARGE BOWEL PROCEDURES W CC ............................... 1.6835 37.1 30.9 

153 ........... 6 MINOR SMALL & LARGE BOWEL PROCEDURES W/O CC ........................... 1.6835 37.1 30.9 

155 ........... 6STOMACH, ESOPHAGEAL & DUODENAL PROCEDURES AGE >17 W/O 

CC.

1.6835 37.1 30.9 

156 ........... 6STOMACH, ESOPHAGEAL & DUODENAL PROCEDURES AGE 0–17 .......... 1.6835 37.1 30.9 

157 ........... 3ANAL & STOMAL PROCEDURES W CC .......................................................... 0.7819 23.9 19.9 

158 ........... 6ANAL & STOMAL PROCEDURES W/O CC ...................................................... 0.7819 23.9 19.9 

159 ........... 5 HERNIA PROCEDURES EXCEPT INGUINAL & FEMORAL AGE >17 W CC 1.6835 37.1 30.9 

160 ........... 1 HERNIA PROCEDURES EXCEPT INGUINAL& FEMORAL AGE >17 W/O CC 0.4175 17.0 14.2 

161 ........... 6 INGUINAL & FEMORAL HERNIA PROCEDURES AGE >17 W CC ................. 0.4175 17.0 14.2 

162 ........... 6 INGUINAL & FEMORAL HERNIA PROCEDURES AGE >17 W/O CC ............. 0.4175 17.0 14.2 

163 ........... 6 HERNIA PROCEDURES AGE 0–17 .................................................................. 0.4175 17.0 14.2 

164 ........... 6APPENDECTOMY W COMPLICATED PRINCIPAL DIAG W CC ..................... 0.7819 23.9 19.9 

165 ........... 6APPENDECTOMY W COMPLICATED PRINCIPAL DIAG W/O CC .................. 0.7819 23.9 19.9 

166 ........... 6APPENDECTOMY W/O COMPLICATED PRINCIPAL DIAG W CC .................. 0.7819 23.9 19.9 

167 ........... 6APPENDECTOMY W/O COMPLICATED PRINCIPAL DIAG W/O CC .............. 0.7819 23.9 19.9 

168 ........... 5 MOUTH PROCEDURES W CC .......................................................................... 1.6835 37.1 30.9 

169 ........... 6 MOUTH PROCEDURES W/O CC ...................................................................... 0.5594 21.0 17.5 

170 ........... OTHER DIGESTIVE SYSTEM O.R.PROCEDURES W CC ................................. 1.6163 35.8 29.8 

171 ........... 3OTHER DIGESTIVE SYSTEM O.R. PROCEDURES W/O CC .......................... 0.7819 23.9 19.9 

172 ........... DIGESTIVE MALIGNANCY W CC ........................................................................ 0.8497 21.8 18.2

173 ........... 2 DIGESTIVE MALIGNANCY W/O CC .................................................................. 0.5594 21.0 17.5 

174 ........... G.I. HEMORRHAGE W CC .................................................................................. 0.7149 22.9 19.1 

175 ........... 2G.I. HEMORRHAGE W/O CC ............................................................................. 0.5594 21.0 17.5 

176 ........... COMPLICATED PEPTIC ULCER ......................................................................... 0.9514 24.8 20.7

177 ........... 2 UNCOMPLICATED PEPTIC ULCER W CC ....................................................... 0.5594 21.0 17.5 

178 ........... 6 UNCOMPLICATED PEPTIC ULCER W/O CC ................................................... 0.4175 17.0 14.2 

179 ........... INFLAMMATORY BOWEL DISEASE ................................................................... 0.8157 23.3 19.4 

180 ........... G.I. OBSTRUCTION W CC .................................................................................. 0.9126 22.8 19.0 

181 ........... 1G.I. OBSTRUCTION W/O CC ............................................................................. 0.4175 17.0 14.2 

182 ........... ESOPHAGITIS, GASTROENT & MISC DIGEST DISORDERS AGE >17 W CC 0.7866 21.8 18.2 

183 ........... 1ESOPHAGITIS, GASTROENT & MISC DIGEST DISORDERS AGE >17 W/O 

CC.

0.4175 17.0 14.2 

184 ........... 6ESOPHAGITIS, GASTROENT & MISC DIGEST DISORDERS AGE 0–17 ....... 0.4175 17.0 14.2 

185 ........... DENTAL & ORAL DIS EXCEPT EXTRACTIONS & RESTORATIONS, AGE 

>17.

0.6634 23.2 19.3 

186 ........... 6 DENTAL & ORAL DIS EXCEPT EXTRACTIONS & RESTORATIONS, AGE 

0–17.

0.5594 21.0 17.5 

187 ........... 6 DENTAL EXTRACTIONS & RESTORATIONS .................................................. 0.5594 21.0 17.5 

188 ........... OTHER DIGESTIVE SYSTEM DIAGNOSES AGE >17 W CC ............................ 0.9596 24.4 20.3 

189 ........... 2OTHER DIGESTIVE SYSTEM DIAGNOSES AGE >17 W/O CC ...................... 0.5594 21.0 17.5 

190 ........... 6OTHER DIGESTIVE SYSTEM DIAGNOSESAGE 0–17 .................................... 0.5594 21.0 17.5 

191 ........... 5PANCREAS, LIVER & SHUNT PROCEDURES W CC ..................................... 1.6835 37.1 30.9 

192 ........... 6PANCREAS, LIVER & SHUNT PROCEDURES W/O CC .................................. 1.6835 37.1 30.9 

193 ........... 4BILIARY TRACT PROC EXCEPT ONLY CHOLECYST W OR W/O C.D.E. W 

CC.

1.1625 29.5 24.6 

194 ........... 6BILIARY TRACT PROC EXCEPT ONLY CHOLECYST W OR W/O C.D.E. W/ 

O CC.

1.1625 29.5 24.6 

195 ........... 5 CHOLECYSTECTOMY W C.D.E. W CC ............................................................ 1.6835 37.1 30.9 

196 ........... 6 CHOLECYSTECTOMY W C.D.E. W/O CC ........................................................ 1.1625 29.5 24.6 

197 ........... 4 CHOLECYSTECTOMY EXCEPT BY LAPAROSCOPE W/O C.D.E. W CC ...... 1.1625 29.5 24.6 

198 ........... 6 CHOLECYSTECTOMY EXCEPT BY LAPAROSCOPE W/O C.D.E. W/O CC .. 1.1625 29.5 24.6 

199 ........... 3 HEPATOBILIARY DIAGNOSTIC PROCEDURE FOR MALIGNANCY .............. 0.7819 23.9 19.9 

200 ........... 5 HEPATOBILIARY DIAGNOSTIC PROCEDURE FOR NON-MALIGNANCY ..... 1.6835 37.1 30.9 

201 ........... OTHER HEPATOBILIARY OR PANCREAS O.R. PROCEDURES ...................... 1.5802 28.8 24.0 

202 ........... CIRRHOSIS & ALCOHOLIC HEPATITIS ............................................................. 0.6011 20.2 16.8 

203 ........... MALIGNANCY OF HEPATOBILIARY SYSTEM OR PANCREAS ....................... 0.7466 19.6 16.3 

204 ........... DISORDERS OF PANCREAS EXCEPT MALIGNANCY ...................................... 0.8853 22.1 18.4 

205 ........... DISORDERS OF LIVER EXCEPT MALIG,CIRR,ALC HEPA W CC .................... 0.6933 23.1 19.3 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48325 

TABLE 11.—FY 2007 LTC–DRGS, RELATIVE WEIGHTS, GEOMETRIC AVERAGE LENGTH OF STAY, AND 5⁄6THS OF THE

GEOMETRIC AVERAGE LENGTH OF STAY—Continued 

LTC–DRG Description Relative 

weight 

Geometric 

average length 

of stay 

5⁄6ths of the 

geometric 

average length 

of stay 

206 ........... 8 DISORDERS OF LIVER EXCEPT MALIG, CIRR, ALC HEPA W/O CC ........... 0.6933 23.1 19.3 

207 ........... DISORDERS OF THE BILIARY TRACT W CC .................................................... 0.7295 21.5 17.9 

208 ........... 1 DISORDERS OF THE BILIARY TRACT W/O CC .............................................. 0.4175 17.0 14.2 

210 ........... HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT AGE >17 W CC ........ 1.4826 41.9 34.9 

211 ........... 6 HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT AGE >17 W/O CC .. 1.6835 37.1 30.9 

212 ........... 6 HIP & FEMUR PROCEDURES EXCEPT MAJOR JOINT AGE 0–17 ............... 1.6835 37.1 30.9 

213 ........... AMPUTATION FOR MUSCULOSKELETAL SYSTEM & CONN TISSUE DISORDERS.1.1871 33.5 27.9 

216 ........... BIOPSIES OF MUSCULOSKELETAL SYSTEM& CONNECTIVE TISSUE ......... 1.2147 37.6 31.3 

217 ........... WND DEBRID & SKN GRFT EXCEPT HAND, FOR MUSCSKELET & CONN 

TISS DIS.

1.2414 36.5 30.4 

218 ........... 5 LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT, FEMUR AGE >17 

W CC.

1.6835 37.1 30.9 

219 ........... 6 LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT, FEMUR AGE >17 

W/O CC.

1.6835 37.1 30.9 

220 ........... 6 LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT, FEMUR AGE 0–

17.

1.6835 37.1 30.9 

223 ........... 4 MAJOR SHOULDER/ELBOW PROC, OR OTHER UPPER EXTREMITY 

PROC W CC.

1.1625 29.5 24.6 

224 ........... 1SHOULDER, ELBOW OR FOREARM PROC, EXC MAJOR JOINT PROC, W/ 

O CC.

0.4175 17.0 14.2 

225 ........... FOOT PROCEDURES .......................................................................................... 0.9550 30.6 25.5 

226 ........... SOFT TISSUE PROCEDURES W CC ................................................................. 1.0626 34.3 28.6 

227 ........... 3SOFT TISSUE PROCEDURES W/O CC ........................................................... 0.7819 23.9 19.9 

228 ........... 3 MAJOR THUMB OR JOINT PROC, OR OTH HAND OR WRIST PROC W CC 0.7819 23.9 19.9 

229 ........... 6 HAND OR WRIST PROC, EXCEPT MAJOR JOINT PROC, W/O CC .............. 0.4175 17.0 14.2 

230 ........... 5 LOCAL EXCISION & REMOVAL OF INT FIX DEVICES OF HIP & FEMUR .... 1.6835 37.1 30.9 

232 ........... 5ARTHROSCOPY ................................................................................................. 1.6835 37.1 30.9 

233 ........... OTHER MUSCULOSKELET SYS & CONN TISS O.R. PROC W CC ................. 1.1724 32.4 27.0 

234 ........... 6OTHER MUSCULOSKELET SYS & CONN TISS O.R. PROC W/O CC ........... 0.4175 17.0 14.2 

235 ........... 3FRACTURES OF FEMUR .................................................................................. 0.7819 23.9 19.9 

236 ........... FRACTURES OF HIP & PELVIS .......................................................................... 0.6802 28.9 24.1 

237 ........... 1SPRAINS, STRAINS, & DISLOCATIONS OF HIP, PELVIS & THIGH .............. 0.4175 17.0 14.2 

238 ........... OSTEOMYELITIS .................................................................................................. 0.8589 28.4 23.7 

239 ........... PATHOLOGICAL FRACTURES & MUSCULOSKELETAL & CONN TISS MALIGNANCY.0.6031 20.6 17.2 

240 ........... CONNECTIVE TISSUE DISORDERS W CC ....................................................... 0.7134 22.4 18.7 

241 ........... 1 CONNECTIVE TISSUE DISORDERS W/O CC ................................................. 0.4175 17.0 14.2 

242 ........... SEPTIC ARTHRITIS ............................................................................................. 0.7700 26.2 21.8 

243 ........... MEDICAL BACK PROBLEMS .............................................................................. 0.6028 22.3 18.6 

244 ........... BONE DISEASES & SPECIFICARTHROPATHIES W CC .................................. 0.5516 22.0 18.3 

245 ........... BONE DISEASES & SPECIFIC ARTHROPATHIES W/O CC ............................. 0.4463 19.4 16.2 

246 ........... 2 NON-SPECIFIC ARTHROPATHIES ................................................................... 0.5594 21.0 17.5 

247 ........... SIGNS & SYMPTOMS OF MUSCULOSKELETAL SYSTEM & CONN TISSUE 0.4582 17.6 14.7 

248 ........... TENDONITIS, MYOSITIS & BURSITIS ................................................................ 0.7328 23.2 19.3 

249 ........... AFTERCARE, MUSCULOSKELETAL SYSTEM & CONNECTIVE TISSUE ........ 0.6370 24.0 20.0 

250 ........... 1FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT AGE >17 W CC ...... 0.4175 17.0 14.2 

251 ........... 6FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT AGE >17 W/O CC .. 0.4175 17.0 14.2 

252 ........... 6FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT AGE 0–17 ............... 0.5594 21.0 17.5 

253 ........... FX, SPRN, STRN & DISL OF UPARM, LOWLEG EX FOOT AGE >17 W CC ... 0.5609 24.0 20.0 

254 ........... 1FX, SPRN, STRN & DISL OF UPARM, LOWLEG EX FOOT AGE >17 W/O 

CC.

0.4175 17.0 14.2 

255 ........... 6FX, SPRN, STRN & DISL OF UPARM, LOWLEG EX FOOT AGE 0–17 .......... 0.5594 21.0 17.5 

256 ........... OTHER MUSCULOSKELETAL SYSTEM & CONNECTIVE TISSUE DIAGNOSES.0.7132 23.6 19.7 

257 ........... 5TOTAL MASTECTOMY FOR MALIGNANCY W CC .......................................... 1.6835 37.1 30.9 

258 ........... 6TOTAL MASTECTOMY FOR MALIGNANCY W/O CC ...................................... 0.7819 23.9 19.9 

259 ........... 3SUBTOTAL MASTECTOMY FOR MALIGNANCY W CC .................................. 0.7819 23.9 19.9 

260 ........... 6SUBTOTAL MASTECTOMY FOR MALIGNANCY W/O CC .............................. 0.7819 23.9 19.9 

261 ........... 2BREAST PROC FOR NON-MALIGNANCY EXCEPT BIOPSY & LOCAL EXCISION.0.5594 21.0 17.5 

262 ........... 4BREAST BIOPSY & LOCAL EXCISION FOR NON-MALIGNANCY .................. 1.1625 29.5 24.6 

263 ........... SKIN GRAFT &/OR DEBRID FOR SKN ULCER OR CELLULITIS W CC .......... 1.2748 38.0 31.7 

264 ........... SKIN GRAFT &/OR DEBRID FOR SKN ULCER OR CELLULITIS W/O CC ....... 0.8507 29.9 24.9 

265 ........... SKIN GRAFT &/OR DEBRID EXCEPT FORSKIN ULCER OR CELLULITIS W 

CC.

1.1019 30.2 25.2 

266 ........... 3SKIN GRAFT &/OR DEBRID EXCEPT FOR SKIN ULCER OR CELLULITIS 

W/O CC.

0.7819 23.9 19.9 


bajohnson on PROD1PC67 with RULES2
48326 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 11.—FY 2007 LTC–DRGS, RELATIVE WEIGHTS, GEOMETRIC AVERAGE LENGTH OF STAY, AND 5⁄6THS OF THE

GEOMETRIC AVERAGE LENGTH OF STAY—Continued 

LTC–DRG Description Relative 

weight 

Geometric 

average length 

of stay 

5⁄6ths of the 

geometric 

average length 

of stay 

267 ........... 6PERIANAL & PILONIDAL PROCEDURES ......................................................... 0.7819 23.9 19.9 

268 ........... 4SKIN, SUBCUTANEOUS TISSUE &BREAST PLASTIC PROCEDURES ......... 1.1625 29.5 24.6 

269 ........... OTHER SKIN, SUBCUT TISS & BREAST PROC W CC ..................................... 1.2075 34.7 28.9 

270 ........... 3OTHER SKIN, SUBCUT TISS & BREASTPROC W/O CC ................................ 0.7819 23.9 19.9 

271 ........... SKIN ULCERS ...................................................................................................... 0.8269 26.9 22.4 

272 ........... MAJOR SKIN DISORDERS W CC ....................................................................... 0.6584 23.0 19.2 

273 ........... 1 MAJOR SKIN DISORDERS W/O CC ................................................................. 0.4175 17.0 14.2 

274 ........... MALIGNANT BREAST DISORDERS W CC ......................................................... 0.7231 21.8 18.2 

275 ........... 6 MALIGNANT BREAST DISORDERS W/O CC ................................................... 0.7819 23.9 19.9 

276 ........... 2 NON-MALIGNANT BREAST DISORDERS ........................................................ 0.5594 21.0 17.5 

277 ........... CELLULITIS AGE >17 W CC ............................................................................... 0.6089 20.9 17.4 

278 ........... CELLULITIS AGE >17 W/O CC ............................................................................ 0.4254 18.0 15.0 

279 ........... 6 CELLULITIS AGE 0–17 ...................................................................................... 0.4175 17.0 14.2 

280 ........... TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE >17 W CC ............... 0.7148 24.1 20.1 

281 ........... 2TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE >17 W/O CC ......... 0.5594 21.0 17.5 

282 ........... 6TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE 0–17 ...................... 0.5594 21.0 17.5 

283 ........... MINOR SKIN DISORDERS W CC ........................................................................ 0.6876 23.1 19.3

284 ........... 2 MINOR SKIN DISORDERS W/O CC .................................................................. 0.5594 21.0 17.5 

285 ........... AMPUTAT OF LOWER LIMB FOR ENDOCRINE,NUTRIT,& METABOL DISORDERS.1.2418 31.6 26.3 

286 ........... 6ADRENAL & PITUITARY PROCEDURES ......................................................... 1.1625 29.5 24.6 

287 ........... SKIN GRAFTS & WOUND DEBRID FOR ENDOC, NUTRIT & METAB DISORDERS.1.0402 33.0 27.5 

288 ........... 4O.R. PROCEDURES FOR OBESITY ................................................................. 1.1625 29.5 24.6 

289 ........... 6PARATHYROID PROCEDURES ........................................................................ 1.1625 29.5 24.6 

290 ........... 6THYROID PROCEDURES .................................................................................. 1.1625 29.5 24.6 

291 ........... 6THYROGLOSSAL PROCEDURES ..................................................................... 1.1625 29.5 24.6 

292 ........... OTHER ENDOCRINE, NUTRIT & METAB O.R. PROC W CC ............................ 1.1549 32.0 26.7 

293 ........... 8OTHER ENDOCRINE, NUTRIT & METAB O.R. PROC W/O CC ...................... 1.1549 32.0 26.7 

294 ........... DIABETES AGE >35 ............................................................................................. 0.6958 23.9 19.9 

295 ........... 2 DIABETES AGE 0–35 ......................................................................................... 0.5594 21.0 17.5 

296 ........... NUTRITIONAL & MISC METABOLIC DISORDERS AGE >17 W CC ................. 0.7092 22.3 18.6 

297 ........... NUTRITIONAL & MISC METABOLIC DISORDERS AGE >17 W/O CC ............. 0.4596 19.3 16.1 

298 ........... 6 NUTRITIONAL & MISC METABOLIC DISORDERS AGE 0–17 ........................ 0.4175 17.0 14.2 

299 ........... 3 INBORN ERRORS OF METABOLISM ............................................................... 0.7819 23.9 19.9 

300 ........... ENDOCRINE DISORDERS W CC ........................................................................ 0.7004 23.7 19.8 

301 ........... 2ENDOCRINE DISORDERS W/O CC .................................................................. 0.5594 21.0 17.5 

302 ........... 7KIDNEY TRANSPLANT ...................................................................................... 0.0000 0.0 0.0 

303 ........... 6KIDNEY AND URETER PROCEDURES FOR NEOPLASM .............................. 0.7819 23.9 19.9 

304 ........... 4KIDNEY AND URETER PROCEDURES FOR NON-NEOPLASM W CC .......... 1.1625 29.5 24.6 

305 ........... 6KIDNEY AND URETER PROCEDURES FOR NON-NEOPLASM W/O CC ...... 0.7819 23.9 19.9 

306 ........... 4PROSTATECTOMY W CC ................................................................................. 1.1625 29.5 24.6 

307 ........... 6PROSTATECTOMY W/O CC ............................................................................. 1.1625 29.5 24.6 

308 ........... 4 MINOR BLADDER PROCEDURES W CC ......................................................... 1.1625 29.5 24.6 

309 ........... 6 MINOR BLADDER PROCEDURES W/O CC ..................................................... 1.1625 29.5 24.6 

310 ........... 4TRANSURETHRAL PROCEDURES W CC ....................................................... 1.1625 29.5 24.6 

311 ........... 6TRANSURETHRAL PROCEDURES W/O CC .................................................... 1.1625 29.5 24.6 

312 ........... 3 URETHRAL PROCEDURES, AGE >17 W CC .................................................. 0.7819 23.9 19.9 

313 ........... 6 URETHRAL PROCEDURES, AGE >17 W/O CC ............................................... 0.7819 23.9 19.9 

314 ........... 6 URETHRAL PROCEDURES, AGE 0–17 ............................................................ 0.7819 23.9 19.9 

315 ........... OTHER KIDNEY & URINARY TRACT PROCEDURES ....................................... 1.4016 33.9 28.3 

316 ........... RENAL FAILURE .................................................................................................. 0.8321 22.9 19.1 

317 ........... ADMIT FOR RENAL DIALYSIS ............................................................................ 0.9102 24.4 20.3 

318 ........... KIDNEY & URINARY TRACT NEOPLASMS WCC .............................................. 0.7565 21.0 17.5 

319 ........... 6KIDNEY & URINARY TRACT NEOPLASMSW/O CC ........................................ 0.7819 23.9 19.9 

320 ........... KIDNEY & URINARY TRACT INFECTIONS AGE >17 W CC ............................. 0.6200 21.7 18.1 

321 ........... KIDNEY & URINARY TRACT INFECTIONS AGE >17 W/O CC ......................... 0.4450 18.5 15.4 

322 ........... 6KIDNEY & URINARY TRACT INFECTIONS AGE 0–17 .................................... 0.4175 17.0 14.2 

323 ........... 1 URINARY STONES W CC, &/OR ESW LITHOTRIPSY .................................... 0.4175 17.0 14.2 

324 ........... 1 URINARY STONES W/O CC .............................................................................. 0.4175 17.0 14.2 

325 ........... 2KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE >17 W CC ............ 0.5594 21.0 17.5 

326 ........... 6KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE >17 W/O CC ........ 0.4175 17.0 14.2 

327 ........... 6KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE 0–17 ..................... 0.4175 17.0 14.2 

328 ........... 6 URETHRAL STRICTURE AGE >17 W CC ........................................................ 0.5594 21.0 17.5 

329 ........... 6 URETHRAL STRICTURE AGE >17 W/O CC .................................................... 0.5594 21.0 17.5 

330 ........... 6 URETHRAL STRICTURE AGE 0–17 ................................................................. 0.5594 21.0 17.5 

331 ........... OTHER KIDNEY & URINARY TRACT DIAGNOSES AGE >17 W CC ................ 0.7773 22.5 18.8 

332 ........... 1OTHER KIDNEY & URINARY TRACT DIAGNOSES AGE >17 W/O CC .......... 0.4175 17.0 14.2 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48327 

TABLE 11.—FY 2007 LTC–DRGS, RELATIVE WEIGHTS, GEOMETRIC AVERAGE LENGTH OF STAY, AND 5⁄6THS OF THE

GEOMETRIC AVERAGE LENGTH OF STAY—Continued 

LTC–DRG Description Relative 

weight 

Geometric 

average length 

of stay 

5⁄6ths of the 

geometric 

average length 

of stay 

333 ........... 6OTHER KIDNEY & URINARY TRACT DIAGNOSES AGE 0–17 ....................... 0.4175 17.0 14.2 

334 ........... 6 MAJOR MALE PELVIC PROCEDURES W CC ................................................. 0.4175 17.0 14.2 

335 ........... 1 MAJOR MALE PELVIC PROCEDURES W/OCC ............................................... 0.4175 17.0 14.2 

336 ........... 4TRANSURETHRAL PROSTATECTOMY W CC ................................................ 1.1625 29.5 24.6 

337 ........... 6TRANSURETHRAL PROSTATECTOMY W/O CC ............................................. 1.1625 29.5 24.6 

338 ........... 3TESTES PROCEDURES, FOR MALIGNANCY ................................................. 0.7819 23.9 19.9 

339 ........... 3TESTES PROCEDURES, NON-MALIGNANCY AGE >17 ................................. 0.7819 23.9 19.9 

340 ........... 6TESTES PROCEDURES, NON-MALIGNANCY AGE 0–17 ............................... 0.7819 23.9 19.9 

341 ........... 5PENIS PROCEDURES ....................................................................................... 1.6835 37.1 30.9 

342 ........... 6 CIRCUMCISION AGE >17 .................................................................................. 0.7819 23.9 19.9 

343 ........... 6 CIRCUMCISION AGE 0–17 ................................................................................ 0.7819 23.9 19.9 

344 ........... 3OTHER MALE REPRODUCTIVE SYSTEM O.R. PROCEDURES FOR MALIGNANCY.0.7819 23.9 19.9 

345 ........... 4OTHER MALE REPRODUCTIVE SYSTEM O.R. PROC EXCEPT FOR MALIGNANCY.1.1625 29.5 24.6 

346 ........... 3 MALIGNANCY, MALE REPRODUCTIVE SYSTEM, W CC ............................... 0.7819 23.9 19.9 

347 ........... 1 MALIGNANCY, MALE REPRODUCTIVE SYSTEM, W/O CC ........................... 0.4175 17.0 14.2 

348 ........... 2BENIGN PROSTATIC HYPERTROPHY W CC ................................................. 0.5594 21.0 17.5 

349 ........... 6BENIGN PROSTATIC HYPERTROPHY W/O CC .............................................. 0.7819 23.9 19.9 

350 ........... INFLAMMATION OF THE MALE REPRODUCTIVE SYSTEM ............................ 0.5606 21.0 17.5 

351 ........... 6STERILIZATION, MALE ...................................................................................... 0.7819 23.9 19.9 

352 ........... OTHER MALE REPRODUCTIVE SYSTEM DIAGNOSES ................................... 0.8209 27.5 22.9 

353 ........... 6PELVIC EVISCERATION, RADICAL HYSTERECTOMY & RADICAL 

VULVECTOMY.

1.1625 29.5 24.6 

354 ........... 6 UTERINE,ADNEXA PROC FOR NON-OVARIAN/ADNEXAL MALIG W CC ..... 1.1625 29.5 24.6 

355 ........... 6 UTERINE,ADNEXA PROC FOR NON-OVARIAN/ADNEXAL MALIG W/O CC 1.1625 29.5 24.6 

356 ........... 6FEMALE REPRODUCTIVE SYSTEM RECONSTRUCTIVE PROCEDURES ... 1.1625 29.5 24.6 

357 ........... 6 UTERINE & ADNEXA PROC FOR OVARIAN OR ADNEXAL MALIGNANCY .. 1.1625 29.5 24.6 

358 ........... 6 UTERINE & ADNEXA PROC FOR NON-MALIGNANCY W CC ........................ 1.1625 29.5 24.6 

359 ........... 6 UTERINE & ADNEXA PROC FOR NONMALIGNANCY W/O CC- .................... 1.1625 29.5 24.6 

360 ........... 6VAGINA, CERVIX & VULVA PROCEDURES .................................................... 1.1625 29.5 24.6 

361 ........... 6 LAPAROSCOPY & INCISIONAL TUBAL INTERRUPTION ............................... 0.4175 17.0 14.2 

362 ........... 6ENDOSCOPIC TUBAL INTERRUPTION ........................................................... 0.4175 17.0 14.2 

363 ........... 6 D&C, CONIZATION & RADIO-IMPLANT, FOR MALIGNANCY ......................... 0.4175 17.0 14.2 

364 ........... 6 D&C, CONIZATION EXCEPT FOR MALIGNANCY ........................................... 0.4175 17.0 14.2 

365 ........... 4OTHER FEMALE REPRODUCTIVE SYSTEM O.R. PROCEDURES ............... 1.1625 29.5 24.6 

366 ........... MALIGNANCY, FEMALE REPRODUCTIVE SYSTEM W CC .............................. 0.9106 21.6 18.0 

367 ........... 1 MALIGNANCY, FEMALE REPRODUCTIVE SYSTEM W/O CC ........................ 0.4175 17.0 14.2 

368 ........... INFECTIONS, FEMALE REPRODUCTIVE SYSTEM ........................................... 0.7846 21.3 17.8 

369 ........... 3 MENSTRUAL & OTHER FEMALE REPRODUCTIVE SYSTEM DISORDERS 0.7819 23.9 19.9 

370 ........... 6 CESAREAN SECTION W CC ............................................................................. 0.4175 17.0 14.2 

371 ........... 6 CESAREAN SECTION W/O CC ......................................................................... 0.4175 17.0 14.2 

372 ........... 6VAGINAL DELIVERY W COMPLICATING DIAGNOSES .................................. 0.4175 17.0 14.2 

373 ........... 6VAGINAL DELIVERY W/O COMPLICATING DIAGNOSES .............................. 0.4175 17.0 14.2 

374 ........... 6VAGINAL DELIVERY W STERILIZATION &/OR D&C ....................................... 0.4175 17.0 14.2 

375 ........... 6VAGINAL DELIVERY W O.R. PROC EXCEPT STERIL &/OR D&C ................. 0.4175 17.0 14.2 

376 ........... 4POSTPARTUM & POST ABORTION DIAGNOSES W/O O.R. PROCEDURE 1.1625 29.5 24.6 

377 ........... 6POSTPARTUM & POST ABORTION DIAGNOSES W O.R. PROCEDURE ..... 0.4175 17.0 14.2 

378 ........... 6ECTOPIC PREGNANCY ..................................................................................... 0.4175 17.0 14.2 

379 ........... 6THREATENED ABORTION ................................................................................ 0.4175 17.0 14.2 

380 ........... 6ABORTION W/O D&C ......................................................................................... 0.4175 17.0 14.2 

381 ........... 6ABORTION W D&C, ASPIRATION CURETTAGE OR HYSTEROTOMY ......... 0.4175 17.0 14.2 

382 ........... 6FALSE LABOR .................................................................................................... 0.4175 17.0 14.2

383 ........... 1OTHER ANTEPARTUM DIAGNOSES W MEDICAL COMPLICATIONS ........... 0.4175 17.0 14.2 

384 ........... 6OTHER ANTEPARTUM DIAGNOSES W/O MEDICAL COMPLICATIONS ....... 0.4175 17.0 14.2 

385 ........... 6 NEONATES, DIED OR TRANSFERRED TO ANOTHER ACUTE CARE FACILITY.0.4175 17.0 14.2 

386 ........... 6EXTREME IMMATURITY OR RESPIRATORY DISTRESS SYNDROME, 

NEONATE.

0.4175 17.0 14.2 

387 ........... 6PREMATURITY W MAJOR PROBLEMS ........................................................... 0.4175 17.0 14.2 

388 ........... 6PREMATURITY W/O MAJOR PROBLEMS ....................................................... 0.4175 17.0 14.2 

389 ........... 6FULL TERM NEONATE W MAJOR PROBLEMS .............................................. 0.4175 17.0 14.2 

390 ........... 6 NEONATE W OTHER SIGNIFICANT PROBLEMS ............................................ 0.4175 17.0 14.2 

391 ........... 6 NORMAL NEWBORN ......................................................................................... 0.4175 17.0 14.2 

392 ........... 6SPLENECTOMY AGE >17 ................................................................................. 1.1625 29.5 24.6 

393 ........... 6SPLENECTOMY AGE 0–17 ............................................................................... 1.1625 29.5 24.6 

394 ........... 4OTHER O.R. PROCEDURES OF THE BLOOD AND BLOOD FORMING ORGANS.1.1625 29.5 24.6 


bajohnson on PROD1PC67 with RULES2
48328 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

TABLE 11.—FY 2007 LTC–DRGS, RELATIVE WEIGHTS, GEOMETRIC AVERAGE LENGTH OF STAY, AND 5⁄6THS OF THE

GEOMETRIC AVERAGE LENGTH OF STAY—Continued 

LTC–DRG Description Relative 

weight 

Geometric 

average length 

of stay 

5⁄6ths of the 

geometric 

average length 

of stay 

395 ........... RED BLOOD CELL DISORDERS AGE >17 ........................................................ 0.6651 21.9 18.3 

396 ........... 6 RED BLOOD CELL DISORDERS AGE 0–17 .................................................... 0.4175 17.0 14.2 

397 ........... COAGULATION DISORDERS .............................................................................. 0.8276 20.4 17.0 

398 ........... RETICULOENDOTHELIAL & IMMUNITY DISORDERS W CC ........................... 0.6278 20.8 17.3 

399 ........... 1 RETICULOENDOTHELIAL & IMMUNITY DISORDERS W/O CC ..................... 0.4175 17.0 14.2 

401 ........... 4 LYMPHOMA & NON-ACUTE LEUKEMIA WOTHER O.R. PROC W CC .......... 1.1625 29.5 24.6 

402 ........... 6 LYMPHOMA & NON-ACUTE LEUKEMIA W OTHER O.R. PROC W/O CC ..... 0.5594 21.0 17.5 

403 ........... LYMPHOMA & NON-ACUTE LEUKEMIA W CC .................................................. 0.8846 23.9 19.9 

404 ........... 3 LYMPHOMA & NON-ACUTE LEUKEMIA W/OCC ............................................. 0.7819 23.9 19.9 

405 ........... 6ACUTE LEUKEMIA W/O MAJOR O.R. PROCEDURE AGE 0–17 .................... 0.7819 23.9 19.9 

406 ........... 5 MYELOPROLIF DISORD OR POORLY DIFF NEOPL W MAJ O.R.PROC W 

CC.

1.6835 37.1 30.9 

407 ........... 6 MYELOPROLIF DISORD OR POORLY DIFF NEOPL W MAJ O.R.PROC W/ 

O CC.

1.1625 29.5 24.6 

408 ........... 4 MYELOPROLIF DISORD OR POORLY DIFF NEOPL W OTHER O.R.PROC 1.1625 29.5 24.6 

409 ........... RADIOTHERAPY .................................................................................................. 0.8416 23.2 19.3 

410 ........... CHEMOTHERAPY W/O ACUTE LEUKEMIA ASSECONDARY DIAGNOSIS ..... 1.2527 28.7 23.9 

411 ........... 6 HISTORY OF MALIGNANCY W/O ENDOSCOPY ............................................. 0.5594 21.0 17.5 

412 ........... 6 HISTORY OF MALIGNANCY W ENDOSCOPY ................................................. 0.5594 21.0 17.5 

413 ........... OTHER MYELOPROLIF DIS OR POORLY DIFF NEOPL DIAG W CC .............. 0.8429 21.4 17.8 

414 ........... 3OTHER MYELOPROLIF DIS OR POORLY DIFF NEOPL DIAG W/O CC ........ 0.7819 23.9 19.9 

417 ........... 6SEPTICEMIA AGE 0–17 ..................................................................................... 0.7819 23.9 19.9 

418 ........... POSTOPERATIVE & POST-TRAUMATIC INFECTIONS ..................................... 0.7961 24.1 20.1 

419 ........... 2FEVER OF UNKNOWN ORIGIN AGE >17 W CC ............................................. 0.5594 21.0 17.5 

420 ........... 2FEVER OF UNKNOWN ORIGIN AGE >17 W/O CC ......................................... 0.5594 21.0 17.5 

421 ........... VIRAL ILLNESS AGE >17 .................................................................................... 0.7065 20.4 17.0 

422 ........... 6VIRAL ILLNESS & FEVER OF UNKNOWN ORIGIN AGE 0–17 ....................... 0.4175 17.0 14.2 

423 ........... OTHER INFECTIOUS & PARASITIC DISEASES DIAGNOSES .......................... 1.0426 23.2 19.3 

424 ........... 5O.R. PROCEDURE W PRINCIPAL DIAGNOSES OF MENTAL ILLNESS ........ 1.6835 37.1 30.9 

425 ........... 1ACUTE ADJUSTMENT REACTION & PSYCHOSOCIAL DYSFUNCTION ....... 0.4175 17.0 14.2 

426 ........... DEPRESSIVE NEUROSES .................................................................................. 0.4038 22.5 18.8 

427 ........... 2 NEUROSES EXCEPT DEPRESSIVE ................................................................. 0.5594 21.0 17.5 

428 ........... DISORDERS OF PERSONALITY & IMPULSE CONTROL ................................. 0.5183 24.5 20.4 

429 ........... ORGANIC DISTURBANCES & MENTAL RETARDATION .................................. 0.5326 24.0 20.0 

430 ........... PSYCHOSES ........................................................................................................ 0.4024 23.1 19.3 

431 ........... 2 CHILDHOOD MENTAL DISORDERS ................................................................. 0.5594 21.0 17.5 

432 ........... 1OTHER MENTAL DISORDER DIAGNOSES ..................................................... 0.4175 17.0 14.2 

433 ........... 6ALCOHOL/DRUG ABUSE OR DEPENDENCE, LEFT AMA .............................. 0.4175 17.0 14.2 

439 ........... SKIN GRAFTS FOR INJURIES ............................................................................ 1.2203 36.0 30.0 

440 ........... WOUND DEBRIDEMENTS FOR INJURIES ......................................................... 1.2248 34.4 28.7 

441 ........... 2 HAND PROCEDURES FOR INJURIES ............................................................. 0.5594 21.0 17.5 

442 ........... OTHER O.R. PROCEDURES FOR INJURIES W CC .......................................... 1.3670 34.9 29.1 

443 ........... 6OTHER O.R. PROCEDURES FOR INJURIES W/O CC .................................... 0.5594 21.0 17.5 

444 ........... TRAUMATIC INJURY AGE >17 W CC ................................................................ 0.6598 23.2 19.3 

445 ........... 2TRAUMATIC INJURY AGE >17 W/O CC .......................................................... 0.5594 21.0 17.5 

446 ........... 6TRAUMATIC INJURY AGE 0–17 ....................................................................... 0.5594 21.0 17.5 

447 ........... 2ALLERGIC REACTIONS AGE >17 .................................................................... 0.5594 21.0 17.5 

448 ........... 6ALLERGIC REACTIONS AGE 0–17 ................................................................... 0.5594 21.0 17.5 

449 ........... 3POISONING & TOXIC EFFECTS OF DRUGS AGE >17 W CC ....................... 0.7819 23.9 19.9 

450 ........... 2POISONING & TOXIC EFFECTS OF DRUGS AGE >17 W/O CC ................... 0.5594 21.0 17.5 

451 ........... 6POISONING & TOXIC EFFECTS OF DRUGS AGE 0–17 ................................ 0.7819 23.9 19.9 

452 ........... COMPLICATIONS OF TREATMENT W CC ......................................................... 0.9275 25.7 21.4 

453 ........... COMPLICATIONS OF TREATMENT W/O CC ..................................................... 0.5790 21.6 18.0 

454 ........... 3OTHER INJURY, POISONING & TOXIC EFFECT DIAG W CC ....................... 0.7819 23.9 19.9 

455 ........... 6OTHER INJURY, POISONING & TOXIC EFFECT DIAG W/O CC ................... 0.7819 23.9 19.9 

461 ........... O.R. PROC W DIAGNOSES OF OTHER CONTACT W HEALTH SERVICES ... 1.1466 32.7 27.3 

462 ........... REHABILITATION ................................................................................................. 0.5823 22.1 18.4 

463 ........... SIGNS & SYMPTOMS W CC ............................................................................... 0.6082 22.9 19.1 

464 ........... SIGNS & SYMPTOMS W/O CC ........................................................................... 0.5831 24.3 20.3 

465 ........... AFTERCARE W HISTORY OF MALIGNANCY AS SECONDARY DIAGNOSIS 0.6877 21.2 17.7 

466 ........... AFTERCARE W/O HISTORY OF MALIGNANCY AS SECONDARY DIAGNOSIS.0.6700 21.7 18.1 

467 ........... 3OTHER FACTORS INFLUENCING HEALTHSTATUS ...................................... 0.7819 23.9 19.9 

468 ........... EXTENSIVE O.R. PROCEDURE UNRELATED TO PRINCIPAL DIAGNOSIS ... 2.1478 40.5 33.8 

469 ........... 7PRINCIPAL DIAGNOSIS INVALID AS DISCHARGE DIAGNOSIS ................... 0.0000 0.0 0.0 

470 ........... 7 UNGROUPABLE ................................................................................................. 0.0000 0.0 0.0 

471 ........... 5BILATERAL OR MULTIPLE MAJOR JOINT PROCS OF LOWER EXTREMITY.1.6835 37.1 30.9 


bajohnson on PROD1PC67 with RULES2
Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48329 

TABLE 11.—FY 2007 LTC–DRGS, RELATIVE WEIGHTS, GEOMETRIC AVERAGE LENGTH OF STAY, AND 5⁄6THS OF THE

GEOMETRIC AVERAGE LENGTH OF STAY—Continued 

LTC–DRG Description Relative 

weight 

Geometric 

average length 

of stay 

5⁄6ths of the 

geometric 

average length 

of stay 

473 ........... ACUTE LEUKEMIA W/O MAJOR O.R. PROCEDURE AGE >17 ........................ 0.9917 25.3 21.1 

476 ........... 5PROSTATIC O.R. PROCEDURE UNRELATED TO PRINCIPAL DIAGNOSIS 1.6835 37.1 30.9 

477 ........... NON-EXTENSIVE O.R. PROCEDURE UNRELATED TO PRINCIPAL DIAGNOSIS.1.5119 35.9 29.9 

479 ........... 2OTHER VASCULAR PROCEDURES W/O CC .................................................. 0.5594 21.0 17.5 

480 ........... 7 LIVER TRANSPLANT AND/ORINTESTINAL TRANSPLANT ............................ 0.0000 0.0 0.0 

481 ........... 6BONE MARROW TRANSPLANT ....................................................................... 1.1625 29.5 24.6 

482 ........... 5TRACHEOSTOMY FOR FACE, MOUTH & NECK DIAGNOSES; ..................... 1.6835 37.1 30.9 

484 ........... 6 CRANIOTOMY FOR MULTIPLE SIGNIFICANT TRAUMA ................................ 1.6835 37.1 30.9 

485 ........... 6 LIMB REATTACHMENT, HIP & FEMUR PROC FOR MULTIPLE 

SIGNIFICANTTRAUMA.

1.1625 29.5 24.6 

486 ........... 3OTHER O.R. PROCEDURES FOR MULTIPLE SIGNIFICANT TRAUMA ......... 0.7819 23.9 19.9 

487 ........... 4OTHER MULTIPLE SIGNIFICANT TRAUMA ..................................................... 1.1625 29.5 24.6 

488 ........... 4 HIV W EXTENSIVE O.R. PROCEDURE ............................................................ 1.1625 29.5 24.6 

489 ........... HIV W MAJOR RELATED CONDITION ............................................................... 0.9436 22.1 18.4 

490 ........... HIV W OR W/O OTHER RELATED CONDITION ................................................ 0.6456 20.3 16.9 

491 ........... 5 MAJOR JOINT & LIMB REATTACHMENT PROCEDURES OF UPPER EXTREMITY.1.6835 37.1 30.9 

492 ........... 2 CHEMO W ACUTE LEUKEMIA AS SDX OR W USE OF HIGH DOSE 

CHEMO AGENT.

0.5594 21.0 17.5 

493 ........... 4 LAPAROSCOPIC CHOLECYSTECTOMY W/O C.D.E. W CC .......................... 1.1625 29.5 24.6 

494 ........... 6 LAPAROSCOPIC CHOLECYSTECTOMY W/O C.D.E. W/O CC ....................... 1.1625 29.5 24.6 

495 ........... 7 LUNG TRANSPLANT .......................................................................................... 0.0000 0.0 0.0 

496 ........... 4 COMBINED ANTERIOR/POSTERIOR SPINAL FUSION .................................. 1.1625 29.5 24.6 

497 ........... 5SPINAL FUSION EXCEPT CERVICAL WCC .................................................... 1.6835 37.1 30.9 

498 ........... 6SPINAL FUSION EXCEPT CERVICAL W/O CC ............................................... 1.6835 37.1 30.9 

499 ........... 5BACK & NECK PROCEDURES EXCEPT SPINAL FUSION W CC .................. 1.6835 37.1 30.9 

500 ........... 4BACK & NECK PROCEDURES EXCEPT SPINAL FUSION W/O CC .............. 1.1625 29.5 24.6 

501 ........... KNEE PROCEDURES W PDX OF INFECTION W CC ....................................... 1.2164 33.3 27.8 

502 ........... 3KNEE PROCEDURES W PDX OF INFECTION W/O CC ................................. 0.7819 23.9 19.9 

503 ........... 4KNEE PROCEDURES W/O PDX OFINFECTION .............................................. 1.1625 29.5 24.6 

504 ........... 5EXTENSIVE BURNS OR FULL THICKNESS BURNS W MV 96+ HRS W 

SKIN GRAFT.

1.6835 37.1 30.9 

505 ........... 5EXTENSIVE BURNS OR FULL THICKNESS BURNS W MV 96+ HRS W/O 

SKIN GRAFT.

1.6835 37.1 30.9 

506 ........... 4FULL THICKNESS BURN W SKIN GRAFTOR INHAL INJ W CC OR SIG 

TRAUMA.

1.1625 29.5 24.6 

507 ........... 6FULL THICKNESS BURN W SKIN GRFT OR INHAL INJ W/O CC OR SIG 

TRAUMA.

0.4175 17.0 14.2 

508 ........... FULL THICKNESS BURN W/O SKIN GRFT OR INHAL INJ W CC OR SIG 

TRAUMA.

0.7588 25.6 21.3 

509 ........... 1FULL THICKNESS BURN W/O SKIN GRFTOR INH INJ W/O CC OR SIG 

TRAUMA.

0.4175 17.0 14.2 

510 ........... NON-EXTENSIVE BURNS W CC OR SIGNIFICANT TRAUMA .......................... 0.6720 22.6 18.8 

511 ........... 1 NON-EXTENSIVE BURNS W/O CC OR SIGNIFICANT TRAUMA .................... 0.4175 17.0 14.2 

512 ........... 7SIMULTANEOUS PANCREAS/KIDNEYTRANSPLANT ..................................... 0.0000 0.0 0.0 

513 ........... 7PANCREAS TRANSPLANT ................................................................................ 0.0000 0.0 0.0 

515 ........... 4 CARDIAC DEFIBRILLATOR IMPLANT W/O CARDIAC CATH ......................... 1.1625 29.5 24.6 

518 ........... 6PERCUTANEOUS CARDIOVASC PROC W/O CORONARY ARTERY STENT 

OR AMI.

0.4175 17.0 14.2 

519 ........... 4 CERVICAL SPINAL FUSION W CC ................................................................... 1.1625 29.5 24.6 

520 ........... 6 CERVICAL SPINAL FUSION W/O CC ............................................................... 1.6835 37.1 30.9 

521 ........... 2ALCOHOL/DRUG ABUSE OR DEPENDENCE W CC ....................................... 0.5594 21.0 17.5 

522 ........... 6ALCOHOL/DRUG ABUSE OR DEPENDENCE W REHABILITATION THERAPY W/O CC.0.5594 21.0 17.5 

523 ........... 1ALCOHOL/DRUG ABUSE OR DEPENDENCE W/O REHABILITATION 

THERAPY W/O CC.

0.4175 17.0 14.2 

524 ........... 2TRANSIENT ISCHEMIA ...................................................................................... 0.5594 21.0 17.5 

525 ........... 6OTHER HEART ASSIST SYSTEM IMPLANT .................................................... 1.6835 37.1 30.9 

528 ........... 6 INTRACRANIAL VASCULAR PROCEDURES W PDX HEMORRHAGE .......... 1.6835 37.1 30.9 

529 ........... 5VENTRICULAR SHUNT PROCEDURES W CC ................................................ 1.6835 37.1 30.9 

530 ........... 6VENTRICULAR SHUNT PROCEDURES W/O CC ............................................ 1.6835 37.1 30.9 

531 ........... 5SPINAL PROCEDURES W CC .......................................................................... 1.6835 37.1 30.9 

532 ........... 3SPINAL PROCEDURES W/O CC ...................................................................... 0.7819 23.9 19.9 

533 ........... 4EXTRACRANIAL PROCEDURES W CC ........................................................... 1.1625 29.5 24.6 

534 ........... 6EXTRACRANIAL PROCEDURES W/O CC ........................................................ 1.1625 29.5 24.6 

535 ........... 5 CARDIAC DEFIB IMPLANT W CARDIAC CATH W AMI/HF/SHOCK ............... 1.6835 37.1 30.9 

536 ........... 6 CARDIAC DEFIB IMPLANT W CARDIACCATH W/O AMI/HF/SHOCK ............ 1.1625 29.5 24.6 


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TABLE 11.—FY 2007 LTC–DRGS, RELATIVE WEIGHTS, GEOMETRIC AVERAGE LENGTH OF STAY, AND 5⁄6THS OF THE

GEOMETRIC AVERAGE LENGTH OF STAY—Continued 

LTC–DRG Description Relative 

weight 

Geometric 

average length 

of stay 

5⁄6ths of the 

geometric 

average length 

of stay 

537 ........... LOCAL EXCISION & REMOVAL INT FIX DEVICES EXCEPT HIP & FEMUR W 

CC.

1.4672 39.9 33.3 

538 ........... 4 LOCAL EXCISION & REMOVAL INT FIX DEVICES EXCEPT HIP & FEMUR 

W/O CC.

1.1625 29.5 24.6 

539 ........... 4 LYMPHOMA & LEUKEMIA W MAJOR O.R. PROCEDURE W CC ................... 1.1625 29.5 24.6 

540 ........... 6 LYMPHOMA & LEUKEMIA W MAJOR O.R. PROCEDURE W/O CC ............... 0.4175 17.0 14.2 

541 ........... ECMO OR TRACH W MV 96+ HRS OR PDX EXC FACE, MOUTH & NECK W 

MAJ O.R..

3.8893 58.1 48.4 

542 ........... TRACH W MV 96+ HRS OR PDX EXC FACE, MOUTH & NECK W/O MAJ 

O.R..

2.8689 45.1 37.6 

543 ........... 5 CRANIOTOMY W MAJOR DEVICE IMPLANT OR ACUTE COMPLEX CNS 

PDX.

1.6835 37.1 30.9 

544 ........... 5 MAJOR JOINT REPLACEMENT OR REATTACHMENT OF LOWER EXTREMITY.1.6835 37.1 30.9 

545 ........... 5 REVISION OF HIP OR KNEE REPLACEMENT ................................................ 1.6835 37.1 30.9 

546 ........... 6SPINAL FUSION EXC CERV WITH CURVATURE OF THE SPINE OR 

MALIG.

1.6835 37.1 30.9 

547 ........... 6 CORONARY BYPASS W CARDIAC CATH W MAJOR CV DX ........................ 1.1625 29.5 24.6 

548 ........... 6 CORONARY BYPASS W CARDIAC CATHW/O MAJOR CV DX ...................... 1.1625 29.5 24.6 

549 ........... 6 CORONARY BYPASS W/O CARDIAC CATH W MAJOR CV DX ..................... 1.1625 29.5 24.6 

550 ........... 6 CORONARY BYPASS W/O CARDIAC CATH W/O MAJOR CV DX ................. 1.1625 29.5 24.6 

551 ........... PERMANENT CARDIAC PACEMAKER IMPL W MAJ CV DX OR AICD LEAD 

OR GNRTR.

1.6035 29.5 24.6 

552 ........... 4OTHER PERMANENT CARDIAC PACEMAKER IMPLANT W/O MAJOR CV 

DX.

1.1625 29.5 24.6 

553 ........... OTHER VASCULAR PROCEDURES W CC W MAJOR CV DX ......................... 1.5837 32.5 27.1 

554 ........... OTHER VASCULAR PROCEDURES W CC W/O MAJOR CV DX ..................... 1.2817 31.6 26.3 

555 ........... 3PERCUTANEOUS CARDIOVASCULAR PROC W MAJOR CV DX .................. 0.7819 23.9 19.9 

556 ........... 6PERCUTANEOUS CARDIOVASC PROC W NON-DRUG-ELUTING STENT 

W/O MAJ CV DX.

0.4175 17.0 14.2 

557 ........... 4PERCUTANEOUS CARDIOVASCULAR PROC W DRUG-ELUTING STENT 

W MAJOR CV DX.

1.1625 29.5 24.6 

558 ........... 6PERCUTANEOUS CARDIOVASCULAR PROC W DRUG-ELUTING STENT 

W/O MAJ CV DX.

0.4175 17.0 14.2 

559 ........... 6ACUTE ISCHEMIC STROKE WITH USE OTHROMBOLYTIC AGENT F ......... 0.7819 23.9 19.9 

560 ........... BACTERIAL & TUBERCULOUS INFECTIONS OF NERVOUS SYSTEM ........... 0.9308 25.5 21.3 

561 ........... NON-BACTERIAL INFECTIONS OF NERVOUS SYSTEM EXCEPT VIRAL 

MENINGITIS.

0.8145 22.3 18.6 

562 ........... SEIZURE AGE >17 W CC .................................................................................... 0.6844 23.2 19.3 

563 ........... 2SEIZURE AGE >17 W/O CC .............................................................................. 0.5594 21.0 17.5 

564 ........... HEADACHES AGE >17 ........................................................................................ 0.7565 24.1 20.1 

565 ........... RESPIRATORY SYSTEM DIAGNOSIS WITH VENTILATOR SUPPORT 96+ 

HOURS.

2.0557 34.7 28.9 

566 ........... RESPIRATORY SYSTEM DIAGNOSIS WITH VENTILATOR SUPPORT < 96 

HOURS.

1.5445 27.4 22.8 

567 ........... 5STOMACH, ESOPHAGEAL & DUODENAL PROC AGE >17 W CC W 

MAJOR GI DX.

1.6835 37.1 30.9 

568 ........... 5STOMACH, ESOPHAGEAL & DUODENAL PROC AGE >17 W CC W/O 

MAJOR GI DX.

1.6835 37.1 30.9 

569 ........... 5 MAJOR SMALL & LARGE BOWEL PROCEDURES W CC W MAJOR GI DX 1.6835 37.1 30.9 

570 ........... 5 MAJOR SMALL & LARGE BOWEL PROCEDURES W CC W/O MAJOR GI 

DX.

1.6835 37.1 30.9 

571 ........... MAJOR ESOPHAGEAL DISORDERS .................................................................. 0.8214 21.9 18.3 

572 ........... MAJOR GASTROINTESTINAL DISORDERS AND PERITONEAL INFECTIONS 0.8505 23.3 19.4 

573 ........... 5 MAJOR BLADDER PROCEDURES ................................................................... 1.6835 37.1 30.9 

574 ........... MAJOR HEMATOLOGIC/IMMUNOLOGIC DIAG EXC SICKLE CELL CRISIS & 

COAGUL.

0.8106 19.7 16.4 

575 ........... SEPTICEMIA W MV 96+ HOURS AGE >17 ........................................................ 1.6583 27.8 23.2 

576 ........... SEPTICEMIA W/O MV 96+ HOURS AGE >17 .................................................... 0.7925 23.0 19.2 

577 ........... 6 CAROTID ARTERY STENT PROCEDURE ....................................................... 1.1625 29.5 24.6 

578 ........... O. R. PROCEDURE W PDX EXC POSTOPERATIVE OR POST-TRAUMATIC 

INFECTION.

1.4849 35.7 29.8 

579 ........... O. R. PROCEDURE W PDX OF POSTOPERATIVE OR POST-TRAUMATIC 

INFECTION.

1.2978 35.2 29.3 

1 Relative weights for these LTC–DRGs were determined by assigning these cases to low-volume quintile 1. 2 Relative weights for these LTC–DRGs were determined by assigning these cases to low-volume quintile 2. 3 Relative weights for these LTC–DRGs were determined by assigning these cases to low-volume quintile 3. 4 Relative weights for these LTC–DRGs were determined by assigning these cases to low-volume quintile 4. 


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Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 48331 

5 Relative weights for these LTC–DRGs were determined by assigning these cases to low-volume quintile 5. 6 Relative weights for these LTC–DRGs were determined by assigning these cases to the appropriate low volume quintile because they had no 

LTCH cases in the FY 2005 MedPAR file. 7 Relative weights for these LTC–DRGs were assigned a value of 0.0000. 8 Relative weights for these LTC–DRGs were determined after adjusting to account for nonmonotonicity (see step 5 above). 

Appendix A—Regulatory Impact 

Analysis 

I. Overall Impact 

We have examined the impacts of this final 

rule, this interim final rule with comment 

period, and this notice with comment period 

as required by Executive Order 12866 

(September 1993, Regulatory Planning and 

Review) and the Regulatory Flexibility Act 

(RFA) (September 19, 1980, Pub. L. 96–354), 

section 1102(b) of the Social Security Act, the 

Unfunded Mandates Reform Act of 1995 

(Pub. L. 104–4), and Executive Order 13132. 

Executive Order 12866 (as amended by 

Executive Order 13258, which merely 

reassigns responsibility of duties) directs 

agencies to assess all costs and benefits of 

available regulatory alternatives and, if 

regulation is necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and equity). A 

regulatory impact analysis (RIA) must be 

prepared for major rules with economically 

significant effects ($100 million or more in 

any 1 year). 

We have determined that these rules are a 

major rule as defined in 5 U.S.C. 804(2). We 

estimate that the changes for FY 2007 

operating and capital payments will 

redistribute in excess of $100 million among 

different types of inpatient cases. The market 

basket update to the IPPS rates required by 

the statute, in conjunction with other 

payment changes finalized in this rule, will 

result in an approximate $3.4 billion increase 

in FY 2007 operating and capital payments. 

This amount does not reflect changes in 

hospital admissions or case-mix intensity in 

operating PPS payments, which would also 

affect overall payment changes. The $142 

million in funds for the loan program for 

cancer center costs under the Health Care 

Infrastructure Improvement Program is 

appropriated specifically for the loan 

program and not more than $2 million may 

be used for the administration costs of the 

program. 

The RFA requires agencies to analyze 

options for regulatory relief of small 

businesses. For purposes of the RFA, small 

entities include small businesses, nonprofit 

organizations, and government agencies. 

Most hospitals and most other providers and 

suppliers are considered to be small entities, 

either by nonprofit status or by having 

revenues of $6 million to $29 million in any 

1 year. (For details, see the Small Business 

Administration’s final rule that sets forth size 

standards for health care industries at 65 FR 

69432, November 17, 2000.) 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 this proposed rule will have 

a significant impact on small entities as 

explained in this Appendix. Because we 

acknowledge that many of the affected 

entities are small entities, the analysis 

discussed throughout the preamble of this 

proposed rule constitutes our initial 

regulatory flexibility analysis. Therefore, in 

the proposed rule, we solicited comments on 

our estimates and analysis of the impact of 

the proposed rule on those small entities. 

In addition, section 1102(b) of the Act 

requires us to prepare a regulatory impact 

analysis for any proposed 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 previously defined a small rural 

hospital as a hospital with fewer than 100 

beds that is located outside of a Metropolitan 

Statistical Area (MSA) or New England 

County Metropolitan Area (NECMA). 

However, under the new labor market 

definitions, we no longer employ NECMAs to 

define urban areas in New England. 

Therefore, we now define a small rural 

hospital as a hospital that is located outside 

of an MSA 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 

NECMA. Thus, for purposes of the IPPS, we 

continue to classify these hospitals as urban 

hospitals. 

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. That threshold level is 

currently approximately $120 million. This 

proposed rule will not mandate any 

requirements for State, local, or tribal 

governments, nor will it affect private sector 

costs. 

Executive Order 13132 establishes certain 

requirements that an agency must meet when 

it promulgates a proposed rule (and 

subsequent final rule) that imposes 

substantial direct requirement costs on State 

and local governments, preempts State law, 

or otherwise has Federalism implications. As 

stated above, this rule will not have a 

substantial effect on State and local 

governments. 

The following analysis, in conjunction 

with the remainder of this document, 

demonstrates that this rule is consistent with 

the regulatory philosophy and principles 

identified in Executive Order 12866, the 

RFA, and section 1102(b) of the Act. The 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. 

II. Objectives 

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 this 

payment system are reasonable and equitable 

while avoiding or minimizing unintended 

adverse consequences. 

III. Limitations of Our Analysis 

The following quantitative analysis 

presents the projected effects of our policy 

changes, as well as statutory changes 

effective for FY 2007, 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 predict 

behavioral responses to our policy changes, 

and we do not make adjustments for future 

changes in such variables as admissions, 

lengths of stay, or case-mix. As we have done 

in the previous rules, we solicited comments 

and information about the anticipated effects 

of these changes on hospitals and our 

methodology for estimating them. Any timely 

comments we have received in response to 

the FY 2007 IPPS proposed rule are 

addressed below under the appropriate 

subject heading in this final rule. 

IV. Hospitals Included In and Excluded 

From the IPPS 

The prospective payment systems for 

hospital inpatient operating and capitalrelated costs encompass nearly all general 

short-term, acute care hospitals that 

participate in the Medicare program. There 

were 36 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 under the waiver at section 

1814(b)(3) of the Act. 

As of July 2006, there are 3,595 IPPS 

hospitals to be included in our analysis. This 

represents about 60 percent of all Medicareparticipating hospitals. The majority of this 

impact analysis focuses on this set of 

hospitals. There are also approximately 1,282 

critical access hospitals (CAHs). These small, 

limited service hospitals are paid on the basis 

of reasonable costs rather than under the 

IPPS. There are also 1,254 excluded hospitals 


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48332 Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules and Regulations 

and 2,305 excluded units that are excluded 

from the IPPS. These excluded hospitals 

include psychiatric hospitals and units (now 

referred to as IPFs), rehabilitation hospitals 

and units (now referred to as IRFs), long-term 

care hospitals (now referred to as LTCHs), 

children’s hospitals, and cancer hospitals. 

Religious Non-Medical Health Care 

Institutions (RNHCIs) are also included. The 

impacts of our policy changes on these 

hospitals and institutions are discussed 

below. 

V. Effects on Excluded Hospitals and 

Hospital Units 

As of July 2006, there were 1,254 hospitals 

excluded from the IPPS. Of these 1,254 

hospitals, 482 IPFs, 81 children’s hospitals, 

11 cancer hospitals, and 17 RNHCIs are being 

paid, in whole or in part, on a reasonable cost 

basis subject to the rate-of-increase ceiling 

under § 413.40. The remaining providers, 271 

IRFs and 392 LTCHs, are paid 100 percent of 

the Federal prospective rate under the IRF 

PPS and the LTCH PPS, respectively. We 

note that, currently, there are 16 LTCHs that 

are being paid under the LTCH PPS 

transition blend methodology, which is based 

in part on a reasonable cost that is subject to 

a rate-of-increase ceiling under § 413.40. 

Effective for cost reporting periods beginning 

on or after October 1, 2006 (FY 2007), these 

LTCHs will no longer receive a portion of 

their payment that is based, in part, on a 

reasonable cost subject to a rate-of-increase 

ceiling. Rather, in accordance with § 412.533, 

for FY 2007, all LTCHs are to be paid 100 

percent of the adjusted Federal prospective 

payment amount. In addition, there are 1,293 

IPFs (paid on a blend of the IPF PPS per diem 

payment and the TEFRA reasonable costbased payment) and 1,012 IRFs (paid under 

the IRF PPS) co-located in hospitals 

otherwise subject to the IPPS. Under 

§ 413.40(a)(2)(i)(A), the rate-of-increase 

ceiling is not applicable to the 93 IPPS 

excluded hospitals and units in Maryland 

that are paid in accordance with the waiver 

at section 1814(b)(3) of the Act. 

In the past, 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). 

Hospitals that continue to be paid fully on a 

reasonable cost basis are subject to TEFRA 

limits for FY 2007. For these hospitals 

(cancer and children’s hospitals), consistent 

with section 1886(b)(3)(B)(ii) of the Act, as 

was proposed the final update will be the 

percentage increase in the FY 2007 IPPS 

operating market basket, currently estimated 

to be 3.4 percent. In addition, in accordance 

with § 403.752(a) of the regulations, RNHCIs 

are paid under § 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. For RNHCIs, the update will be the 

percentage increase in the FY 2007 IPPS 

operating market basket increase, currently 

estimated to be 3.4 percent. 

IRFs are paid under a prospective payment 

system (IRF PPS) for cost reporting periods 

beginning on or after January 1, 2002. For 

cost reporting periods beginning during FY 

2007, the IRF PPS is based on 100 percent 

of the adjusted Federal IRF prospective 

payment amount, updated annually. 

Therefore, these hospitals are not affected by 

this final rule. 

Effective for cost reporting periods 

beginning on or after October 1, 2002, LTCHs 

are paid under a LTCH PPS, based on a 

Federal prospective payment amount that is 

updated annually. Existing LTCHs receive a 

blended payment that consists of the Federal 

prospective payment rate and a reasonable 

cost-based payment rate over a 5-year 

transition period, unless the LTCH elects to 

be paid at 100 percent of the Federal 

prospective rate at the beginning of any of its 

cost reporting periods during the 5-year 

transition period. Under § 412.533, the 5-year 

transition period for all existing LTCHs 

subject to the LTCH PPS began with the 

LTCH’s first cost reporting period beginning 

on or after October 1, 2002, and is extended 

through the LTCH’s cost reporting period 

beginning on or after October 1, 2006. In 

accordance with § 412.533, for cost reporting 

periods beginning on or after October 1, 

2006, the LTCH PPS transition blend 

percentages are 100 percent of the Federal 

prospective payment amount and zero 

percent of the amount calculated under 

reasonable cost principles. Therefore, even 

though FY 2007 is the fifth year of the 5-year 

transition period established under 

§ 412.533, because the reasonable cost 

principles amount is zero percent for cost 

reporting periods beginning during FY 2007, 

LTCHs will no longer receive a portion of 

their payment that is based in part on a 

reasonable cost subject to the rate-of-increase 

ceiling. Thus, there is no longer a need for 

an update factor for LTCH’s TEFRA target 

amount for FY 2007 and beyond. 

Section 124 of the Medicare, Medicaid, and 

SCHIP Balanced Budget Refinement Act of 

1999 (BBRA) required the development of a 

per diem prospective payment system (PPS) 

for payment of inpatient hospital services 

furnished in IPFs. The final rule 

implementing the IPF PPS (69 FR 66922) 

established a 3-year transition to the IPF PPS 

during which some providers will receive a 

blend of the IPF PPS per diem payment and 

the TEFRA reasonable cost-based payment. 

For purposes of determining what the TEFRA 

payment to the IPF will be, we updated the 

IPF’s TEFRA target amount by the excluded 

hospital market basket percentage increase of 

3.4 percent. 

The impact on excluded hospitals and 

hospital units of the update in the rate-ofincrease limit depends on the cumulative 

cost increases experienced by each excluded 

hospital or unit since its applicable base 

period. For excluded hospitals and units 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 hospitals 

and hospital units receive. Conversely, for 

excluded hospitals and hospital units 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 § 413.40(d)(3), an 

excluded hospital or unit 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 § 413.40, certain excluded hospitals 

and hospital units can obtain payment 

adjustments for justifiable increases in 

operating costs that exceed the limit. 

However, at the same time, by generally 

limiting payment increases, we continue to 

provide an incentive for excluded hospitals 

and hospital units to restrain the 

inappropriate spending for patient services. 

VI. Quantitative Effects of the Policy 

Changes Under the IPPS for Operating Costs 

A. Basis and Methodology of Estimates 

In this final rule, we are announcing policy 

changes and payment rate updates for the 

IPPS for operating costs. Changes to the 

capital payments are discussed in section 

VIII. of this Appendix. We note that due to 

the decision in Bellevue Hosp. Center v. 

Leavitt, in which the Court of Appeals for the 

Second Circuit (the Court) ordered CMS to 

apply the occupational mix adjustment to 

100 percent of the wage index effective for 

FY 2007 (see section III.C. of this final rule 

for more details of this Court decision), we 

are unable to finalize the FY 2007 wage index 

data at this time. Therefore, we are also 

unable to finalize the relative weights, budget 

neutrality calculations, the outlier threshold, 

the outlier offsets and the standardized 

payment amounts. We have calculated 

tentative amounts for all of these factors and 

have based the impacts shown in the 

following pages on these tentative amounts. 

When the final 100 percent occupational mix 

adjusted wage data is available, we will 

recalculate impacts and publish them in a 

separate Federal Register notice prior to 

October 1, 2006. 

Based on the overall percentage change in 

payments per case estimated using our 

payment simulation model, we estimate that 

total FY 2007 operating payments will 

increase 3.5 percent compared to FY 2006 

largely due to the statutorily mandated 

update to the IPPS rates. This amount does 

not reflect changes in hospital admissions or 

case-mix intensity, which would 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 

prospective payment system. 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 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 2005 MedPAR file and the most current 

Provider-Specific File that is used for 

payment purposes. Although the analyses of 

the changes to the operating PPS do not 

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recently available hospital cost report were 

used to categorize hospitals. Our analysis has 

several qualifications. First, in this analysis, 

we do not make adjustments for behavioral 

changes that hospitals may adopt in response 

to the policy changes, and we do not adjust 

for future changes in such variables as 

admissions, lengths of stay, or 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 sources for the data used 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 

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 2005 MedPAR 

file, we simulated payments under the 

operating IPPS given various combinations of 

payment parameters. Any short-term, acute 

care hospitals not paid under the IPPS 

(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 FY 

2007 changes to the capital IPPS are 

discussed in section VIII. of this Appendix. 

The changes discussed separately below 

are the following: 

• The effect of a reduced update to the 

standardized amount for hospitals that do not 

comply with section 1886(b)(3)(B)(viii) of the 

Act by submitting quality data in accordance 

with our requirements. 

• The effects of the MDH payment changes 

set forth in section 5003 of Pub. L. 109–171. 

• The effects of the revisions we are 

adopting to our methodology for calculating 

DRG relative weights. 

• The effects of the annual reclassification 

of diagnoses and procedures and the 

recalibration of the DRG relative weights 

required by section 1886(d)(4)(C) of the Act. 

The relative weights used in estimating this 

impact are not yet final as the wage data used 

in the relative weight computation is not 

available at this time. 

• The effects of the changes in hospitals’

wage index values reflecting wage data from 

hospitals’ cost reporting periods beginning 

during FY 2003, compared to the FY 2002 

wage data are shown in this impact but are 

not yet final because the occupational mix 

wage data that will be used to calculate the 

FY 2007 wage indices are not available at this 

time. 

• The effects of the wage and recalibration 

budget neutrality factors are shown in this 

impact but are not yet final because 

occupational mix adjusted wage indices are 

yet to be calculated. 

• The effects of the remaining labor market 

area transition for those hospitals that were 

urban under the old labor market area 

designations and are now considered rural 

hospitals are shown in this impact but are 

not yet final pending calculation of the final 

occupational mix adjusted wage indices. 

• The effects of geographic 

reclassifications by the MGCRB that will be 

effective in FY 2007 are shown in this impact 

but are not yet final because we will be 

making reclassification decisions for 

hospitals subsequent to this final rule prior 

to October 1, 2006, based on the final 

occupational mix adjusted wage indices. 

• The effects of section 505 of Pub. L. 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, are 

shown in this impact but are not yet final 

because the final occupational mix adjusted 

wage data are not available at this time. 

• The total estimated change in payments 

based on FY 2007 policies and MMA and 

DRA-imposed changes relative to payments 

based on FY 2006 policies. 

To illustrate the impacts of the FY 2007 

changes, our analysis begins with a FY 2006 

baseline simulation model using: the FY 

2007 market basket update of 3.4 percent; the 

FY 2006 DRG GROUPER (version 23.0); the 

CBSA designations for hospitals based on 

OMB’s June 2003 MSA definitions; the FY 

2006 wage index; and no MGCRB 

reclassifications. Outlier payments are set at 

5.1 percent of total operating DRG and outlier 

payments. 

Section 1886(b)(3)(B)(vii) of the Act, as 

added by section 501(b) of Pub. L. 108–173, 

and amended by section 5001(a) of Pub. L. 

109–171, provides that, for FYs 2005 through 

2006, the update factors will be reduced by 

0.4 percentage points for any hospital that 

does not submit quality data. Section 5001(a) 

of Pub. L. 109–171 provides that for FY 2007 

and subsequent years, the update factor will 

be reduced by 2.0 percentage points for any 

hospital that does not submit quality data or 

that fails the quality data validation process. 

At the time this impact was prepared, 117 

providers did not receive the full market 

basket rate-of-increate for FY 2006 because 

they failed the quality data submission 

process. For purposes of the simulations 

shown below, we modeled the payment 

changes for FY 2007 using a reduced update 

for these 117 hospitals. However, we do not 

have enough information to determine which 

hospitals will not receive the full market 

basket rate-of-increase for FY 2007 at this 

time. 

Each final and statutory policy change is 

then added incrementally to this baseline, 

finally arriving at an FY 2007 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 

2006 to FY 2007. Three factors not discussed 

separately have significant impacts here. The 

first is the update to the standardized 

amount. In accordance with section 

1886(b)(3)(B)(i) of the Act, we have updated 

standardized amounts for FY 2007 using the 

most recently forecasted hospital market 

basket increase for FY 2007 of 3.4 percent. 

(Hospitals that fail to comply with the quality 

data submission requirement to receive the 

full update will receive an update reduced by 

2.0 percentage points to 1.4 percent.) Under 

section 1886(b)(3)(B)(iv) of the Act, the 

updates to the hospital-specific amounts for 

sole community hospitals (SCHs) and for 

Medicare-dependent small rural hospitals 

(MDHs) are also equal to the market basket 

increase, or 3.4 percent. 

A second significant factor that affects 

changes in hospitals’ payments per case from 

FY 2006 to FY 2007 is the change in MGCRB 

status from one year to the next. That is, 

payments may be reduced for hospitals 

reclassified in FY 2006 that are no longer 

reclassified in FY 2007. Conversely, 

payments may increase for hospitals not 

reclassified in FY 2006 that are reclassified 

in FY 2007. In some cases, these impacts can 

be quite substantial, so if a relatively small 

number of hospitals in a particular category 

lose their reclassification status, the 

percentage change in payments for the 

category may be below the national mean. 

However, this effect is alleviated by section 

1886(d)(10)(D)(v) of the Act, which provides 

that reclassifications for purposes of the wage 

index are for a 3-year period. 

A third significant factor is that we 

currently estimate that actual outlier 

payments during FY 2006 will be 4.6 percent 

of total DRG payments. When the FY 2006 

final rule was published, we projected FY 

2006 outlier payments would be 5.1 percent 

of total DRG plus outlier payments; the 

average standardized amounts were offset 

correspondingly. The effects of the lower 

than expected outlier payments during FY 

2006 (as discussed in the Addendum to this 

final rule) are reflected in the analyses below 

comparing our current estimates of FY 2006 

payments per case to estimated FY 2007 

payments per case (with outlier payments 

projected to equal 5.1 percent of total DRG 

payments). 

B. Analysis of Table I 

Table I displays the results of our analysis 

of changes for FY 2007. 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 3,595 hospitals 

included in the analysis. There are 149 fewer 

hospitals than were included in the impact 

analysis in the FY 2006 final rule (70 FR 

47690). 

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 2,590 hospitals 

located in urban areas included in our 

analysis. Among these, there are 1,441 

hospitals located in large urban areas 

(populations over 1 million), and 1,149 

hospitals in other urban areas (populations of 

1 million or fewer). In addition, there are 

1,005 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 2007 payment 

classifications, including any 


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reclassifications under section 1886(d)(10) of 

the Act. For example, the rows labeled urban, 

large urban, other urban, and rural show that 

the number of hospitals paid based on these 

categorizations after consideration of 

geographic reclassifications (including 

reclassifications under 1886(d)(8)(B) and 

1886(d)(8)(E) which have implications for 

capital payments) are 2,608, 1,450, 1,158, and 

987, 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 2,511 nonteaching hospitals in our 

analysis, 843 teaching hospitals with fewer 

than 100 residents, and 241 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 after geographic reclassification, 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 (sole community hospitals 

(SCHs), rural referral centers (RRCs), and 

Medicare dependent hospitals (MDHs)), as 

well as rural hospitals not receiving a special 

payment designation. There were 187 RRCs, 

376 SCHs, 146 MDHs, 98 hospitals that are 

both SCHs and RRCs, and 8 hospitals that are 

both MDHs and RRCs. 

The next two groupings are based on type 

of ownership and the hospital’s Medicare 

utilization expressed as a percent of total 

patient days. These data are taken primarily 

from the FY 2004 Medicare cost reports, if 

available (otherwise FY 2003 data are used). 

The next series of groupings concern the 

geographic reclassification status of 

hospitals. The first grouping displays all 

urban hospitals that were reclassified by the 

MGCRB for FY 2007. The next grouping 

shows the MGCRB rural reclassifications. 

The final three rows in Table I contain 

hospitals located in urban counties, but 

deemed to be rural under section 

1886(d)(8)(E) of the Act, hospitals located in 

rural counties but deemed to be urban under 

section 1886(d)(8)(B) of the Act, and 

hospitals currently reclassified under section 

508 of Pub. L. 108–173, which expires on 

March 31, 2007. 

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C. Effects on the Hospitals That Failed the 

Quality Data Submission Process (Column 2) 

Column 2 of Table I shows the effect of 

assigning a reduced update to the 

standardized amount to hospitals that either 

fail to submit quality data or fail the data 

validation requirements. This column shows 

the effect of paying these providers based on 

an update of market basket, less 2.0 

percentage points (1.4 percent) relative to a 

full market basket update (3.4 percent), for 

FY 2007. There are 117 hospitals in this 

analysis that did not receive the full market 

basket update for FY 2006. Most of these 

hospitals are either small rural or small urban 

hospitals. For purposes of simulation only, 

we used these same hospitals to simulate the 

effects on IPPS payments receiving a reduced 

FY 2007 update. However, at this time, 

information is not available to determine the 

hospitals that do not meet the requirements 

for the full hospital market increase for FY 

2007. If the same hospitals were to fail to 

meet the requirements for the full market 

basket rate-of-increase for FY 2007 as in FY 

2006, we project that hospitals in the small 

urban and rural hospital categories (0–99 

beds) will receive an overall decrease in 

payments of 0.1 percent. 

D. Effects of the DRA Provision Related to 

MDHs (Column 3) 

In Column 3 of Table I, we show the effects 

of implementing section 5003 of Pub. L. 109–

171 for MDHs. Section 5003(b) requires 

MDHs to rebase their hospital-specific rate to 

the FY 2002 cost reporting period, if doing 

so increases their target amount. Section 

5003(c) increases the hospital-specific 

payment amount from the Federal rate plus 

50 percent of the difference between the 

Federal rate and the hospital-specific amount 

(presuming the hospital-specific amount 

exceeds the Federal amount) to the Federal 

rate plus 75 percent of the difference. In 

addition, MDHs are no longer subject to the 

12-percent cap on their DSH payments, 

effective FY 2007. 

This column compares the FY 2007 

payment rates under the section 5003 

provisions to payments under the FY 2006 

MDH provisions. (The MDH provisions were 

set to expire at the end of FY 2006 but were 

extended by section 5003(a)(1).) Overall, 

hospitals experience a 0.1 percent increase. 

This is primarily due to the substantial 

increase in payments to MDH providers; 

MDH providers experience a 4.7 percent 

increase, while MDH/RRC combination 

providers experience an 11.5 percent 

increase. 

E. Effects of the Changes to the DRG 

Reclassifications and Relative Cost-Based 

Weights (Column 4) 

In Column 4 of Table I, we present the 

combined effects of the DRG reclassifications 

and recalibration, as discussed in section II. 

of the preamble to this final rule. 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. 

As discussed in the preamble of this final 

rule, we are changing the relative weight 

calculation methodology from a charge-based 

method to a cost-based method. Further, we 

are implementing the new methodology 

under a 3-year transition such that weights in 

FY 2007 are 1⁄3 cost-based and 2⁄3 chargebased. In this column, we compare aggregate 

payments using the FY 2007 blended relative 

weights(GROUPER Version 24) to the FY 

2006 DRG relative charge weights (GROUPER 

Version 23.0) so the percentages shown here 

illustrate the effect of changes to the DRGs 

and relative weights. The method of 

calculating the relative weights and the 

reclassification changes to the GROUPER are 

described in more detail in section II. of the 

preamble to this final rule. We note that, 

consistent with section 1886(d)(4)(C)(iii) of 

the Act, we have applied a budget neutrality 

factor to ensure that the overall payment 

impact of the DRG changes (combined with 

the wage index changes) is budget neutral. 

This tentative budget neutrality factor of 

0.997968 is applied to payments in Column 

6 and not Column 4 because it is a combined 

DRG reclassification and recalibration and 

wage index budget neutrality factor. 

In general, surgical DRGs tend to have 

charges concentrated in ancillary cost center 

groups while medical DRGs tend to have 

charges concentrated in routine or intensive 

care unit (ICU) cost center groups. As 

discussed in the preamble of this final rule, 

the CCRs for ancillary cost center groups are 

lower than the cost to charge ratios for 

routine and ICU cost center groups, 

indicating that the charge markups for 

ancillary services are higher. Because the 

standardized cost-based relative weight 

methodology adjusts the weights to remove 

differential mark-ups in charges, the FY 2007 

cost-based weights are redistributed among 

medical and surgical DRGs, which will result 

in a redistribution of payments among 

hospitals according to the types of cases they 

provide. For instance, hospitals that perform 

more surgical procedures are likely to 

experience decreases in payments while 

hospitals with heavy concentrations of 

medical DRGs are expected to experience 

increases in payments. Hospitals with a casemix that is equal to average will see little or 

no change in payment. 

Due to the fact that we significantly 

modified our proposal and are adopting cost 

weights without the hospital-specific portion 

of the methodology, the impacts for the final 

rule are much smaller than those we 

proposed. The payment impacts are further 

moderated because we are implementing the 

change to the relative weights over a 3-year 

transition period. Therefore, the impacts 

shown in this column are generally smaller 

than those for the proposed rule. Rural DSH 

hospitals with less than 100 beds and small 

rural hospitals (0–49 beds) have payment 

increases of 0.6 percent and 0.7 percent, 

respectively. Cardiac specialty hospitals 

experience the greatest decline in payments 

of 2.2 percent and rural hospitals with more 

than 200 beds and urban hospitals in the East 

South Central Region have the next largest 

decreases of 0.1 percent. 

F. Effects of Wage Index Changes (Column 5) 

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 FY 2007 is 

based on data submitted for hospital cost 

reporting periods beginning on or after 

October 1, 2002 and before October 1, 2003. 

However, we note that this impact is 

calculated on wage data with no 

occupational mix adjustment due to the 

decision in Bellevue Hosp. Center v. Leavitt, 

in which the Court of Appeals for the Second 

Circuit ordered CMS to apply the 

occupational mix adjustment to 100 percent 

of the wage index effective for FY 2007 (see 

section III.C. of this final rule for more details 

of this Court decision). Because the effects of 

the wage index data are dependent, in part, 

upon the occupational mix adjusted wage 

index, and due to the short timeframe for 

implementing the Court’s order, we are not 

able to provide the final occupational mix 

adjusted wage data impacts with this FY 

2007 IPPS final rule. We will include the FY 

2007 occupational mix adjusted wage index 

and related impacts in a separate Federal 

Register notice to be published prior to 

October 1, 2006. We believe these procedures 

comply with section 1886(d)(6) of the Act 

because, by August 1, we will have described 

our data and methods for calculating the 

wage index and IPPS rates in this FY 2007 

IPPS final rule, but the actual impacts 

concerning the wage index will not be issued 

until a later date. 

The estimated impact of the new wage data 

(with no occupational mix applied) 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 changes in payments 

when going from a model using the FY 2006 

wage index, based on FY 2002 wage data and 

having a 10-percent occupational mix 

adjustment applied, to a model using the FY 

2007 pre-reclassification wage index, based 

on FY 2003 wage data with no occupational 

mix applied. The wage data collected on the 

FY 2003 cost report are the same as the FY 

2002 wage data that were used to calculate 

the FY 2006 wage index. The impacts shown 

in Column 5 are likely to change with the 

application of the occupational mix 

adjustment to 100 percent of the wage index. 

The final impacts will be shown and 

discussed in a subsequent Federal Register 

notice to be published prior to October 1, 

2006. 

G. Combined Effects of DRG and Wage Index 

Changes, Including Budget Neutrality 

Adjustment (Column 6) 

Section 1886(d)(4)(C)(iii) of the Act 

requires that changes to 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. As noted in the 

Addendum to this final rule, in determining 

the budget neutrality factor, we equated 

simulated aggregate payments for FY 2006 

and FY 2007 using the FY 2005 Medicare 

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the DRG relative weights and the wage index. 

However, we note that the payment impact 

and budget neutrality factors are calculated 

by applying an occupational mix adjustment 

to 10 percent of the FY 2006 wage index and 

zero percent of the FY 2007 wage index due 

to the decision in Bellevue Hosp. Center v. 

Leavitt, as stated previously. 

We computed a tentative wage and DRG 

recalibration budget neutrality factor of 

0.997030. The 0.0 percent impact for all 

hospitals demonstrates that these changes, in 

combination with the budget neutrality 

factor, are budget neutral. In Table I, the 

combined overall impacts of the effects of 

both the DRG reclassifications and the 

updated wage index are shown in Column 6. 

The changes in this column are the sum of 

the changes in Columns 4 and 5, combined 

with the budget neutrality factor for the wage 

index, including the wage index floor for 

urban areas required by section 4410 of Pub. 

L. 105–33. There also may be some variation 

of plus or minus 0.1 percentage point due to 

rounding. 

Currently, we project that large urban 

hospitals will show a 0.1 percent increase, 

other urban hospitals will experience a 0.1 

percent decrease, and rural hospitals will not 

be affected. We are not able to provide the 

final DRG and wage index budget neutrality 

impacts with this FY 2007 IPPS final rule 

due to the short timeframes for implementing 

the Court’s order for implementation of the 

occupational mix adjustment. However, we 

will recalculate the budget neutrality factor 

to include the effects of the 100 percent 

occupational mix adjustment when the data 

become available, and we will publish 

updated payment impacts in a subsequent 

Federal Register notice document prior to 

October 1, 2006. 

H. Effects of the 3-Year Provision Allowing 

Urban Hospitals That Were Converted to 

Rural as a Result of the FY 2005 Labor 

Market Area Changes To Maintain the Wage 

Index of the Urban Labor Market Area in 

Which They Were Formerly Located (Column 

7) 

To help alleviate the decreased payments 

for urban hospitals that became rural under 

the new labor market area definitions, for 

purposes of the wage index, we adopted a 

policy in FY 2005 to allow them to maintain 

the wage index assignment of the MSA where 

they were located for the 3-year period FY 

2005, FY 2006, and FY 2007. Column 7 

shows the impact of the remaining labor 

market area transition, for those hospitals 

that were urban under the old labor market 

area designations and are now considered 

rural hospitals. Section 1886(d)(3)(E) of the 

Act specifies that any updates or adjustments 

to the wage index are to be budget neutral. 

Therefore, we applied a tentative adjustment 

of 0.999605 to ensure that the effects of 

reclassification are budget neutral as 

indicated by the zero effect on payments to 

hospitals overall. However, we note that this 

budget neutrality factor and this impact are 

both calculated using FY 2007 wage data 

with no occupational mix adjustment due to 

the decision in Bellevue Hosp. Center v. 

Leavitt. We are not able to provide the final 

urban to rural hold harmless budget 

neutrality impacts with this FY 2007 IPPS 

final rule. This information will also be 

include in a separate Federal Register notice 

to be published prior to October 1, 2006. 

Currently, the rural hospital row shows a 0.3 

percent benefit from this provision as these 

hold harmless hospitals are now considered 

geographically rural. 

I. Effects of MGCRB Reclassifications 

(Column 8) 

Our impact analysis to this point has 

assumed 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, such as hospitals in 

rural counties that are deemed urban under 

section 1886(d)(8)(B) of the Act). The changes 

in Column 8 reflect the per case payment 

impact of moving from this baseline to a 

simulation incorporating the MGCRB 

decisions for FY 2007 which affect hospitals’

wage index area assignments. 

By February 28 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. The FY 2007 wage index values 

incorporate all of the MGCRB’s 

reclassification decisions for FY 2007. The 

wage index values also reflect any decisions 

made by the CMS Administrator through the 

appeals and review process through February 

28, 2006. 

For FY 2007, as stated in the FY 2006 IPPS 

final rule (70 FR 47382, August 12, 2005), we 

established procedural rules under section 

1886(d)(10)(D)(v) of the Act to address 

specific circumstances where individual and 

group reclassifications involve a section 508 

hospital. The rules were designed to 

recognize the special circumstances of 

section 508 hospital reclassifications ending 

mid-year during FY 2007 and were intended 

to allow previously approved 

reclassifications to continue through March 

31, 2007, and new section 1886(d)(10) 

reclassifications to begin April 1, 2007, upon 

the conclusion of the section 508 

reclassifications. Under these procedural 

rules, some section 1886(d)(10) hospital 

reclassifications are only in effect for the 

second half of the fiscal year. 

The first and second half fiscal year section 

1886(d)(10) reclassifications permitted under 

these procedural rules have implications for 

the calculation of the reclassified wage 

indices and the reclassification budget 

neutrality factor. Section 1886(d)(8)(c) of the 

Act provides requirements for determining 

the wage index values for hospitals that were 

reclassified as a result of the MGCRB 

decisions under 1886(d)(10) of the Act. As 

provided in the statute, we are required to 

calculate a separate wage index for hospitals 

reclassified to an area if including the wage 

data for the reclassified hospitals would 

reduce the area wage index by more than 1 

percent. 

Because of the half-year reclassifications 

permitted under the procedural rules, in this 

final rule, we are issuing two separate wage 

indexes for affected areas (one effective from 

October 1, 2006, through March 31, 2007 and 

a second reclassified wage index effective 

April 1, 2007, through September 30, 2007). 

The FY 2007 wage index values are 

calculated based on the wage data for 

hospitals reclassified to the area in the 

respective half of the fiscal year. The impact 

of this policy is modeled in Column 8 of 

Table I above. 

The overall effect of geographic 

reclassification is required by section 

1886(d)(8)(D) of the Act to be budget neutral. 

In this final rule, we are calculating one 

budget neutrality adjustment that reflects the 

average of the adjustments required for first 

and second half fiscal year reclassifications, 

respectively. Therefore, we applied a 

tentative adjustment of 0.991850 to ensure 

that the effects of the section 1886(d)(10) 

reclassifications are budget neutral. (See 

section II.A. of the Addendum to this final 

rule.) However, we note that this budget 

neutrality factor and this impact are both 

calculated using wage adjustment applied 

due to the decision in Bellevue Hosp. Center 

v. Leavitt. As noted earlier, CMS will apply 

a reclassification decision for FY 2007 on 

behalf of hospitals to give them the highest 

wage index. Hospitals will then have 30 days 

from the date of public display of the 

separate notice to be published prior to 

October 1, 2006 at the Office of the Federal 

Register to revise the decision that CMS 

made on their behalf. We are unable to state 

with certainty that all of the reclassified 

providers shown in Table 9A in the 

Addendum to this final rule will retain their 

approved reclassifications for FY 2007 once 

the final occupational mix adjusted wage 

indices are known. We will include the FY 

2007 occupational mix adjusted wage index 

related impacts and our reclassification 

decisions made on behalf of hospitals in a 

separate Federal Register notice document to 

be published prior to October 1, 2006. 

J. Effects of the Wage Index Adjustment for 

Out-Migration (Column 9) 

Section 1886(d)(13) of the Act, as added by 

section 505 of Pub. L. 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 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. We note that this 

impact is based on the section 505 wage 

index adjustments in place as of FY 2006. As 

the FY 2007 adjustments must be calculated 

using wage data with an occupational mix 

adjustment and because we do not yet have 

these data due to the decision in Bellevue 

Hosp. Center v. Leavitt, we were unable to 

assess whether any new counties would 

qualify for section 505 adjustments for FY 

2007 prior to the publication of this final 

rule. In the notice that we publish in the 


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Federal Register notice prior to October 1, 

2006, we will show any new counties that 

qualify for the section 505 adjustment for FY 

2007 and any related impacts that result from 

application of the out-migration adjustment 

to the revised occupational mix adjusted 

wage indices. 

K. Effects of All Changes (Column 10) 

Column 10 compares our estimate of 

payments per case between FY 2006 and FY 

2007, incorporating all changes reflected in 

this final rule for FY 2007 (including 

statutory changes). This column includes all 

of the policy changes. We note that this 

impact is calculated using standardized 

amounts, outlier estimates, and budget 

neutrality factors based on wage data with no 

occupational mix adjustment applied due to 

the decision in Bellevue Hosp. Center v. 

Leavitt. 

Currently, Column 10 reflects the impact of 

all FY 2007 changes (other than the final 

occupational mix adjusted wage indices) 

relative to FY 2006, including those shown 

in Columns 2 through 9 as well as other 

factors that are not applied until the final 

rates are calculated. The average increase for 

all hospitals is approximately 3.5 percent. 

This increase includes the effects of the 3.4 

percent market basket update. It also reflects 

the 0.5 percentage point difference between 

the projected outlier payments in FY 2006 

(5.1 percent of total DRG payments) and the 

current estimate of the percentage of actual 

outlier payments in FY 2006 (4.6 percent), as 

described in the introduction to this 

Appendix and the Addendum to this final 

rule. As a result, payments are projected to 

be 0.5 percentage points lower in FY 2006 

than originally estimated, resulting in a 0.5 

percentage point greater increase for FY 2007 

than would otherwise occur. In addition, the 

impact of section 505 adjustments accounted 

for a 0.1 percent increase. Indirect medical 

education formula changes for teaching 

hospitals under section 502 of Pub. L. 108–

173, changes in payments due to the 

difference between the FY 2006 and FY 2007 

wage index values assigned to providers 

reclassified under section 508 of Pub. L. 108–

173, and changes in the incremental increase 

in payments from section 505 of Pub. L. 108–

173 out-migration adjustments account for 

the remaining ¥0.6 percent. 

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 10 may not equal the product of the 

percentage changes described above. 

The overall change in payments per case 

for hospitals in FY 2007 would increase by 

3.5 percent. Hospitals in urban areas would 

experience a 3.4 percent increase in 

payments per case compared to FY 2006. 

Hospitals in large urban areas would 

experience a 3.5 percent increase in 

payments and hospitals in other urban areas 

would experience a 3.3 percent increase in 

payments. Hospitals in rural areas, 

meanwhile, would experience a 3.7 percent 

payment increase. 

Among urban census divisions, the largest 

payment increases would be 4.5 percent in 

the Pacific region and 4.3 percent in the 

Mountain region. The smallest urban 

increase is 2.2 percent in Puerto Rico. 

Among rural regions in Column 10, no 

hospital category would experience overall 

payment decreases. The New England and 

Middle Atlantic regions would benefit the 

most, with 5.6 and 5 percent increases, 

respectively. The smallest increase would 

occur in the Mountain region, with a 3.0 

percent increases in payments. 

Among special categories of rural hospitals 

in Column 10, MDH/RRC providers receive 

an increase in payments of 11.5 percent and 

MDH providers receive an increase of 4.7 

percent, primarily due to the changes to 

MDH payments set forth in section 5003 of 

Pub. L. 109–171. 

Urban hospitals reclassified for the first 

half of FY 2007 are anticipated to receive an 

increase of 3.6 percent, while urban hospitals 

that reclassified for the second half of FY 

2007 are expected to receive an increase of 

3.4 percent. The same set of rural hospitals 

is reclassified for the first and second half of 

FY 2007. Rural hospitals reclassifying for the 

entire year of FY 2007 are anticipated to 

receive a 3.5 percent payment increase. 

Those hospitals located in rural counties, but 

deemed to be urban under section 

1886(d)(8)(B) of the Act are expected to 

receive an increase in payments of 4.4 

percent. Hospitals that were reclassified 

under section 508 of Pub. L. 108–173, which 

is only effective through March 31, 2007, are 

expected to receive an increase of 1.7 

percent. This lower estimated increase in 

payment is due to the expiration of the 

higher section 508 wage indices in effect for 

6 months of FY 2007. We caution that all of 

these impacts will be revised prior to October 

1, 2006 when the occupational mix wage 

indices are calculated for FY 2007. 

L. Effects of Policy on Payment Adjustments 

for Low-Volume Hospitals 

For FY 2007, we are continuing to apply 

the volume adjustment criteria we specified 

in the FY 2005 IPPS final rule (69 FR 49099). 

We expect that two providers would receive 

the low-volume adjustment for FY 2007. We 

included these additional payments to 

providers in the impact table shown above 

and we estimate the impact of these 

providers receiving the additional 25-percent 

payment increase to be approximately 

$89,000. 

M. Impact Analysis of Table II 

Table II presents the projected impact of 

the changes for FY 2007 for urban and rural 

hospitals and for the different categories of 

hospitals shown in Table I. It compares the 

estimated payments per case for FY 2006 

with the average estimated per case payments 

for FY 2007, 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 percentage changes 

shown in the last column of Table II equal 

the percentage changes in average payments 

from Column 10 of Table I. 

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BILLING CODE 4120–01–C 

VII. 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. 

A. Effects of LTC–DRG Reclassifications and 

Relative Weights for LTCHs 

In section II.F. of the preamble to this final 

rule, we discuss the changes in the LTC–DRG 

relative weights for FY 2007, which are based 

on the Version 24.0 of the CMS GROUPER 

(including the changes in the classifications, 

relative weights and geometric mean length 

of stay for each LTC–DRG). As also discussed 

in that same section of this final rule, 

currently, there is no statutory or regulatory 

requirement that the annual update to the 

LTC–DRG classifications and relative weights 

be done in a budget neutral manner. As 

discussed above in section II.F. of the 

preamble of this final rule, the LTCH PPS is 

still in the midst of a transition from a 

reasonable cost-based payment system to 

fully Federal PPS payments, during which 

time LTCH treatment patterns and coding 

practices, which are reflected in the LTCH 

claims data, appear to continue to change as 

LTCHs adapt to this new payment system. 

The LTCH PPS was implemented for cost 

reporting periods beginning on or after 

October 1, 2002 (FY 2003). Therefore, the FY 

2005 MedPAR data used to compute the FY 

2007 LTC–DRG relative weights in this final 

rule are based on LTCH claims data taken 

from only the second full year of the LTCH 

PPS. Based on LTCH cases in the March 2006 

update of the FY 2005 MedPAR files, we 

estimate that the changes to the LTC–DRG 

classifications and relative weights for FY 

2007 would result in an aggregate decrease in 

LTCH PPS payments of approximately 1.3 

percent based on the data from the 369 

LTCHs in our database. (We note that this 

estimated aggregate decrease in LTCH PPS 

payments of approximately 1.3 percent was 

determined based on the current payment 


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rates and policies established in the RY 2007 

LTCH PPS final rule (71 FR 27798 through 

27939) and the revised LTC–DRG 

classifications, relative weights and average 

lengths of stay established for FY 2007 in this 

final rule). 

When we compared the GROUPER Version 

23.0 (FY 2006) LTC–DRG relative weights to 

the GROUPER Version 24.0 (FY 2007) LTC–

DRG relative weights, we found that 

approximately 68 percent of the LTC–DRGs 

would have a higher relative weight under 

Version 23.0, while the remaining 

approximately 32 percent of the LTC–DRGs 

would have a higher relative weight under 

Version 24.0. We also found that, based on 

FY 2005 LTCH cases, the GROUPER Version 

23.0 LTC–DRG relative weights were, on 

average, approximately 3.3 percent higher 

than the GROUPER Version 24.0 LTC–DRG 

relative weights. In addition, based on an 

analysis of the most recent available LTCH 

claims data from the FY 2005 MedPAR file, 

we continue to observe that the average LTC–

DRG relative weight decreases due to an 

increase of relatively lower charge cases 

being assigned to LTC–DRGs with higher 

relative weights in the prior year. 

Contributing to this increase in these 

relatively lower charge cases being assigned 

to LTC–DRGs with higher relative weights in 

the prior year are improvements in coding 

practices, which are typical when moving 

from a reasonable cost-based payment system 

to a PPS. The impact of including additional 

cases with relatively lower charges into LTC–

DRGs that had a relatively higher relative 

weight in the GROUPER Version 23.0 (FY 

2006) is a decrease in the average relative 

weight for those LTC–DRGs in the GROUPER 

Version 24.0. As noted above in section II.F. 

of the preamble to this final rule, LTCHs are 

a specialized provider type that typically do 

not treat a broad spectrum of patients in their 

facilities with many different diagnoses. 

While there are 538 valid GROUPER Version 

24.0 LTC–DRGs, 183 LTC–DRGs have no 

LTCH cases. In addition, another 180 LTC–

DRGs are categorized as ‘‘low volume’’ (that 

is, have less than 25 cases annually). 

Consequently, only about 175 LTC–DRGs are 

used by most LTCHs on a ‘‘regular basis’’

(that is, nationally LTCHs discharge, in total, 

an average of 25 or more of these cases 

annually). 

Of these 175 LTC–DRGs that are used on 

a ‘‘regular basis,’’ we found that 

approximately 65 percent of the LTC–DRGs 

would have higher relative weights under 

GROUPER Version 23.0 in comparison to 

GROUPER Version 24.0, and the remaining 

35 percent of the 175 LTC–DRGs that are 

used on a ‘‘regular basis’’ would have higher 

relative weights under GROUPER Version 

24.0 in comparison to GROUPER Version 

23.0. In addition, about 30 percent of the 175 

LTC–DRGs that are used on a ‘‘regular basis’’

would experience a decrease in the average 

charge per case as compared to the average 

charge per case in that DRG based on FY 

2004 data, which generally results in a lower 

relative weight. Moreover, of the 175 LTC–

DRGs that are used on a ‘‘regular basis,’’

approximately 62 percent of those LTC–DRGs 

would experience a change in the average 

charge per case from FY 2004 LTCH data as 

compared to FY 2005 LTCH data that is less 

than the increase in overall average LTCH 

charges across all LTC–DRGs from FY 2004 

to FY 2005 of about 8.3 percent. Accordingly, 

those LTC–DRGs would also have a 

reduction in their relative weight as 

compared to the relative weight in FY 2006. 

For those LTC–DRGs in which the average 

charge within the LTC–DRG increase is less 

than 8.3 percent, the relative weights for 

those LTC–DRGs would decrease because the 

average charge for each of those LTC–DRGs 

is being divided by a larger number (that is, 

the average charge across all LTC–DRGs). For 

the reasons discussed above, we believe that 

the changes in the LTC–DRG relative weights 

for FY 2007, which include a significant 

number of LTC–DRGs with lower relative 

weights, would result in approximately a 1.3 

percent decrease in estimated aggregate 

LTCH PPS payments. 

B. Effects of New Technology Add-On 

Payments 

In section II.G. of the preamble to this final 

rule, we discuss add-on payments for new 

medical services and technologies. As 

explained in that section, we are no longer 

required to ensure that any add-on payments 

for new technology under section 

1886(d)(5)(K) of the Act are budget neutral. 

However, we are still providing an estimate 

of the payment increases here, as they will 

have an impact on total payments made in 

FY 2007. New technology add-on payments 

are limited to the lesser of 50 percent of the 

costs of the technology, or 50 percent of the 

costs in excess of the DRG payment for the 

case. Because it is difficult to predict the 

actual new technology add-on payment for 

each case, we are estimating the increase in 

payment for FY 2007 as if every claim with 

these add-on payments will receive the 

maximum add-on payment. As discussed in 

section II.G. of the preamble to this final rule, 

we are approving the X STOP Interspinous 

Process Decompression System for new 

technology add-on payments. As stated in the 

proposed rule, the applicant estimated that 

there would be a total of 2,124 patients (424 

in DRG 499 and 1,700 in DRG 500) eligible 

to receive the device in FY 2007. Therefore, 

we estimate that payments for this 

technology will increase overall FY 2007 

payments by $9.35 million. 

In addition, we are continuing to make 

add-on payments in FY 2007 for two 

technologies that were approved for FY 2006 

new technology add-on payments: Restore

Rechargeable Implantable Neurostimulator 

and GORE TAG. We estimate these payments 

for these technologies will increase overall 

FY 2007 payments by $6.01 million and 

$16.61 million, respectively. 

The total increase in payments for these 

three new technologies, approximately 

$31.97 million, is not reflected in the tables. 

C. Effects of Requirements for Hospital 

Reporting of Quality Data for Annual 

Hospital Payment Update 

In section IV.A. of the preamble to this 

final rule, we discuss new requirements for 

hospital reporting of quality data based on 

our continuing experience with this program 

and recent legislation. Section 5001(a) of 

Pub. L. 109–171 (DRA) sets out extensive 

new requirements for the Reporting Hospital 

Quality Data for Annual Payment Update 

(RHQDAPU) program. The RHQDAPU 

program was established to implement 

section 501(b) of Pub. L. 108–173 (MMA). 

Section 5001(a) of Pub. L. 109–171 revised 

the mechanism used to update the 

standardized amount for payment for 

hospital inpatient operating costs. New 

sections 1886(b)(3)(B)(viii)(I) and (II) of the 

Act provide that the payment update for FY 

2007 and each subsequent fiscal year will be 

reduced by 2.0 percentage points for any 

‘‘subsection (d) hospital’’ that does not 

submit certain quality data in a form and 

manner, and at a time, specified by the 

Secretary. 

We have modeled the payment impact of 

this change in Table 1 of this Appendix, and 

discussed it in section VI. of this Appendix. 

We discuss other policy changes we are 

making to the RHQDAPU program in section 

IV.A. of the preamble to this final rule. 

We also note that, for the FY 2007 payment 

update, hospitals must pass our validation 

requirement of a minimum of 80 percent 

reliability, based upon our chart-audit 

validation process, for the first three quarters 

of data from CY 2005. These data were due 

to the QIO Clinical Warehouse by July 15, 

2005 (first quarter CY 2005 discharges), 

November 15, 2005 (second quarter CY 2005 

discharges), and February 15, 2005 (third 

quarter CY 2005 discharges). We have 

continued our efforts to ensure that QIOs 

provide assistance to all hospitals that wish 

to submit data. In the preamble of this final 

rule, we are providing additional validation 

criteria to ensure that the quality data being 

sent to CMS are accurate. The requirement of 

5 charts per hospital will result in 

approximately 19,000 charts per quarter total 

submitted to the agency. We reimburse 

hospitals for the cost of sending charts to the 

Clinical Data Abstraction Center (CDAC) 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 at the CDAC is approximately 140 

pages. Thus, the agency will have 

expenditures of approximately $380,000 per 

quarter to collect the charts. Given that we 

reimburse for the data collection effort, we 

believe that a requirement for five charts per 

hospital per quarter represents a minimal 

burden to the participating hospital. 

D. Effects of Other Policy Changes Affecting 

Sole Community Hospitals (SCHs) and 

Medicare-Dependent, Small Rural Hospitals 

(MDHs) 

In section IV.C. of the preamble to this 

final rule, we discuss the payment changes 

for MDHs made by section 5003 of Pub. L. 

109–171. We modeled the payment impact of 

these changes in Table 1 of this Appendix 

and discussed them in section VI. of this 

Appendix. 

In addition, in section IV.C.2. of the 

preamble to this final rule, we discussed 

changes to the data source and methodology 

that we will use to compute the volume 

decrease adjustment for MDHs and SCHs. If 

certain requirements are met, this adjustment 

may be made if the hospital’s total discharges 


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decrease by more than 5 percent from one 

cost reporting period to the next. We do not 

believe that these changes will have any 

significant impact on Medicare payment to 

these hospitals. 

E. Effects of Policy on Payment for Direct 

Costs of Graduate Medical Education 

1. Determination of Weighted Average GME 

PRAs for Merged Teaching Hospitals 

In section IV.H.2. of the preamble to this 

final rule, we discuss our changes related to 

determining the weighted average GME PRA 

for a merged teaching hospital. Our current 

policy is that when two or more teaching 

hospitals merge, we determine a weighted 

PRA for the surviving merged hospital using 

GME costs and resident data from the base 

year cost report for each teaching hospital in 

the merger. We are revising our policy to 

determine a merged teaching hospital’s PRA 

by using PRA data and FTE resident data 

from the most recent settled cost reports of 

the merging hospitals, rather than using the 

direct GME cost data from the hospitals’ base 

year cost report. This policy revision is 

administrative in nature, and we do not 

foresee that the revision will result in 

payment increases to merged teaching 

hospitals. 

2. Determination of PRAs for New Teaching 

Hospitals 

In section IV.H.3. of the preamble to this 

final rule, we discuss the methodology for 

determining the hospital-specific PRA for 

new teaching hospitals and we make a 

change to the existing regulations at 

§ 413.77(e) in order to specify a base period 

for certain situations, that is, for new 

teaching hospitals that did not have residents 

on duty during the first month of the cost 

reporting period in which the hospital 

became a new teaching hospital. The base 

period for these hospitals would be the next 

cost reporting period following the cost 

reporting period where any residents were on 

duty at the new teaching hospital. Because 

this change is administrative in nature, we do 

not foresee that it will result in a financial 

impact for FY 2007. 

3. Requirements for Counting and 

Appropriate Documentation of FTE Residents 

In section IV.H.4. of the preamble to this 

final rule, we are clarifying the policies that 

apply in determining hospitals’ FTE resident 

counts for Medicare GME payment purposes. 

Because this is a clarification of existing 

policy, there is no financial impact for FY 

2007. 

4. Resident Time Spent in Nonpatient Care 

Activities as Part of an Approved Residency 

Program 

In section IV.H.5. of the preamble to this 

final rule, we are clarifying our policy that, 

with respect to residency training in 

nonhospital settings, only the time residents 

spend in patient care activities may be 

counted for purposes of direct GME and IME 

payments; and with respect to training in the 

hospital, residents training in all areas of the 

hospital complex may be counted for direct 

GME purposes, but may only be counted for 

IME purposes if the residents are furnishing 

patient care. Because we are clarifying 

existing policy, there is no financial impact 

of this clarification for FY 2007. 

F. Effects of Policy Changes Relating to 

Emergency Services Under EMTALA 

In section IV.J. of the preamble to this final 

rule, we discuss several policy changes under 

the EMTALA requirements. We are clarifying 

that any participating hospital with 

specialized capabilities or facilities, even if it 

does not have a dedicated emergency 

department, may not refuse to accept an 

appropriate transfer if the hospital has the 

capacity to treat the individual. We note that 

this proposed revision does not reflect any 

change in current CMS policy. We further 

note that the revision will not require 

hospitals without dedicated emergency 

departments to open dedicated emergency 

departments nor will it impose any EMTALA 

obligation on these hospitals with respect to 

individuals who come to the hospital as their 

initial point of entry into the medical system 

seeking a medical screening examination or 

treatment for a medical condition. Thus, 

there will be no impact on Medicare payment 

policies or practices. 

In addition, we are modifying the 

definition of ‘‘labor’’ to state that a woman 

experiencing contractions is in true labor 

unless a physician, certified nurse-midwife, 

or other qualified medical person acting 

within his or her scope of practice as defined 

in hospital medical staff bylaws and State 

law, certifies that, after a reasonable time of 

observation, the woman is in false labor. The 

effect of this change will be to have a single, 

uniform policy on the personnel who are 

authorized to make a determination as to 

whether an individual has an emergency 

medical condition. This change will have a 

Medicare payment effect, if any, only on 

payments to physicians and nonphysician 

practitioners under the physician fee 

schedule. The amount of any impact will be 

negligible because only a very small number 

of Medicare beneficiaries are women of 

childbearing age. 

G. Effects of Policy on Rural Community 

Hospital Demonstration Program 

In section IV.L. of the preamble to this final 

rule, we discuss our implementation of 

section 410A of Pub. L. 108–173 that 

required the Secretary to establish a 

demonstration that will modify 

reimbursement for inpatient services for up 

to 15 small rural hospitals. Section 

410A(c)(2) requires that ‘‘in 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.L. 

of the preamble to this final rule, we are 

satisfying this requirement by adjusting 

national IPPS rates by a factor that is 

sufficient to account for the added costs of 

this demonstration. We estimate that the 

average additional annual payment for FY 

2007 that will be made to each participating 

hospital under the demonstration will be 

approximately $1,021,985. We based this 

estimate on the recent historical experience 

of the difference between inpatient cost and 

payment for hospitals that are participating 

in the demonstration. For the 9 participating 

hospitals, the total annual impact of the 

demonstration program is estimated to be 

$9,197,870. The adjustment factor to the 

Federal rate used in calculating Medicare 

inpatient prospective payments as a result of 

the demonstration is 0.999905. 

H. Effects of Policy on Hospitals-WithinHospitals and Satellite Facilities 

In section VI.A.5. of the preamble to this 

final rule, we discuss our revision of the 

regulations for grandfathered HwHs, 

grandfathered hospital satellites and 

grandfathered satellite units at §§ 412.22(f), 

412.22(h), and 412.25(e), respectively, to 

allow these facilities to increase or decrease 

their square footage or decrease the number 

of beds without jeopardizing their 

grandfathered status. 

We estimate that there will be no net effect 

on the treatment of such hospitals as a result 

of this final rule. Payments to most HwHs 

and satellites are made on a prospective rate 

basis. For these facilities, our policy of 

allowing either increases or decreases in 

square footage would have no cost impact, 

since the prospective rates are not affected by 

a facility’s changes in square footage. 

However, if grandfathered HwHs and 

satellites facilities were to decrease their 

number of beds, as provided by the policy 

revision that we are finalizing, the effect of 

this change will likely be a reduction in 

Medicare payments to such hospitals and 

satellite facilities because they will probably 

have fewer discharges. 

A small number of grandfathered HwHs 

and satellite facilities, specifically children’s 

and cancer hospitals and satellites of these 

facilities, are paid on a cost-related basis 

under the TEFRA system. Under that system, 

increases or decreases in square footage may 

cause corresponding increases or decreases 

in the costs on which payments to the 

facilities are based. However, any increases 

in costs caused by increased square footage 

may be offset by other factors. For example, 

under our policy a grandfathered HwH or 

satellite facility could reduce its number of 

beds and the decreased utilization flowing 

from this change may offset any added costs 

resulting from an increase in the square 

footage of a grandfathered hospital or satellite 

facility paid under the TEFRA system. 

Moreover, an increase in facility square 

footage to modernize a physical facility or to 

accommodate new equipment or technology 

may also result in improved efficiency, 

leading to reduced operating costs. The cost 

savings resulting from these increases in 

efficiency could also partially or entirely 

offset any cost increases. Because we cannot 

predict which grandfathered HwHs or 

satellite facilities will opt to increase or 

decrease their size or to decrease their bed 

numbers, we are unable to quantify the 

impact of these changes. (We are only aware 

of one cancer hospital and three children’s 

hospitals that are HwHs.) However, overall 

we expect that there will be offsetting cost 

increases and reductions, with no net change 

in costs. 


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I. Effects of Policy Changes to the 

Methodology for Determining LTCH CCRs 

and the Reconciliation of LTCH PPS Outlier 

Payments 

In section VI.A.6. of the preamble to this 

final rule, we discuss our revision and 

clarification of the existing policies 

governing the determination of LTCHs’ CCRs 

and the reconciliation of high-cost and shortstay outlier payments under the LTCH PPS. 

Under the LTCH PPS high-cost outlier and 

short-stay outlier policies, CCRs are used to 

determine the estimated cost of the case by 

multiplying the LTCH’s overall CCR by the 

Medicare allowable charges for the case. 

In that section, specifically, we present a 

revision of our methodology for determining 

the annual LTCH CCR ceiling. Based on the 

most recent complete IPPS total CCR data, we 

are establishing a total CCR ceiling of 1.321 

under the LTCH PPS effective October 1, 

2006. This ceiling was determined based on 

the same data used to determine the separate 

IPPS operating CCR ceiling (1.26) and IPPS 

capital CCR ceiling (0.154). The LTCH CCR 

ceiling determined under our current 

‘‘combined’’ methodology will result in a 

slightly higher LTCH CCR ceiling (that is, 

1.26 + 0.154 = 1.414) for FY 2007 compared 

to the ‘‘total’’ CCR ceiling of 1.321 for FY 

2007. However, we note that, based on the 

most recent complete IPPS and LTCH CCR 

data, there are no LTCHs that currently have 

a CCR that is greater than the ceiling of 1.321 

(the highest LTCH CCR in the database of 392 

LTCHs is 1.1277). Therefore, based on these 

data, because no LTCHs currently have a CCR 

that is in excess of the LTCH CCR ceiling we 

are establishing for FY 2007 in this final rule, 

we believe that there will be no significant 

impact on LTCH PPS payments based on this 

policy. 

Also in section VI.A.6. of the preamble to 

this final rule, we discuss our revision of our 

methodology for determining the applicable 

statewide average LTCH CCRs. Based on the 

most recent complete IPPS total CCR data, 

the LTCH PPS statewide average CCRs that 

would be effective October 1, 2006, are 

presented in Table 8C of the Addendum to 

this final rule. A comparison of the statewide 

average total CCRs in Table 8C of the 

Addendum to this final rule to the 

‘‘combined’’ statewide average CCRs that 

would be calculated under our existing 

methodology from the operating PPS 

statewide average CCRs in Table 8A of the 

Addendum to this final rule and the capital 

PPS statewide average CCRs in Table 8B of 

the Addendum to this final rule shows that 

the changes to our methodology for 

determining LTCH statewide average CCRs 

will result in minor changes in the average 

CCR for each state. In particular, the largest 

decrease in a statewide average CCR (with 

the exception of Maryland, which will be 

assigned the national average total CCR as 

discussed in section VI.A.6 of the preamble 

of this final rule) will be in urban Wyoming 

(-0.7 percent), and there is currently only one 

LTCH located in Wyoming. The largest 

increase in a statewide average CCR will be 

in urban District of Columbia (0.7 percent), 

and there are currently only two LTCHs 

located in the District of Columbia. Thus, we 

believe that the change in the methodology 

for determining the applicable statewide 

average LTCH CCRs established in this final 

rule will result in no significant impact on 

LTCH PPS payments. 

In addition, in section VI.A.6 of the 

preamble of this final rule we discussed our 

codification in Subpart O of 42 CFR Part 412 

the provisions governing the determination 

of LTCHs’ CCRs and the reconciliation of 

high cost and short-stay outlier payments 

under the LTCH PPS, including 

modifications and editorial clarifications to 

our existing methodology. These changes are 

similar or almost identical (except for the 

minor clarifications and modifications) to our 

current policy governing the determination of 

LTCHs’ CCRs and the reconciliation of high 

cost and short-stay outlier payments under 

the LTCH PPS, and therefore, there will be 

no expected impact if such policies were 

codified. 

J. Effects of Policy on Payment for Services 

Furnished Outside the United States 

In section VII. of the preamble to this final 

rule, we discuss our clarification of our 

regulations regarding payment for Medicare 

services furnished outside the United States. 

The clarification revises references in our 

regulations that could be read to limit 

Medicare payment for certain services 

furnished outside the United States to 

services furnished in Canada or Mexico, 

contrary to the provisions of the Act. Only a 

small fraction of Medicare claims are paid as 

a result of services furnished outside of the 

United States. Moreover, we are unaware of 

any claims for payment that would otherwise 

satisfy the requirements under the Act that 

have not been paid due to the language in our 

current regulations. Therefore, because we 

are clarifying existing policy, this 

clarification has little or no financial impact 

for FY 2007. 

K. Effects of Policy on Limitation on 

Payments to SNFs 

In section IX. of the preamble to this final 

rule, we discuss the implementation of 

section 5004 of Pub. L. 109–171, which 

mandated that, for cost reporting periods 

beginning on or after October 1, 2005, 

Medicare payments to SNFs for certain 

otherwise allowable debt amounts 

attributable to the coinsurance amounts for 

patients who are not certain specified dual 

eligible individuals be reduced by 30 

percent. We anticipate that the provisions of 

section 5004 of Pub. L. 109–171 will result 

in a savings to the Medicare program of $490 

million over the 5-year period from FY 2006 

to FY 2010. 

L. Effects of Policy on CAP for Outpatient 

Drugs and Biologicals Under Part B for the 

Purpose of Calculating the Average Sales 

Price 

We have reviewed the effects of the 

provisions of XII. of this final rule as required 

by Executive Order 12866, the RFA, section 

1102(b) of the Social Security Act, the 

Unfunded Mandates Reform Act of 1995, and 

Executive Order 13132. We believe the 

change to the definition of ‘‘unit’’ will be 

beneficial to CAP drug vendors, as they will 

be able to exclude from the ASP calculation, 

for the initial 3-year contract period under 

the CAP, units of CAP drugs sold to an 

approved CAP vendor for use under the CAP 

drug program. 

VIII. Impact of Changes in the Capital PPS 

A. General Considerations 

Fiscal year (FY) 2001 was the last year of 

the 10-year transition period established to 

phase in the PPS for hospital capital-related 

costs. During the transition period, hospitals 

were paid under one of two payment 

methodologies: fully prospective or hold 

harmless. Under the fully prospective 

methodology, hospitals were paid a blend of 

the capital Federal rate and their hospitalspecific rate (see § 412.340). Under the holdharmless methodology, unless a hospital 

elected payment based on 100 percent of the 

capital Federal rate, hospitals were paid 85 

percent of reasonable costs for old capital 

costs (100 percent for SCHs) plus an amount 

for new capital costs based on a proportion 

of the capital Federal rate (see § 412.344). As 

we state in section V. of the preamble of this 

final rule, with the 10-year transition period 

ending with hospital cost reporting periods 

beginning on or after October 1, 2001 (FY 

2002), beginning in FY 2002 capital 

prospective payment system payments for 

most hospitals are based solely on the capital 

Federal rate. Therefore, we no longer include 

information on obligated capital costs or 

projections of old capital costs and new 

capital costs, which were factors needed to 

calculate payments during the transition 

period, for our impact analysis. 

In accordance with § 412.312, the basic 

methodology for determining a capital PPS 

payment is: 

(Standard Federal Rate) × (DRG weight) × 

(Geographic Adjustment Factor (GAF)) × 

(Large Urban Add-on, if applicable) × (COLA 

for hospitals located in Alaska and Hawaii) 

× (1 + Disproportionate Share (DSH) 

Adjustment Factor + Indirect Medical 

Education (IME) Adjustment Factor, if 

applicable). 

In addition, hospitals may also receive 

outlier payments for those cases that qualify 

under the threshold established for each 

fiscal year. 

The data used in developing the impact 

analysis presented below are taken from the 

March 2006 update of the FY 2005 MedPAR 

file and the March 2006 update of the 

Provider-Specific File 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 2006 update of the most 

recently available hospital cost report data 

(FYs 2003 and 2004) to categorize hospitals. 

Our analysis has several qualifications. First, 

we do not make adjustments for behavioral 

changes that hospitals may adopt in response 

to policy changes. Second, due to the 

interdependent nature of the IPPS, it is very 

difficult to precisely quantify the impact 

associated with each change. Third, 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, for 


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individual hospitals, some 

miscategorizations are possible. 

Using cases from the March 2006 update of 

the FY 2005 MedPAR file, we simulated 

payments under the capital PPS for FY 2006 

and FY 2007 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. 

As we explain in section III.A. of the 

Addendum to this final rule, payments are no 

longer made under the regular exceptions 

provision under §§ 412.348(b) through (e). 

Therefore, we no longer use the actuarial 

capital cost model (described in Appendix B 

of the August 1, 2001 proposed rule (66 FR 

40099)). 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, large urban add-on, 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 2006 and 2007. 

• We estimate that the Medicare 

discharges will be 13.5 million in FY 2006 

and 13.1 million in FY 2007 for a 3.0 percent 

decrease from FY 2006 to FY 2007. 

• 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. The 

FY 2007 update is 1.1 percent (see section 

III.A.1.of the Addendum to this final rule). 

• In addition to the FY 2007 update factor, 

the tentative FY 2007 capital Federal rate was 

calculated based on a tentative GAF/DRG 

budget neutrality factor of 0.9994, a tentative 

outlier adjustment factor of 0.9568, and an 

exceptions adjustment factor of 0.9997. 

B. Results 

We used the actuarial model described 

above to estimate the potential impact of our 

changes for FY 2007 on total capital 

payments per case, using a universe of 3,595 

hospitals. As described above, the individual 

hospital payment parameters are taken from 

the best available data, including the March 

2006 update of the FY 2005 MedPAR file, the 

March 2006 update to the Provider-Specific 

File, and the most recent cost report data 

from the March 2006 update of HCRIS. In 

Table III, we present a comparison of total 

payments per case for FY 2006 compared to 

FY 2007 based on the FY 2007 payment 

policies. Column 2 shows estimates of 

payments per case under our model for FY 

2006. Column 3 shows estimates of payments 

per case under our model for FY 2007. 

Column 4 shows the total percentage change 

in payments from FY 2006 to FY 2007. The 

change represented in Column 4 includes the 

1.1 percent update to the capital Federal rate, 

a 0.0 percent increase in case-mix, changes 

in the adjustments to the capital Federal rate 

(for example, the effect of the hospital wage 

index on the GAF), and reclassifications by 

the MGCRB. 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 can be 

expected to increase 2.3 percent in FY 2007. 

In addition to the 1.1 percent increase due to 

the capital market basket update, this 

projected increase in capital payments per 

case is largely attributable to the change in 

the DRG recalibration process methodology 

for FY 2007 as discussed in section II.C. of 

the preamble. The tentative GAF and 

tentative outlier factor impose equal but 

opposite effects on capital payments (¥0.2 

percent and 0.2 percent, respectively), and 

therefore have a zero net effect on capital 

payments per case. 

The results of our comparisons by 

geographic location and by region are 

consistent with the results we expected after 

applying the changes to the DRG 

recalibration methodology. The geographic 

comparison shows that urban hospitals are 

expected to experience a 2.3 percent increase 

in IPPS capital payments per case, while 

rural hospitals are expected to experience a 

2.1 percent increase in capital payments per 

case. This difference is mostly due to the 

changes to the methodology used to 

recalibrate DRGs discussed in section II.C. of 

the preamble of this final rule. As discussed 

in greater detail in that section of this final 

rule, analysis of our current methodology for 

setting DRG weights (using gross charges) 

indicates that bias is introduced into the 

weighting process. Specifically, we have also 

observed that ancillary service cost centers, 

in general, have higher charge markups than 

routine and ICU service cost centers, and 

therefore, higher weights for DRGs that use 

more ancillary services as opposed to DRGs 

that use more routine services. Surgical DRGs 

tend to have charges concentrated in 

ancillary cost center groups while medical 

DRGs tend to have charges concentrated in 

routine or ICU cost center groups. The bias 

in our current methodology results in 

artificially higher DRG relative weights for 

hospitals that are generally more expensive, 

such as teaching hospitals and specialty 

hospitals. Hospitals with these characteristics 

are generally found in urban locations. 

The redistributive impact of our proposals 

to reform the current DRG system was 

evident in the capital impact analysis as 

discussed in the proposed rule. 

Consequently, the proposed rule impact 

analysis showed greater capital increases per 

case for rural hospitals, as expected, than for 

hospitals in urban locations. In response to 

comments on the proposed rule, significant 

modifications were made to our DRG 

proposals. The modifications made in this 

final rule to our proposed changes to the DRG 

system are intended to moderate the payment 

redistribution, and the capital impact 

analysis reflects those modifications 

accordingly. Further mitigating the effects of 

the changes is moving to a 3-year transition 

period to apply the new methodology. The 

capital impact was also somewhat affected by 

the wage-index changes from the proposed 

rule to the final rule because the GAF values 

are derived from the wage index. The wage 

index used in the proposed rule included an 

occupational mix component. Due to 

circumstances as described in section III.C. of 

the preamble to this final rule, the wage 

index used in these calculations is tentative, 

and will be updated in a future Federal 

Register document, as well as on the CMS 

Web site. 

All regions are estimated to receive an 

increase in total capital payments per case 

from FY 2006 to FY 2007. Changes vary by 

region from a minimum increase of 0.4 

percent (Puerto Rico) urban to a maximum 

increase of 3.2 percent (Pacific) urban. The 

change in payments per case for all hospitals 

is 2.3 percent and is similar to the change 

indicated in the proposed rule. However, the 

differences between urban and rural 

hospitals in this final rule are noticeably less 

than the differences observed in the proposed 

rule. As previously discussed, the increases 

in payments are largely attributable to 

changes in the DRG recalibration 

methodology, and the lesser degree of 

difference between rural and urban 

hospitals’’ capital payment increases from 

the proposed rule and this final rule is due 

to the modifications made to the proposed 

DRG reforms. By type of ownership, the 

increases in payment are similar among all 

three types. Government hospitals and 

proprietary hospitals are both projected to 

have a 2.4 percent increase in total payments, 

while payments to voluntary hospitals are 

expected to increase 2.3 percent. 

Section 1886(d)(10) of the Act established 

the MGCRB. Before FY 2005, hospitals could 

apply to the MGCRB for reclassification for 

purposes of the standardized amount, wage 

index, or both. Section 401(c) of Pub. L. 108–

173 equalized the standardized amounts 

under the operating IPPS. Therefore, 

beginning in FY 2005, there is no longer 

reclassification for the purposes of the 

standardized amounts; however, hospitals 

still may apply for reclassification for 

purposes of the wage index for FY 2007. 

Reclassification for wage index purposes also 

affects the GAF because that factor is 

constructed from the hospital wage index. 

As discussed in section III.H.5. of the 

preamble of this final rule, procedural rules 

were established in the FY 2006 final rule (70 

FR 47382) to recognize the special 

circumstances of section 508 hospital 

reclassifications ending mid-year during FY 

2007. Under these procedural rules, some 

section 1886(d)(10) hospital reclassifications 

are only in effect for the second half of the 

fiscal year. These half fiscal year 

reclassifications have implications for the 

calculation of reclassified wage indices and 

therefore, affect capital payments because 

GAF values are calculated from the hospital 

wage index. 

To present the effects of the hospitals being 

reclassified for FY 2007, we show the average 

payments per case for reclassified hospitals 

for each half of FY 2007 compared to the 

average payments per case for the same time 

period in FY 2006. The reclassified groups 

are compared to all other nonreclassified 

hospitals for the same time period. These 

categories are further identified by urban and 

rural designation. In general, the average 

payments per case in the first half of FY 2007 


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is the same as the average payments per case 

in the second half of FY 2007 with the 

exception of urban reclassifications, which 

decreases by 0.1 percent (2.5 percent to 2.4 

percent) for the second half of FY 2007. Rural 

nonreclassified hospitals are expected to 

have the largest increases in payments (2.5 

percent in both halves), as compared to the 

2.0 percent increase for rural reclassified 

hospitals (for both halves of FY 2007). Falling 

between the percentage increase for rural 

non-reclassified hospitals and the increase 

for rural reclassified hospitals are the urban 

hospitals. Reclassified (urban) hospitals are 

projected to have increases of 2.5 percent and 

2.4 percent in the first and second halves of 

FY 2007, respectively, while nonreclassified 

(urban) hospitals are projected to have a 

slightly lesser increase of 2.3 percent. 

As discussed in section VI.B. of the 

preamble of this final rule, we are making a 

technical revision to § 412.316(b) and 

§ 412.320 to clarify that hospitals reclassified 

as rural under § 412.103 are not eligible for 

the large urban add-on or for capital DSH to 

reflect our historic policy that hospitals 

reclassified as rural under § 412.103 also are 

considered rural under capital PPS 

regulations. Currently, there are 38 hospitals 

that reclassified under this regulation and 

only 12 of these hospitals (about 0.3 percent 

of all IPPS hospitals) will be affected by the 

technical revisions to sections § 412.316(b) 

and § 412.320 concerning the treatment of 

hospitals reclassified as rural under section 

§ 412.103. Based on the most recent available 

data, we estimate that the impact of these 

changes will be a less than 0.00001 percent 

decrease in aggregate IPPS payments. 

TABLE III.—COMPARISON OF TOTAL PAYMENTS PER CASE

[FY 2006 payments compared to FY 2007 payments] 

Number of 

hospitals 

Average 

FY 2006 

payments/ 

case 

Average 

FY 2007 

payments/ 

case 

Change 

By Geographic Location: 

All hospitals ...................................................................................................................... 3,595 753 771 2.3 

Large urban areas (populations over 1 million) ............................................................... 1,441 849 870 2.5 

Other urban areas (populations of 1 million of fewer) ..................................................... 1,149 731 746 2.1 

Rural areas ....................................................................................................................... 1,005 513 524 2.1 

Urban hospitals ................................................................................................................. 2,590 796 814 2.3 

0–99 beds .................................................................................................................. 651 617 632 2.4 

100–199 beds ............................................................................................................ 867 673 691 2.7 

200–299 beds ............................................................................................................ 492 751 769 2.4 

300–499 beds ............................................................................................................ 413 827 845 2.2 

500 or more beds ...................................................................................................... 167 1,005 1,027 2.1 

Rural hospitals .................................................................................................................. 1,005 513 524 2.1 

0–49 beds .................................................................................................................. 348 422 433 2.5 

50–99 beds ................................................................................................................ 370 469 481 2.5 

100–149 beds ............................................................................................................ 174 516 526 2.0 

150–199 beds ............................................................................................................ 68 564 574 1.8 

200 or more beds ...................................................................................................... 45 642 652 1.6 

By Region: 

Urban by Region .............................................................................................................. 2,590 796 814 2.3 

New England ............................................................................................................. 128 853 870 2.0 

Middle Atlantic ........................................................................................................... 357 873 893 2.3 

South Atlantic ............................................................................................................ 388 755 770 2.0 

East North Central ..................................................................................................... 395 782 802 2.6 

East South Central .................................................................................................... 165 720 733 1.8 

West North Central .................................................................................................... 157 783 799 2.1 

West South Central ................................................................................................... 374 740 755 2.0 

Mountain .................................................................................................................... 149 787 811 3.1 

Pacific ........................................................................................................................ 424 920 949 3.2 

Puerto Rico ................................................................................................................ 53 347 349 0.4 

Rural by Region ................................................................................................................ 1,005 513 524 2.1 

New England ............................................................................................................. 19 686 699 1.9 

Middle Atlantic ........................................................................................................... 72 518 532 2.6 

South Atlantic ............................................................................................................ 176 497 509 2.2 

East North Central ..................................................................................................... 125 547 558 2.0 

East South Central .................................................................................................... 180 476 486 2.2 

West North Central .................................................................................................... 116 540 550 2.0 

West South Central ................................................................................................... 193 464 473 1.9 

Mountain .................................................................................................................... 81 535 544 1.6 

Pacific ........................................................................................................................ 43 616 631 2.4 

By Payment Classification: 

All hospitals ...................................................................................................................... 3,595 753 771 2.3 

Large urban areas (populations over 1 million) ............................................................... 1,450 848 869 2.5 

Other urban areas (populations of 1 million of fewer) ..................................................... 1,158 730 746 2.1 

Rural areas ....................................................................................................................... 987 515 526 2.1 

Teaching Status: 

Non-teaching ............................................................................................................. 2,511 630 645 2.5 

Fewer than 100 Residents ........................................................................................ 843 765 782 2.2

100 or more Residents .............................................................................................. 241 1,100 1,125 2.2 

Urban DSH: 

100 or more beds ............................................................................................... 1,520 821 840 2.3 

Less than 100 beds ........................................................................................... 347 543 558 2.7 

Rural DSH: 

Sole Community (SCH/EACH) ........................................................................... 385 464 475 2.2 

Referral Center (RRC/EACH) ............................................................................ 199 569 580 1.9 


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TABLE III.—COMPARISON OF TOTAL PAYMENTS PER CASE—Continued 

[FY 2006 payments compared to FY 2007 payments] 

Number of 

hospitals 

Average 

FY 2006 

payments/ 

case 

Average 

FY 2007 

payments/ 

case 

Change 

Other Rural: 

100 or more beds ........................................................................................ 55 475 485 2.0 

Less than 100 beds .................................................................................... 183 423 433 2.5 

Urban teaching and DSH: 

Both teaching and DSH ............................................................................................ 815 902 922 2.2 

Teaching and no DSH ............................................................................................... 201 816 834 2.3 

No teaching and DSH ............................................................................................... 1,052 667 684 2.6 

No teaching and no DSH .......................................................................................... 540 700 717 2.4

Rural Hospital Types: 

Non special status hospitals ...................................................................................... 288 451 461 2.4 

RRC/EACH ................................................................................................................ 142 577 590 2.2 

SCH/EACH ................................................................................................................ 339 477 487 2.2 

Medicare-dependent hospitals (MDH) ....................................................................... 127 433 445 2.7 

SCH, RRC and EACH ............................................................................................... 83 580 588 1.3 

Hospitals Reclassified by the Medicare Geographic Classification Review Board: 

FY2007 Reclassifications: 

All Urban Reclassified 1st Half .................................................................................. 325 775 795 2.5 

All Urban Non-Reclassified 1st Half .......................................................................... 2,240 800 819 2.3 

All Rural Reclassified 1st Half ................................................................................... 375 558 569 2.0 

All Rural Non-Reclassified 1st Half ........................................................................... 569 450 462 2.5 

All Urban Reclassified 2nd Half ................................................................................ 385 800 819 2.4 

All Urban Non-Reclassified 2nd Half ......................................................................... 2,180 796 815 2.3 

All Rural Reclassified 2nd Half .................................................................................. 375 558 569 2.0 

All Rural Non-Reclassified 2nd Half .......................................................................... 569 450 462 2.5 

All Section 401 Reclassified Hospitals ...................................................................... 33 548 554 1.1 

Other Reclassified Hospitals (Section 1886(d)(8)(B)) ............................................... 53 516 527 2.2 

Type of Ownership: 

Voluntary ................................................................................................................... 2,102 771 789 2.3 

Proprietary ................................................................................................................. 880 679 696 2.4 

Government ............................................................................................................... 603 740 757 2.4 

Medicare Utilization as a Percent of Inpatient Days: 

0–25 ........................................................................................................................... 243 999 1,030 3.0 

25–50 ......................................................................................................................... 1,328 855 875 2.3 

50–65 ......................................................................................................................... 1,478 663 679 2.3 

Over 65 ...................................................................................................................... 462 597 609 2.1 

IX. Impact of Changes Relating to the Loan 

Program for Capital Cost Under the Health 

Care Infrastructure Improvement Program 

In section XI. of the preamble to this final 

rule, we finalize the provisions of a 

September 30, 2005 interim final rule with 

comment period and the proposed changes in 

a September 30, 2005 proposed rule relating 

to the selection criteria and the forgiveness 

of indebtedness for loans made to certain 

hospitals engaged in research in the causes, 

prevention, and treatment of cancer under 

the Health Care Infrastructure Improvement 

Program. This section of this final rule affects 

qualifying hospitals as defined in section 

1897 of the Act that have been selected to 

receive funds under the loan program. 

This provision will have little impact on 

the Medicare Trust Fund. The Congress 

provided $142 million for the loan program 

effective July 1, 2004, through September 30, 

2008, and of the $142 million, not more than 

$2 million may be used for the 

administration of the loan program for each 

of the fiscal years (that is, 2004 through 

2008). 

X. Alternatives Considered 

This final rule contains a range of policies, 

including some changes related to specific 

DRA and MMA provisions. The preamble of 

this final rule provides descriptions of the 

statutory provisions that are addressed, 

identifies those policies when discretion has 

been exercised, presents rationale for our 

decisions and, where relevant, alternatives 

that were considered. 

In addition, we did not consider any 

alternatives to the policies we are 

implementing in this final rule relating to the 

implementation of the loan program under 

the Health Care Infrastructure Improvement 

Program because the statute specifically 

authorized the conditions under which the 

Secretary may forgive a loan provided under 

the program. 

XI. Overall Conclusion 

The changes in this final rule will affect all 

classes of hospitals. Some hospitals are 

expected to experience significant gains and 

others less significant gains, but overall 

hospitals are projected to experience positive 

updates in IPPS payments in FY 2007. Table 

I of section VI of this Appendix demonstrates 

the estimated distributional impact of the 

IPPS budget neutrality requirements for DRG 

and wage index changes, for the hold 

harmless transition for rural hospitals 

formerly classified as urban, and for the wage 

index reclassifications under the MGCRB. 

Table I also shows an overall increase of 3.4 

percent in operating payments, which, in 

conjunction with the estimated 2.0 percent 

increase in capital payments to IPPS 

providers shown in Table III of section VIII 

of this Appendix, should result in a net 

increase of $3.33 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. 

XII. Accounting Statement 

As required by OMB Circular A–4 

(available at http://www.whitehousegov/omb/ 

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

we have prepared an accounting statement 

showing the classification of the 

expenditures associated with the provisions 

of this final rule. This table provides our best 

estimate of the increase in Medicare 

payments on providers as a result of the 

changes to the IPPS, the LTCH case-mix, and 

the limitation on payments to SNFs for bad 

debt presented in this rule. All expenditures 

are classified as transfers to Medicare 

providers. 

The Congress provided $142 million for 

the loan program, effective July 1, 2004, 


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through September 30, 2008. Of the $142 

million, not more than $2 million may be 

used for the administration of the loan 

program for each of the fiscal years (that is 

FY 2004 through FY 2008). 

TABLE IV.—ACCOUNTING STATEMENT: 

CLASSIFICATION OF ESTIMATED EXPENDITURES FROM FY 2006 TO FY 

2007 

Category annualized 

monetized transfers 

from whom to whom 

Transfers $3.889 

billion federal government to IPPS medicare providers, 

LTCHs, and SNFs 

Total .......................... $3.889 Billion. 

XIII. Executive Order 12866 

In accordance with the provisions of 

Executive Order 12866, the 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 the Medicare 

Payment Advisory Commission (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)(B) of the 

Act, we are required to publish factors 

recommended by the Secretary in the final 

IPPS rule. Accordingly, we are publishing 

our final recommendations for the 

appropriate update factors for the IPPS 

standardized amount, the hospital-specific 

rates for SCHs and MDHs, and the rate-ofincrease limits for hospitals and hospital 

units excluded from the IPPS. 

Section 1886(b)(3)(B)(i)(XX) of the Act, as 

amended by section 5001(a) of Pub. L. 109–

171, sets the FY 2007 percentage increase in 

the operating cost standardized amount equal 

to the rate-of-increase in the hospital market 

basket for IPPS hospitals in all areas, subject 

to the hospital submitting quality 

information under rules established by the 

Secretary under section 1886(b)(3)(B)(viii) of 

the Act. For hospitals that do not provide 

these data, the update is equal to the market 

basket percentage increase less 2.0 

percentage points. 

Consistent with current law, based on the 

Office of the Actuary’s second quarter 2006 

forecast of the FY 2007 market basket 

increase of 3.4 percent, the FY 2007 update 

to the standardized amount for hospitals 

subject to the acute inpatient prospective 

payment system is 3.4 percent (that is, the 

market basket rate-of-increase) for hospitals 

in all areas, provided the hospital submits 

quality data in accordance with our rules. For 

hospitals that do not submit quality data, the 

update to the standardized amount is 1.4 

percent (that is, the market basket rate-ofincrease minus 2.0 percentage points). (In the 

proposed rule, the most recent estimate of the 

market basket increase was also 3.4 percent.) 

Section 1886(b)(3)(B)(iv) of the Act sets the 

FY 2007 percentage increase in the hospitalspecific rates applicable to SCHs and MDHs 

equal to the rate 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, or the rate-of-increase in the 

market basket). Therefore, the update to the 

hospital-specific rates applicable to SCHs 

and MDHs is also 3.4 percent. 

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 for years after FY 2002. In 

accordance with § 403.752(a) of the 

regulations, RNHCIs are paid under § 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 Pub. L. 106–113, 

as amended by section 307(b) of Pub. L. 106–

554, provides the statutory authority for 

updating payment rates under the LTCH PPS. 

Some LTCHs and IPFs are transitioning to 

100 percent of the Federal rate and currently 

receive a blend of reasonable cost-based 

payments computed under the TEFRA 

methodology and their respective Federal 

payment rates. As discussed below, the 

transition ends for LTCHs (not defined as 

new and that have not elected to be paid 

under 100 percent of the Federal rate) for cost 

reporting periods beginning on or after 

October 1, 2006. Therefore, because no 

portion of LTCHs’ prospective payments will 

be based on reasonable costs for cost 

reporting periods beginning on or after 

October 1, 2006, we are not providing an FY 

2007 rate-of-increase adjustment under 

section 1886(b)(3)(B)(ii) of the Act for LTCHs. 

Currently, children’s hospitals, cancer 

hospitals and RNHCIs are the remaining 

three types of hospitals still reimbursed fully 

under reasonable costs. As we discuss in 

section IV. of the Addendum to this final 

rule, we are providing the FY 2007 IPPS 

operating market basket percentage increase 

(3.4 percent) that is being used to update the 

target limits for children’s hospitals, cancer 

hospitals, and RNHCIs. (In the proposed rule, 

the most recent estimate of the market basket 

increase was also 3.4 percent for children’s 

hospitals, cancer hospitals, and RNHCIs.) 

Effective since cost reporting periods 

beginning FY 2003, LTCHs have been paid 

under the LTCH PPS, which was 

implemented with a 5-year transition period 

for LTCHs not defined as new under 

§ 412.23(e)(4) (hereafter referred to as 

‘‘existing’’). (Refer to 67 FR 55954, August 30, 

2002.) An existing LTCH could have elected 

to be paid on 100 percent of the Federal 

prospective rate at the start of any of its cost 

reporting periods during the 5-year transition 

period. During this transition period, if an 

existing LTCH did not elect to be paid 100 

percent of the Federal prospective payment 

rate, it received a payment which consisted 

of a blend of its reasonable cost-based 

payment (subject to the TEFRA rate-ofincrease limits) and the Federal prospective 

payment rate. Because the transition period 

ends with LTCH cost reporting periods 

beginning on or after October 1, 2006, those 

LTCHs who now receive blended payments 

will be paid based on 100 percent of the 

Federal prospective rate. 

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 based on 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. During a 

transition period between January 1, 2005 

and January 1, 2008, existing IPFs are paid 

based on a blend of the reasonable cost-based 

payments, subject to the TEFRA limit, and 

the Federal per diem base rate. For cost 

reporting periods beginning on or after 

January 1, 2008, IPFs will be paid based on 

100 percent of the Federal per diem rate. For 

purposes of the update factor for FY 2007, 

the portion of the IPF PPS transitional blend 

payment based on reasonable costs would be 

determined by updating the IPF’s TEFRA 

limit by the current estimate of the excluded 

hospital market basket, which is estimated to 

be 3.4 percent. The update factor of 4.3 

percent to the Federal per diem rate for July 

1, 2006, through June 30, 2007, was provided 

in the RY 2007 IPF final rule (71 FR 27046). 

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. (Refer to 

the IRF final rule (69 FR 45721).) In the FY 

2007 IRF PPS proposed rule (71 FR 28106 

and 28125), we proposed an update factor of 

3.4 percent to the IRF PPS for FY 2007. The 

final update factor for the FY 2007 IRF PPS 

will be published in the FY 2007 IRF PPS 

final rule. 

Comment: One commenter believed the 

market basket update of 3.4 percent is 

inadequate. The commenter claimed that 

data for 1998 through 2006 indicate that 

hospital costs increased 37.9 percent, while 

Medicare payments increased 19.7 percent, 

resulting in a shortfall of $4.4 billion. The 

commenter noted that continual 

underfunding by CMS will further threaten 

the financial viability of not-for-profit 

hospitals in Michigan, thus limiting their 

ability to provide service to Medicare 

beneficiaries and others. 

Response: The current market basket 

forecast update of 3.4 percent is based on 

Global Insight, Inc.’s (GII) 2006 second 

quarter forecast with historical data through 

the first quarter of 2006. GII is a nationally 

recognized economic and financial 

forecasting firm that contracts with CMS to 

forecast the components of the market 

baskets. In the FY 2006 IPPS rule, we noted 

that over the last several years, dramatic 

fluctuations in the price of certain costs 


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(mainly energy costs) have made it difficult 

to forecast the IPPS market basket. With our 

input and consultation, GII recently 

evaluated and modified its forecasting 

models to help enhance their accuracy. GII’s 

latest forecast is based on these improved 

models and takes into account national and 

global economic trends. 

We will continue to monitor both the 

accuracy of our market basket updates and 

the profitability of IPPS hospitals, as well as 

work with GII to ensure the most accurate 

updates possible. 

Comment: One commenter was concerned 

that GII’s methodology has a built-in bias of 

under projecting during the period when the 

overall economy is transitioning from a high 

growth and low inflation era to a low growth 

and high inflation period. The commenter 

explained that, during a transition period, the 

extrapolation of historical data tends to have 

larger projection variances and therefore 

adjustments should be made to correct these 

systematic projection biases during the time 

of major business cycle reversals. As a result, 

the commenter recommended that CMS 

include an adjustment in its projection 

methodology to correct for this systematic 

bias or adjust the projection error in its 

subsequent years’ payments. 

Response: CMS and GII recognize the 

complexities associated with projecting 

prices during times of major business cycle 

reversals. GII includes adjustments in their 

forecasts to account for these systematic 

biases. GII employs a simultaneous equation 

approach to solve both macro and micro 

simulation models for the underlying 

components of the hospital market basket. 

Using this simultaneous approach facilitates 

the accurate inclusion of broader economic 

conditions, such as economy-wide growth 

and inflationary pressures, to be more 

accurately reflected in the micro level 

components that comprise the market basket. 

In addition, as part of these micro models, 

underlying businesses cycles, seasonal 

changes, and market fluctuations are 

incorporated to ensure forecasts accurately 

control for these market conditions during 

forecast cycles. 

Comment: One commenter was concerned 

that it is consistently disproportionately 

negatively affected by Medicare rate policies. 

The commenter recommended that no 

hospital receive less payments in the current 

year than the previous year or optimally CMS 

should provide a minimum payment increase 

of 2 percent. 

Response: We thank the commenter for its 

comments. However, as noted above, section 

1886(b)(3)(B)(i)(XX) of the Act, as amended 

by section 5001(a) of Pub. L. 109–171, ties 

the FY 2007 percentage increase in the 

operating cost standardized amount equal to 

the rate-of-increase in the hospital market 

basket for IPPS hospitals in all areas. 

Therefore, we do not have the statutory 

authority to implement the changes to the 

update factors that the commenter is 

requesting. 

II. Secretary’s Final Recommendation for 

Updating the Prospective Payment System 

Standardized Amounts 

In recommending an update, the Secretary 

takes into account the factors such as the 

recommendations of MedPAC, the long-term 

solvency of the Medicare Trust Funds, and 

the capacity of the hospital industry to 

continually provide access to high quality 

care to Medicare beneficiaries through 

adequate payment to health care providers. 

In years prior to FY 2006, in making a 

recommendation, we included an update 

framework that analyzed hospital 

productivity, scientific and technological 

advances, practice pattern changes, changes 

in case-mix, the effects of reclassification on 

recalibration and forecast error correction. As 

we stated in the FY 2007 proposed rule, we 

are no longer including this analysis in our 

recommendation for the update (71 FR 

24420). 

In the FY 2007 IPPS proposed rule, we 

proposed to recommend an update of 2.95 

percent, which reflected the CMS Office of 

the Actuary’s most recent forecast of the FY 

2007 market basket increase minus an 

adjustment factor of 0.45 percentage points 

based on the FY 2007 President’s budget. We 

did not receive any public comments 

regarding this issue. In this final rule, we are 

also recommending an update for IPPS 

hospitals based on the forecasted market 

basket increase of 3.4 percent from the Office 

of the Actuary’s most recent (second quarter) 

2006 forecast of the FY 2007 market basket 

increase minus an adjustment factor of 0.45 

percentage points based on the FY 2007 

President’s budget. Thus, the Secretary’s final 

recommendation for the update to the IPPS 

standardized amount for all hospitals is 2.95 

percentage points for hospitals that provide 

the required quality data. 

In addition to making a recommendation 

for IPPS hospitals, in accordance with 

section 1886(e)(4)(A) of the Act, we are also 

recommending update factors for all other 

types of hospitals. Using the 2006 second 

quarter forecast from the Office of the 

Actuary of the FY 2007 market basket 

increase and an adjustment factor based on 

the FY 2007 President’s budget, for FY 2007, 

for SCHs and MDHs, we are also 

recommending an update of 2.95 percent. 

III. Secretary’s Final Recommendation for 

Updating the Rate-of-Increase Limits for 

Excluded Hospitals and Hospital Units 

We did not receive any public comments 

concerning our proposed recommendations 

for updating the rate-of-increase for FY 2007 

for cancer hospitals, RNHCIs, and children’s 

hospitals. Our final recommendation does 

not differ from the proposed 

recommendation. The second quarter forecast 

from the Office of the Actuary of the FY 2007 

market basket increase is also 3.4 percent for 

these excluded hospitals and hospital units. 

Thus, using an adjustment factor based on 

the FY 2007 President’s budget, the 

Secretary’s final recommendation is for a 

2.95 percent increase to the target limits for 

cancer hospitals, RNHCIs, and children’s 

hospitals. 

Further, we did not receive any public 

comments concerning our proposed 

recommendations for the update factors for 

IPFs. For IPFs that are currently paid a blend 

of reasonable cost-based (subject to the 

TEFRA limits) and Federal prospective 

payment amounts, based on the estimate 

from the Office of the Actuary and an 

adjustment factor from the FY 2007 

President’s budget, in the proposed rule, we 

recommended an update factor of 3.15 

percent for the portion of the payment that 

is based on reasonable costs, subject to the 

TEFRA limits. Based on second quarter data 

from the Office of the Actuary and an 

adjustment factor from the FY 2007 

President’s budget, we are recommending a 

final update of 2.95 percent for the portion 

of the payment that is based on reasonable 

costs, subject to the TEFRA limits. 

Consistent with the RY 2007 LTCH PPS 

proposed rule (71 FR 4648), in the FY 2007 

IPPS proposed rule, we recommended that 

the Federal rate remain unchanged for FY 

2007. In this final rule, consistent with the 

RY 2007 LTCH final rule (71 FR 27826), we 

are recommending that the Federal rate to the 

LTCH PPS remain unchanged for FY 2007. 

In the RY 2007 IPF PPS proposed rule (71 

FR 3620) and in the FY 2006 IPPS proposed 

rule, we proposed an update factor of 4.5 

percent to the IPF PPS for RY 2007. The 

proposed update reflected an increase from 

the 18-month period beginning January 1, 

2005, when the IPF PPS was first adopted. 

However, in the RY 2007 IPF final rule (71 

FR 27040), we recommended an update 

factor of 4.3 percent. Consistent with the RY 

2007 IPF final rule, in this IPPS final rule, 

we are recommending an update factor of 4.3 

percent for IPFs. 

In the FY 2007 IPPS proposed rule, 

consistent with the President’s FY 2007 

budget, we recommended the Federal rate to 

the IRF PPS remain unchanged for FY 2007. 

We note, as mentioned above, in the FY 2007 

IRF PPS proposed rule (71 FR 281206 and 

28125), we proposed an update factor of 3.4 

percent to the IRF PPS for FY 2007. The final 

update factor for the FY 2007 IRF PPS will 

be published in the FY 2007 IRF PPS final 

rule. Therefore, in this final rule, consistent 

with FY 2007 IRF PPS final rule, we are 

recommending the update factor that will be 

published in the FY 2007 IRF PPS final rule. 

We refer readers to the FY 2007 IRF PPS final 

rule to view the update factor. 

IV. Secretary’s Recommendation for 

Updating the Capital Prospective Payment 

Amounts 

Because the operating and capital 

prospective payment systems remain 

separate, we are continuing to use separate 

updates for operating and capital payments. 

The final update to the capital payment rates 

is discussed in section III. of the Addendum 

to this final rule. 

[FR Doc. 06–6692 Filed 8–1–06; 4:00 pm] 

BILLING CODE 4120–01–P 


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