```

[Federal Register Volume 76, Number 151 (Friday, August 5, 2011)]
[Rules and Regulations]
[Pages 47836-47915]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-19516]

[[Page 47835]]

Vol. 76

Friday,

No. 151

August 5, 2011

Part III

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Part 412

Medicare Program; Inpatient Rehabilitation Facility Prospective Payment 
System for Federal Fiscal Year 2012; Changes in Size and Square Footage 
of Inpatient Rehabilitation Units and Inpatient Psychiatric Units; 
Final Rule

Federal Register / Vol. 76 , No. 151 / Friday, August 5, 2011 / Rules 
and Regulations

[[Page 47836]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1349-F]
RIN 0938-AQ28

Medicare Program; Inpatient Rehabilitation Facility Prospective 
Payment System for Federal Fiscal Year 2012; Changes in Size and Square 
Footage of Inpatient Rehabilitation Units and Inpatient Psychiatric 
Units

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

ACTION: Final rule.

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SUMMARY: This final rule will implement section 3004 of the Affordable 
Care Act, which establishes a new quality reporting program that 
provides for a 2 percent reduction in the annual increase factor 
beginning in 2014 for failure to report quality data to the Secretary 
of Health and Human Services. This final rule will also update the 
prospective payment rates for inpatient rehabilitation facilities 
(IRFs) for Federal fiscal year (FY) 2012 (for discharges occurring on 
or after October 1, 2011 and on or before September 30, 2012) as 
required under section 1886(j)(3)(C) of the Social Security Act (the 
Act). Section 1886(j)(5) of the Act requires the Secretary to publish 
in the Federal Register on or before the August 1 that precedes the 
start of each FY the classification and weighting factors for the IRF 
prospective payment system (PPS) case-mix groups and a description of 
the methodology and data used in computing the prospective payment 
rates for that fiscal year. We are also consolidating, clarifying, and 
revising existing policies regarding IRF hospitals and IRF units of 
hospitals to eliminate unnecessary confusion and enhance consistency. 
Furthermore, in accordance with the general principles of the 
President's January 18, 2011 Executive Order entitled ``Improving 
Regulation and Regulatory Review,'' we are amending existing regulatory 
provisions regarding ''new'' facilities and changes in the bed size and 
square footage of IRFs and inpatient psychiatric facilities (IPFs) to 
improve clarity and remove obsolete material.

DATES: Effective Date: This final rule becomes effective on October 1, 
2011.

FOR FURTHER INFORMATION CONTACT:

Gwendolyn Johnson, (410) 786-6954, for general information about the 
final rule.
Hillary Loeffler, (410) 786-0456, for information about the payment 
rates.
Susanne Seagrave, (410) 786-0044, for information about the payment 
policies.
Judith C. Tobin, (410) 786-6892, for information about the quality 
reporting program.

SUPPLEMENTARY INFORMATION:

Table of Contents

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

I. Background
    A. Historical Overview of the Inpatient Rehabilitation Facility 
Prospective Payment System (IRF PPS)
    B. Provisions of the Affordable Care Act Affecting the IRF PPS 
in FY 2012 and Beyond
    C. Operational Overview of the Current IRF PPS
II. Summary of Provisions of the Proposed Rule
    A. Proposed Updates to the IRF Federal Prospective Payment Rates 
for Federal Fiscal Year (FY) 2012
    B. Proposed Revisions to Existing Regulation Text
III. Analysis and Responses to Public Comments
IV. Update to the Case-Mix Group (CMG) Relative Weights and Average 
Length of Stay Values for FY 2012
V. Updates to the Facility-Level Adjustment Factors for FY 2012
    A. Updates to the IRF Facility-Level Adjustment Factors
    B. Policy for Temporary Cap Adjustments To Reflect Interns and 
Residents Displaced Due to Closure of IRFs or IRF Residency Training 
Programs
    1. Background
    2. FTE Intern and Resident Temporary Cap Adjustment
    3. Temporary Adjustment to the FTE Cap To Reflect Interns and 
Residents Displaced Due to IRF Closure
    4. Temporary Adjustment to the FTE Cap To Reflect Interns and 
Residents Displaced Due to a Residency Program Closure
VI. FY 2012 IRF PPS Federal Prospective Payment Rates
    A. Market Basket Increase Factor, Productivity Adjustment, and 
Labor-Related Share for FY 2012
    1. Rebasing and Revising of the RPL Market Basket Used for IRF 
PPS for FY 2012
    2. Productivity Adjustment
    3. Calculation of the IRF PPS Market Basket Increase Factor for 
FY 2012
    4. Calculation of the Labor-Related Share for FY 2012
    B. Area Wage Adjustment
    C. Description of the IRF Standard Conversion Factor and Payment 
Rates for FY 2012
    D. Example of the Methodology for Adjusting the Federal 
Prospective Payment Rates
VII. Update to Payments for High-Cost Outliers Under the IRF PPS
    A. Update to the Outlier Threshold Amount for FY 2012
    B. Update to the IRF Cost-to-Charge Ratio Ceilings
VIII. Impact of the IPPS Data Matching Process Changes on the IRF 
PPS Calculation of the Low-Income Percentage Adjustment Factor
IX. Updates to the Policies in 42 CFR Part 412
    A. Consolidation of the Requirements for Rehabilitation 
Hospitals and Rehabilitation Units
    B. Revisions to the Regulations at Sec.  412.29
    C. Revisions to the Requirements for Changes in Bed Size and 
Square Footage
    D. Revisions To Enhance Consistency Between the IRF Coverage and 
Payment Requirements
X. Quality Reporting Program for IRFs
    A. Background and Statutory Authority
    B. Quality Measures for IRF Quality Reporting Program for FY 
2014
    1. General
    2. Considerations in the Selection of the Quality Measures
    3. FY 2014 Measure 1: Healthcare Associated Infection 
Measure (HAI): Urinary Catheter-Associated Urinary Tract Infections 
(CAUTI)
    4. FY 2014 Measure 2: Percent of Patients With Pressure 
Ulcers That Are New or Worsened
    5. Potential FY 2014 Measure 3: 30-Day Comprehensive 
All Cause Risk Standardized Readmission Measure
    C. Data Submission Requirements
    1. Method of Data Submission for HAI Measure (CAUTI)
    2. Method of Data Submission for the Percent of Patients With 
New or Worsened Pressure Ulcer Measure.
    3. Potential Method of Data Submission for the 30-Day 
Comprehensive All-Cause Risk-Standardized Readmission Measure.
    D. Public Reporting
    E. Quality Measures for Future Consideration for Determination 
of Increase Factors for Future Fiscal Year Payments
    F. New Regulation Text for the IRF Quality Reporting Program
XI. Miscellaneous Comments
XII. Provisions of the Final Regulations
XIII. Collection of Information Requirements
XIV. Economic Analyses
    A. Regulatory Impact Analysis
    1. Introduction
    2. Statement of Need
    3. Overall Impacts
    4. Detailed Economic Analysis
    5. Alternatives Considered
    6. Accounting Statement
    7. Conclusion
    B. Regulatory Flexibility Act Analysis
    C. Unfunded Mandates Reform Act Analysis
XV. Federalism Analysis
Regulation Text
Addendum

Acronyms

    To assist the reader, we are listing the acronyms used and their 
corresponding meaning in alphabetical order.

[[Page 47837]]

ADC Average Daily Census
AHA American Hospital Association
ASCA Administrative Simplification Compliance Act of 2002, Public 
Law 107-105
BBA Balanced Budget Act of 1997, Public Law 105-33
BBRA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Balanced Budget Refinement Act of 1999, Public 
Law 106-113
BEA Bureau of Economic Analysis
BIPA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Benefits Improvement and Protection Act of 2000, 
Public Law 106-554
BLS Bureau of Labor Statistics
CAH Critical Access Hospital
CAUTI Catheter-Associated Urinary Tract Infection
CBSA Core-Based Statistical Area
CDC Centers for Disease Control and Prevention
CCR Cost-to-Charge Ratio
CFR Code of Federal Regulations
CIPI Capital Input Price Index
CMG Case-Mix Group
CMS Centers for Medicare & Medicaid Services
CPI Consumer Price Index
DSH Disproportionate Share Hospital
ECI Employment Cost Index
EHR Electronic Health Record
FI Fiscal Intermediary
FR Federal Register
FTE Full-time Equivalent
FY Federal Fiscal Year
GDP Gross Domestic Product
GME Graduate Medical Education
HAI Healthcare Associated Infection
HHH Hubert H. Humphrey Building
HHS Department of Health and Human Services
HIPAA Health Insurance Portability and Accountability Act of 1996, 
Public Law 104-191
HOMER Home Office Medicare Records
IGI IHS Global Insight
IME Indirect Medical Education
I-O Input-Output
IPF Inpatient Psychiatric Facility
IPPS Inpatient Prospective Payment System
IRF Inpatient Rehabilitation Facility
IRF-PAI Inpatient Rehabilitation Facility--Patient Assessment 
Instrument
IRF PPS Inpatient Rehabilitation Facility Prospective Payment System
IRVEN Inpatient Rehabilitation Validation and Entry
LTCH Long Term Care Hospital
LIP Low-Income Percentage
LOS Length of Stay
MA Medicare Advantage
MAC Medicare Administrative Contractor
MedPAR Medicare Provider Analysis and Review
MFP Multifactor Productivity
MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007, Public 
Law 110--173
MSA Metropolitan Statistical Area
NAICS North American Industry Classification System
NHSN National Healthcare Safety Network
NQF National Quality Forum
OMB Office of Management and Budget
PLI Professional Liability Insurance
PPI Producer Price Indexes
PPS Prospective Payment System
QM Quality Measure
RFA Regulatory Flexibility Act of 1980, Public Law 96-354
RIA Regulatory Impact Analysis
RIC Rehabilitation Impairment Category
RO Regional Office
RP Rehabilitation and Psychiatric
RPL Rehabilitation, Psychiatric, and Long-Term Care Hospital
SCHIP State Children's Health Insurance Program
SSI Supplemental Security Income
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Public Law 
97-248

I. Background

A. Historical Overview of the Inpatient Rehabilitation Facility 
Prospective Payment System (IRF PPS)

    Section 4421 of the Balanced Budget Act of 1997 (Pub. L. 105-33, 
enacted on August 5, 1997) (BBA), as amended by section 125 of the 
Medicare, Medicaid, State Children's Health Insurance Program (SCHIP) 
Balanced Budget Refinement Act of 1999 (Pub. L. 106-113, enacted on 
November 29, 1999) (BBRA) and by section 305 of the Medicare, Medicaid, 
and SCHIP Benefits Improvement and Protection Act of 2000 (Pub. L. 106-
554, enacted on December 21, 2000) (BIPA) provides for the 
implementation of a per discharge prospective payment system (PPS) 
under section 1886(j) of the Social Security Act (the Act) for 
inpatient rehabilitation hospitals and inpatient rehabilitation units 
of a hospital (hereinafter referred to as IRFs).
    Payments under the IRF PPS encompass inpatient operating and 
capital costs of furnishing covered rehabilitation services (that is, 
routine, ancillary, and capital costs) but not direct graduate medical 
education costs, costs of approved nursing and allied health education 
activities, bad debts, and other services or items outside the scope of 
the IRF PPS. Although a complete discussion of the IRF PPS provisions 
appears in the original FY 2002 IRF PPS final rule (66 FR 41316) and 
the FY 2006 IRF PPS final rule (70 FR 47880), we are providing below a 
general description of the IRF PPS for fiscal years (FYs) 2002 through 
2010.
    Under the IRF PPS from FY 2002 through FY 2005, as described in the 
FY 2002 IRF PPS final rule (66 FR 41316), the Federal prospective 
payment rates were computed across 100 distinct case-mix groups (CMGs). 
We constructed 95 CMGs using rehabilitation impairment categories 
(RICs), functional status (both motor and cognitive), and age (in some 
cases, cognitive status and age may not be a factor in defining a CMG). 
In addition, we constructed 5 special CMGs to account for very short 
stays and for patients who expire in the IRF.
    For each of the CMGs, we developed relative weighting factors to 
account for a patient's clinical characteristics and expected resource 
needs. Thus, the weighting factors accounted for the relative 
difference in resource use across all CMGs. Within each CMG, we created 
tiers based on the estimated effects that certain comorbidities would 
have on resource use.
    We established the Federal PPS rates using a standardized payment 
conversion factor (formerly referred to as the budget neutral 
conversion factor). For a detailed discussion of the budget neutral 
conversion factor, please refer to our FY 2004 IRF PPS final rule (68 
FR 45684 through 45685). In the FY 2006 IRF PPS final rule (70 FR 
47880), we discussed in detail the methodology for determining the 
standard payment conversion factor.
    We applied the relative weighting factors to the standard payment 
conversion factor to compute the unadjusted Federal prospective payment 
rates under the IRF PPS from FYs 2002 through 2005. Within the 
structure of the payment system, we then made adjustments to account 
for interrupted stays, transfers, short stays, and deaths. Finally, we 
applied the applicable adjustments to account for geographic variations 
in wages (wage index), the percentage of low-income patients, location 
in a rural area (if applicable), and outlier payments (if applicable) 
to the IRF's unadjusted Federal prospective payment rates.
    For cost reporting periods that began on or after January 1, 2002 
and before October 1, 2002, we determined the final prospective payment 
amounts using the transition methodology prescribed in section 
1886(j)(1) of the Act. Under this provision, IRFs transitioning into 
the PPS were paid a blend of the Federal IRF PPS rate and the payment 
that the IRF would have received had the IRF PPS not been implemented. 
This provision also allowed IRFs to elect to bypass this blended 
payment and immediately be paid 100 percent of the Federal IRF PPS 
rate. The transition methodology expired as of cost reporting periods 
beginning on or after October 1, 2002 (FY 2003), and payments for all 
IRFs now consist of 100 percent of the Federal IRF PPS rate.
    We established a CMS Web site as a primary information resource for 
the IRF PPS. The Web site URL is http://www.cms.gov/InpatientRehabFacPPS/ and may be accessed to download or

[[Page 47838]]

view publications, software, data specifications, educational 
materials, and other information pertinent to the IRF PPS.
    Section 1886(j) of the Act confers broad statutory authority upon 
the Secretary to propose refinements to the IRF PPS. In the FY 2006 IRF 
PPS final rule (70 FR 47880) and in correcting amendments to the FY 
2006 IRF PPS final rule (70 FR 57166) that we published on September 
30, 2005, we finalized a number of refinements to the IRF PPS case-mix 
classification system (the CMGs and the corresponding relative weights) 
and the case-level and facility-level adjustments. These refinements 
included the adoption of the Office of Management and Budget's (OMB) 
Core-Based Statistical Area (CBSA) market definitions, modifications to 
the CMGs, tier comorbidities, and CMG relative weights, implementation 
of a new teaching status adjustment for IRFs, revision and rebasing of 
the market basket index used to update IRF payments, and updates to the 
rural, low-income percentage (LIP), and high-cost outlier adjustments. 
Beginning with the FY 2006 IRF PPS final rule (70 FR 47908 through 
47917), the market basket index used to update IRF payments is a market 
basket reflecting the operating and capital cost structures for 
freestanding IRFs, freestanding inpatient psychiatric facilities 
(IPFs), and long-term care hospitals (LTCHs) (hereafter referred to as 
the rehabilitation, psychiatric, and long-term care (RPL) market 
basket). Any reference to the FY 2006 IRF PPS final rule in this final 
rule also includes the provisions effective in the correcting 
amendments. For a detailed discussion of the final key policy changes 
for FY 2006, please refer to the FY 2006 IRF PPS final rule (70 FR 
47880 and 70 FR 57166).
    In the FY 2007 IRF PPS final rule (71 FR 48354), we further refined 
the IRF PPS case-mix classification system (the CMG relative weights) 
and the case-level adjustments, to ensure that IRF PPS payments would 
continue to reflect as accurately as possible the costs of care. For a 
detailed discussion of the FY 2007 policy revisions, please refer to 
the FY 2007 IRF PPS final rule (71 FR 48354).
    In the FY 2008 IRF PPS final rule (72 FR 44284), we updated the 
Federal prospective payment rates and the outlier threshold, revised 
the IRF wage index policy, and clarified how we determine high-cost 
outlier payments for transfer cases. For more information on the policy 
changes implemented for FY 2008, please refer to the FY 2008 IRF PPS 
final rule (72 FR 44284), in which we published the final FY 2008 IRF 
Federal prospective payment rates.
    After publication of the FY 2008 IRF PPS final rule (72 FR 44284), 
section 115 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 
(Pub. L. 110-173, enacted on December 29, 2007) (MMSEA), amended 
section 1886(j)(3)(C) of the Act to apply a zero percent increase 
factor for FYs 2008 and 2009, effective for IRF discharges occurring on 
or after April 1, 2008. Section 1886(j)(3)(C) of the Act required the 
Secretary to develop an increase factor to update the IRF Federal 
prospective payment rates for each FY. Based on the legislative change 
to the increase factor, we revised the FY 2008 Federal prospective 
payment rates for IRF discharges occurring on or after April 1, 2008. 
Thus, the final FY 2008 IRF Federal prospective payment rates that were 
published in the FY 2008 IRF PPS final rule (72 FR 44284) were 
effective for discharges occurring on or after October 1, 2007 and on 
or before March 31, 2008; and the revised FY 2008 IRF Federal 
prospective payment rates were effective for discharges occurring on or 
after April 1, 2008 and on or before September 30, 2008. The revised FY 
2008 Federal prospective payment rates are available on the CMS Web 
site at http://www.cms.gov/InpatientRehabFacPPS/07_DataFiles.asp#TopOfPage.
    In the FY 2009 IRF PPS final rule (73 FR 46370), we updated the CMG 
relative weights, the average length of stay values, and the outlier 
threshold; clarified IRF wage index policies regarding the treatment of 
``New England deemed'' counties and multi-campus hospitals; and revised 
the regulation text in response to section 115 of the MMSEA to set the 
IRF compliance percentage at 60 percent (``the 60 percent rule'') and 
continue the practice of including comorbidities in the calculation of 
compliance percentages. We also applied a zero percent market basket 
increase factor for FY 2009 in accordance with section 115 of the 
MMSEA. For more information on the policy changes implemented for FY 
2009, please refer to the FY 2009 IRF PPS final rule (73 FR 46370), in 
which we published the final FY 2009 IRF Federal prospective payment 
rates.
    In the FY 2010 IRF PPS final rule (74 FR 39762) and in correcting 
amendments to the FY 2010 IRF PPS final rule (74 FR 50712) that we 
published on October 1, 2009, we updated the Federal prospective 
payment rates, the CMG relative weights, the average length of stay 
values, the rural, LIP, and teaching status adjustment factors, and the 
outlier threshold; implemented new IRF coverage requirements for 
determining whether an IRF claim is reasonable and necessary; and 
revised the regulation text to require IRFs to submit patient 
assessments on Medicare Advantage (MA) (Medicare Part C) patients for 
use in the 60 percent rule calculations. Any reference to the FY 2010 
IRF PPS final rule in this final rule also includes the provisions 
effective in the correcting amendments. For more information on the 
policy changes implemented for FY 2010, please refer to the FY 2010 IRF 
PPS final rule (74 FR 39762 and 74 FR 50712), in which we published the 
final FY 2010 IRF Federal prospective payment rates.
    After publication of the FY 2010 IRF PPS final rule (74 FR 39762), 
section 3401(d) of the Patient Protection and Affordable Care Act (Pub. 
L. 111-148, enacted on March 23, 2010) as amended by section 10319 of 
the same Act and by section 1105 of the Health Care and Education 
Reconciliation Act of 2010 (Pub. L. 111-152, enacted on March 30, 2010) 
(collectively, hereafter referred to as ``The Affordable Care Act''), 
amended section 1886(j)(3)(C) of the Act and added section 
1886(j)(3)(D) of the Act. Section 1886(j)(3)(C) of the Act requires the 
Secretary to estimate a multi-factor productivity adjustment to the 
market basket increase factor, and to apply other adjustments as 
defined by the Act. The productivity adjustment applies to FYs from 
2012 forward. The other adjustments apply to FYs 2010-2019.
    Sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(i) of the Act 
defined the adjustments that were to be applied to the market basket 
increase factors in FYs 2010 and 2011. Under these provisions, the 
Secretary was required to reduce the market basket increase factor in 
FY 2010 by a 0.25 percentage point adjustment. Notwithstanding this 
provision, in accordance with section 3401(p) of the Affordable Care 
Act, the adjusted FY 2010 rate was only to be applied to discharges 
occurring on or after April 1, 2010. Based on the self-implementing 
legislative changes to section 1886(j)(3) of the Act, we adjusted the 
FY 2010 Federal prospective payment rates as required, and applied 
these rates to IRF discharges occurring on or after April 1, 2010 and 
on or before September 30, 2010. Thus, the final FY 2010 IRF Federal 
prospective payment rates that were published in the FY 2010 IRF PPS 
final rule (74 FR 39762) were used for discharges occurring on or after 
October 1, 2009 and on or before March 31, 2010; and the adjusted FY 
2010 IRF Federal prospective payment rates applied to discharges 
occurring on or

[[Page 47839]]

after April 1, 2010 and on or before September 30, 2010. The adjusted 
FY 2010 Federal prospective payment rates are available on the CMS Web 
site at http://www.cms.gov/InpatientRehabFacPPS/07_DataFiles.asp#TopOfPage.
    In addition, sections 1886(j)(3)(C) and (D) of the Act also 
affected the FY 2010 IRF outlier threshold amount because they required 
an adjustment to the FY 2010 RPL market basket increase factor, which 
changed the standard payment conversion factor for FY 2010. 
Specifically, the original FY 2010 IRF outlier threshold amount was 
determined based on the original estimated FY 2010 RPL market basket 
increase factor of 2.5 percent and the standard payment conversion 
factor of $13,661. However, as adjusted, the IRF prospective payments 
are based on the adjusted RPL market basket increase factor of 2.25 
percent and the revised standard payment conversion factor of $13,627. 
To maintain estimated outlier payments for FY 2010 equal to the 
established standard of 3 percent of total estimated IRF PPS payments 
for FY 2010, we revised the IRF outlier threshold amount for FY 2010 
for discharges occurring on or after April 1, 2010 and on or before 
September 30, 2010. The revised IRF outlier threshold amount for FY 
2010 was $10,721.
    Sections 1886(j)(3)(ii)(II) and 1886(j)(3)(D)(i) of the Act also 
required the Secretary to reduce the market basket increase factor in 
FY 2011 by a 0.25 percentage point adjustment. The FY 2011 IRF PPS 
notice (75 FR 42836) and the correcting amendments to the FY 2011 IRF 
PPS notice (75 FR 70013, November 16, 2010) described the required 
adjustments to the FY 2011 and FY 2010 IRF PPS Federal prospective 
payment rates and outlier threshold amount for IRF discharges occurring 
on or after April 1, 2010 and on or before September 30, 2011. It also 
updated the FY 2011 Federal prospective payment rates, the CMG relative 
weights, and the average length of stay values. Any reference to the FY 
2011 IRF PPS notice in this final rule also includes the provisions 
effective in the correcting amendments. For more information on the FY 
2010 and FY 2011 adjustments or the updates for FY 2011, please refer 
to the FY 2011 IRF PPS notice (75 FR 42836 and 75 FR 70013).

B. Provisions of the Affordable Care Act Affecting the IRF PPS in FY 
2012 and Beyond

    The Affordable Care Act included several provisions that affect the 
IRF PPS in FYs 2012 and beyond. In addition to what was discussed 
above, section 3401(d) of the Affordable Care Act also added section 
1886(j)(3)(C)(ii)(I) of the Act (providing for a ``productivity 
adjustment'' for fiscal year 2012 and each subsequent fiscal year). The 
productivity adjustment for FY 2012 is discussed in section VI.A.6 of 
this final rule, and the 0.1 percentage point reduction is discussed in 
section VI.A of this final rule. Section 1886(j)(3)(C)(ii)(II) of the 
Act notes that the application of these adjustments to the market 
basket update may result in an update that is less than 0.0 for a 
fiscal year and in payment rates for a fiscal year being less than 
payment rates for the preceding fiscal year.
    Section 3004(b) of the Affordable Care Act also addressed the IRF 
PPS program. It reassigned the previously-designated section 1886(j)(7) 
of the Act to section 1886(j)(8) and inserted a new section 1886(j)(7) 
of the Act, which contains new requirements for the Secretary to 
establish a quality reporting program for IRFs. Under that program, 
data must be submitted in a form and manner, and at a time specified by 
the Secretary. Beginning in FY 2014, section 1886(j)(7)(A)(i) of the 
Act will require application of a 2 percentage point reduction to the 
applicable market basket increase factor for IRFs that fail to comply 
with the quality data submission requirements. Application of the 2 
percentage point reduction may result in an update that is less than 
0.0 for a fiscal year and in payment rates for a fiscal year being less 
than payment rates for the preceding fiscal year. Reporting-based 
reductions to the market basket increase factor will not be cumulative; 
they will only apply for the FY involved.
    Under section 1886(j)(7)(D)(i) and (ii) of the Act, the Secretary 
is generally required to select quality measures for the IRF quality 
reporting program from those that have been endorsed by the consensus-
based entity which holds a performance measurement contract under 
section 1890(a) of the Act. This contract is currently held by the 
National Quality Forum (NQF). So long as due consideration is given to 
measures that have been endorsed or adopted by a consensus-based 
organization, section 1886(j)(7)(D)(ii) of the Act authorizes the 
Secretary to select non-endorsed measures for specified areas or 
medical topics when there are no feasible or practical endorsed 
measure(s). Under section 1886(j)(7)(D)(iii) of the Act, the Secretary 
is required to publish the measures that will be used in FY 2014 no 
later than October 1, 2012.
    Section 1886(j)(7)(E) of the Act requires the Secretary to 
establish procedures for making the IRF PPS quality reporting data 
available to the public. Also, the Secretary must ensure that IRFs have 
the opportunity to review any data prior to its release to the public. 
Future rulemaking will address these public reporting obligations.
    The quality reporting program for IRFs, in accordance with section 
1886(j)(7) of the Act, is discussed in detail in section X. of this 
final rule.

C. Operational Overview of the Current IRF PPS

    As described in the FY 2002 IRF PPS final rule, upon the admission 
and discharge of a Medicare Part A fee-for-service patient, the IRF is 
required to complete the appropriate sections of a patient assessment 
instrument, designated as the Inpatient Rehabilitation Facility-Patient 
Assessment Instrument (IRF-PAI). In addition, beginning with IRF 
discharges occurring on or after October 1, 2009, the IRF is also 
required to complete the appropriate sections of the IRF-PAI upon the 
admission and discharge of each Medicare Part C (Medicare Advantage) 
patient, as described in the FY 2010 IRF PPS final rule. All required 
data must be electronically encoded into the IRF-PAI software product. 
Generally, the software product includes patient classification 
programming called the GROUPER software. The GROUPER software uses 
specific IRF-PAI data elements to classify (or group) patients into 
distinct CMGs and account for the existence of any relevant 
comorbidities.
    The GROUPER software produces a 5-digit CMG number. The first digit 
is an alpha-character that indicates the comorbidity tier. The last 4 
digits represent the distinct CMG number. Free downloads of the 
Inpatient Rehabilitation Validation and Entry (IRVEN) software product, 
including the GROUPER software, are available on the CMS Web site at 
http://www.cms.gov/InpatientRehabFacPPS/06_Software.asp.
    Once a patient is discharged, the IRF submits a Medicare claim as a 
Health Insurance Portability and Accountability Act of 1996 (Pub. L. 
104-191, enacted on August 21, 1996) (HIPAA) compliant electronic claim 
or, if the Administrative Simplification Compliance Act of 2002 (Pub. 
L. 107-105, enacted on December 27, 2002) (ASCA) permits, a paper claim 
(a UB-04 or a CMS-1450 as appropriate) using the five-digit CMG number 
and sends it to the appropriate Medicare fiscal intermediary (FI) or 
Medicare

[[Page 47840]]

Administrative Contractor (MAC). Claims submitted to Medicare must 
comply with both ASCA and HIPAA. For further discussion of these 
requirements, please see the FY 2011 IRF PPS Notice (75 FR 42836 at 
42838).
    The Medicare FI or MAC processes the claim through its software 
system. This software system includes pricing programming called the 
``PRICER'' software. The PRICER software uses the CMG number, along 
with other specific claim data elements and provider-specific data, to 
adjust the IRF's prospective payment for interrupted stays, transfers, 
short stays, and deaths, and then applies the applicable adjustments to 
account for the IRF's wage index, percentage of low-income patients, 
rural location, and outlier payments. For discharges occurring on or 
after October 1, 2005, the IRF PPS payment also reflects the new 
teaching status adjustment that became effective as of FY 2006, as 
discussed in the FY 2006 IRF PPS final rule (70 FR 47880).

II. Summary of Provisions of the Proposed Rule

    In the FY 2012 IRF PPS proposed rule (76 FR 24214), we proposed to 
update the IRF Federal prospective payment rates, to rebase and revise 
the RPL market basket, to implement refinements to the methodologies 
for calculating the LIP adjustment, and to establish a new quality 
reporting program for IRFs in accordance with section 1886(j)(7) of the 
Act. We also proposed to revise existing regulations text for the 
purpose of updating and providing greater clarity. These proposals are 
as follows:

A. Proposed Updates to the IRF Federal Prospective Payment Rates for 
Federal Fiscal Year (FY) 2012

    The proposed updates to the IRF Federal prospective payment rates 
for FY 2012 are as follows:
     Update the FY 2012 IRF PPS relative weights and average 
length of stay values using the most current and complete Medicare 
claims and cost report data in a budget neutral manner, as discussed in 
section III. of the FY 2012 IRF PPS proposed rule (76 FR 24214, 24219 
through 24220).
     Update the FY 2012 IRF facility-level adjustments (rural, 
LIP, and teaching status adjustments) in a budget neutral manner using 
the most current and complete Medicare claims and cost report data and 
by removing the weighting methodology previously used to analyze the 
data, and propose a temporary cap adjustment policy for the teaching 
status adjustment to reflect interns and residents displaced due to 
closure of IRFs or IRF residency training programs, as discussed in 
section IV. of the FY 2012 IRF PPS proposed rule (76 FR 24214, 24226).
     Update the FY 2012 IRF PPS payment rates by the proposed 
market basket increase factor, based upon the most current data 
available, with a 0.1 percentage point reduction as required by 
sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act and a 
productivity adjustment required by section 1886(j)(3)(C)(ii)(I) of the 
Act, as described in section V. of the FY 2012 IRF PPS proposed rule 
(76 FR 24214, 24228 through 24241).
     Update the wage index and the labor-related share of the 
FY 2012 IRF PPS payment rates in a budget neutral manner, as discussed 
in section V. of the FY 2012 IRF PPS proposed rule (76 FR 24214, 24241 
through 24244).
     Calculate the IRF Standard Payment Conversion Factor for 
FY 2012, as discussed in section V. of the FY 2012 IRF PPS proposed 
rule (76 FR 24214, 24244 through 24245).
     Update the outlier threshold amount for FY 2012, as 
discussed in section VI. of the FY 2012 IRF PPS proposed rule (76 FR 
24214, 24248 through 24249).
     Update the cost-to-charge ratio (CCR) ceiling and urban/
rural average CCRs for FY 2012, as discussed in section VI. of the FY 
2012 IRF PPS proposed rule 76 (FR 24214, 24249).
     Discuss the impact of the Inpatient Prospective Payment 
System (IPPS) data matching process changes on the IRF PPS calculation 
of the Supplemental Security Income (SSI) ratios used to compute the 
IRF LIP adjustment factor, as discussed in section VII. of the FY 2012 
IRF PPS proposed rule (76 FR 24214, 24249 through 24250).
     Implement the IRF quality reporting program provisions of 
section 1886(j)(7) of the Act, as discussed in section IX. of the FY 
2012 IRF PPS proposed rule (76 FR 24214, 24252 through 24257).

B. Proposed Revisions to Existing Regulation Text

    We proposed to revise the existing requirements at Sec.  412.25(b), 
Sec.  412.25(b)(1), Sec.  412.25(b)(2), and Sec.  412.25(b)(3) that 
apply to all units that are excluded from the IPPS, as described in 
section VIII. of the FY 2012 IRF PPS proposed rule (76 FR 24214, 24250 
through 24252). To amend the regulatory reference to conform with the 
other proposed changes, we also proposed to revise the existing 
requirements at Sec.  412.25(e)(2)(ii)(A). With the exception of Sec.  
412.25(e)(2)(ii)(A), the proposed revisions would affect both IRFs and 
IPFs.
    We also proposed to relocate and revise the existing requirements 
at Sec.  412.23(b), Sec.  412.29, and Sec.  412.30 that describe the 
requirements for facilities to qualify to receive payment under the IRF 
PPS, as described in section VIII. of the FY 2012 IRF PPS proposed rule 
(76 FR 24214, 24252).
    Finally, we proposed to re-designate the existing paragraph Sec.  
412.624(c)(4) as Sec.  412.624(c)(5) and add a new paragraph Sec.  
412.624(c)(4) to implement the IRF quality reporting program.

III. Analysis and Responses to Public Comments

    We received approximately 46 timely responses, many of which 
contained multiple comments on the FY 2012 IRF PPS proposed rule (76 FR 
24214) from the public. We received comments from various trade 
associations, inpatient rehabilitation facilities, individual 
physicians, therapists, clinicians, health care industry organizations, 
and health care consulting firms. The following sections, arranged by 
subject area, include a summary of the public comments that we 
received, and our responses.

IV. Update to the Case-Mix Group (CMG) Relative Weights and Average 
Length of Stay Values for FY 2012

    As specified in Sec.  412.620(b)(1), we calculate a relative weight 
for each CMG that is proportional to the resources needed by an average 
inpatient rehabilitation case in that CMG. For example, cases in a CMG 
with a relative weight of 2, on average, will cost twice as much as 
cases in a CMG with a relative weight of 1. Relative weights account 
for the variance in cost per discharge due to the variance in resource 
utilization among the payment groups, and their use helps to ensure 
that IRF PPS payments support beneficiary access to care, as well as 
provider efficiency.
    In the FY 2012 proposed rule (76 FR 24214, 24219 through 24225), we 
proposed to update the CMG relative weights and average length of stay 
values for FY 2012. As required by statute, we always use the most 
recent available data to update the CMG relative weights and average 
lengths of stay. This ensures that the CMG relative weights and average 
length of stay values reflect as accurately as possible the current 
costs of care in IRFs. For FY 2012, we proposed to use the FY 2010 IRF 
claims and FY 2009 IRF cost report data. These data are the most 
current and complete data available at this time. Currently, only a 
small portion of the

[[Page 47841]]

FY 2010 IRF cost report data are available for analysis, but the 
majority of the FY 2010 IRF claims data are available for analysis.
    We proposed to use the same methodology that we have used to update 
the CMG relative weights and average length of stay values in the FY 
2009 IRF PPS final rule (73 FR 46370), the FY 2010 IRF PPS final rule 
(74 FR 39762), and the FY 2011 notice (75 FR 42836).
    In calculating the CMG relative weights, we use a hospital-specific 
relative value method to estimate operating (routine and ancillary 
services) and capital costs of IRFs. The process we use to calculate 
the CMG relative weights is as follows:
    Step 1. We estimate the effects that comorbidities have on costs.
    Step 2. We adjust the cost of each Medicare discharge (case) to 
reflect the effects found in the first step.
    Step 3. We use the adjusted costs from the second step to calculate 
CMG relative weights, using the hospital-specific relative value 
method.
    Step 4. We normalize the FY 2012 CMG relative weights to the same 
average CMG relative weight from the CMG relative weights implemented 
in the FY 2011 IRF PPS notice (75 FR 42836).
    Consistent with the methodology that we have used to update the IRF 
classification system in each instance in the past, we proposed to 
update the CMG relative weights for FY 2012 in a way that total 
estimated aggregate payments to IRFs for FY 2012 are the same with or 
without the changes (that is, in a budget neutral manner) by applying a 
budget neutrality factor to the standard payment amount. To calculate 
the appropriate budget neutrality factor for use in updating the FY 
2012 CMG relative weights, we use the following steps:
    Step 1. Calculate the estimated total amount of IRF PPS payments 
for FY 2012 (with no changes to the CMG relative weights).
    Step 2. Calculate the estimated total amount of IRF PPS payments 
for FY 2012 by applying the changes to the CMG relative weights (as 
discussed above).
    Step 3. Divide the amount calculated in step 1 by the amount 
calculated in step 2 to determine the budget neutrality factor (0.9988) 
that would maintain the same total estimated aggregate payments in FY 
2012 with and without the changes to the CMG relative weights.
    Step 4. Apply the budget neutrality factor (0.9988) to the FY 2011 
IRF PPS standard payment amount after the application of the budget-
neutral wage adjustment factor.
    In section VI.C. of this final rule, we discuss the use of the 
existing methodology to calculate the standard payment conversion 
factor for FY 2012.
    Note that the budget neutrality factor that we used to update the 
CMG relative weights for FY 2012 changed from 0.9989 in the proposed 
rule to 0.9988 in this final rule due to the use of updated FY 2010 IRF 
claims data in this final rule.
    We received 2 comments on the proposed updates to the CMG relative 
weights and average length of stay values, which are summarized below.
    Comment: One commenter expressed confusion about whether CMS might 
have used an ``older'' methodology to calculate the CMG relative 
weights in the FY 2011 IRF PPS Notice (75 FR 42836) that differed from 
the methodology that CMS used to calculate the CMG relative weights in 
the FY 2009 IRF PPS final rule (73 FR 46370), the FY 2010 IRF PPS final 
rule (74 FR 39762), or the FY 2012 IRF PPS proposed rule (76 FR 24214).
    Response: We used the same methodology to update the CMG relative 
weights in the FY 2002 IRF PPS final rule (66 FR 41316), the FY 2006 
IRF PPS final rule (70 FR 47880), and the FY 2007 IRF PPS final rule 
(71 FR 48354). We did not update the CMG relative weights in the FY 
2008 IRF PPS final rule (72 FR 44284). In the FY 2009 IRF PPS final 
rule (73 FR 46370), we implemented one change to the methodology which 
involved the use of more detailed cost-to-charge ratio (CCR) data from 
the cost reports of IRF subprovider units of primary acute care 
hospitals, instead of CCR data from the associated primary acute care 
hospitals, to calculate IRFs' average costs per case. We have used this 
same revised methodology from FY 2009 to update the CMG relative 
weights in the FY 2010 IRF PPS final rule (74 FR 39762), the FY 2011 
notice (75 FR 42836), and the FY 2012 IRF PPS proposed rule (76 FR 
24214). We continue to use the same methodology that was revised in FY 
2009 for updating the CMG relative weights in this final rule.
    Comment: Two commenters requested that CMS provide more information 
about the methodology that we use to calculate the average length of 
stay values. One commenter noted that it would be useful for CMS to 
provide information on the standard deviations for the average length 
of stay values, and another commenter suggested that we reiterate the 
purpose of the average length of stay values.
    Response: To calculate the average length of stay values for the 
proposed and final rules each year, we use the following steps:
    Step 1. Sum the lengths of stay for all of the cases in each CMG 
and tier using the most current IRF claims data (for this final rule, 
we used FY 2010 IRF claims data).
    Step 2. Divide the number in step 1 by the number of cases in each 
CMG and tier in the most current IRF claims data (for this final rule, 
we used FY 2010 IRF claims data) to obtain an average.
    Step 3. Use the average length of stay value calculated in step 2 
to identify all of the cases in each CMG and tier that would meet the 
criteria for payment under the IRF short-stay transfer policy, and 
remove those cases from the analysis.
    Step 4. Repeat steps 1 through 3 until no additional cases are 
identified in step 3 (that is, until all of the cases left in step 3 
are ``full CMG'' cases that would not meet the short-stay transfer 
policy criteria).
    As we have stated in previous rules, the average length of stay for 
each CMG is used to determine when an IRF discharge meets the 
definition of a short-stay transfer, which results in a per diem case 
level adjustment. The average length of stay values should not be used 
to limit a patient's length of stay in an IRF.
    At the request of several of the commenters, we have placed the 
standard deviations for the proposed average length of stay values from 
the FY 2012 IRF PPS proposed rule (76 FR 24214) with the other proposed 
rule data files on the IRF PPS Web site at http://www.cms.gov/InpatientRehabFacPPS/07_DataFiles.asp#TopOfPage. We will continue to 
provide this information as part of our standard rulemaking files that 
we post to the Web site in conjunction with the IRF PPS rules.
    Final Decision: After carefully considering all of the comments 
that we received on the proposed updates to the CMG relative weights 
and average length of stay values, we are implementing the FY 2012 
updates to the CMG relative weights and average length of stay values 
presented in Table 1 (which are different from the relative weights and 
average length of stay values that we had proposed because these final 
values are based on analysis of updated FY 2010 IRF claims data).

[[Page 47842]]

                                     Table 1--Relative Weights and Average Length of Stay Values for Case-Mix Groups
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            Relative weight                 Average length of stay
                      CMG                        CMG Description (M = motor, C = -----------------------------------------------------------------------
                                                       cognitive, A = age)         Tier 1   Tier 2   Tier 3    None    Tier 1   Tier 2   Tier 3    None
--------------------------------------------------------------------------------------------------------------------------------------------------------
0101..........................................  Stroke M > 51.05................   0.7676   0.7182   0.6451   0.6102       10       10        9        8
0102..........................................  Stroke M > 44.45 and               0.9527   0.8913   0.8007   0.7573       12       13       10       10
                                                 M  18.5.........
0103..........................................  Stroke M > 44.45 and               1.1377   1.0644   0.9562   0.9043       14       14       12       12
                                                 M 38.85 and               1.1819   1.1058   0.9934   0.9395       15       14       13       12
                                                 M  34.25 and               1.3733   1.2849   1.1542   1.0916       16       17       14       14
                                                 M  30.05 and               1.5815   1.4796   1.3291   1.2571       20       18       16       16
                                                 M  26.15 and               1.7906   1.6753   1.5049   1.4233       20       20       18       18
                                                 M  84.5...   2.2178   2.0749   1.8639   1.7629       31       25       23       22
0109..........................................  Stroke M > 22.35 and               2.0508   1.9188   1.7236   1.6302       24       23       20       20
                                                 M  53.35 and C > 23.5.........
0202..........................................  Traumatic brain injury             1.0613   0.8712   0.8070   0.7327       12       12       10       10
                                                 M > 44.25 and M  23.5...................
0203..........................................  Traumatic brain injury             1.2080   0.9917   0.9185   0.8341       16       11       13       12
                                                 M > 44.25 and C  40.65 and M  28.75 and M  22.05 and M  41.05......................
0302..........................................  Non-traumatic brain injury         1.3393   1.2048   1.0689   0.9789       12       15       13       13
                                                 M > 35.05 and M  26.15 and M  48.45......................
0402..........................................  Traumatic spinal cord injury       1.3802   1.1491   1.0453   0.9171       17       14       13       12
                                                 M > 30.35 and M  16.05 and M  63.5.........
0405..........................................  Traumatic spinal cord injury       3.8686   3.2206   2.9298   2.5706       52       39       36       29
                                                 M  51.35
0502..........................................  Non-traumatic spinal cord injury   0.9815   0.9423   0.8404   0.7448       13       13       11       10
                                                 M > 40.15 and M  31.25 and M  29.25 and M  23.75 and M  47.75..........   0.9457   0.7992   0.7289   0.6589       10       11        9        9
0602..........................................  Neurological M > 37.35 and         1.2516   1.0577   0.9648   0.8721       12       13       12       11
                                                 M  25.85 and         1.6164   1.3660   1.2460   1.1263       17       16       14       14
                                                 M  42.15......................

[[Page 47843]]

 
0702..........................................  Fracture of lower extremity        1.0470   1.0307   0.9927   0.8861       12       13       12       12
                                                 M > 34.15 and M  28.15 and M  49.55
0802..........................................  Replacement of lower extremity     0.7725   0.7725   0.7199   0.6573        8       11        9        9
                                                 joint M > 37.05 and............
                                                 M  28.65 and............
                                                 M  83.5.........
0804..........................................  Replacement of lower extremity     0.9407   0.9407   0.8767   0.8004       10       12       11       10
                                                 joint M > 28.65 and............
                                                 M  22.05 and............
                                                 M  44.75......   0.8467   0.7460   0.6751   0.6116       10       10        9        8
0902..........................................  Other orthopedic M > 34.35 and M   1.1324   0.9978   0.9029   0.8180       12       13       12       11
                                                  24.15 and M   1.4503   1.2779   1.1564   1.0477       16       16       14       13
                                                  47.65......................
1002..........................................  Amputation, lower extremity        1.3571   1.1931   1.0660   0.9528       16       14       13       12
                                                 M > 36.25 and M  36.35
1102..........................................  Amputation, non-lower extremity    1.5586   1.5586   1.4783   1.3875       14       18       16       16
                                                 M  37.65........   0.8102   0.8102   0.8104   0.7660       13       13       11       10
1202..........................................  Osteoarthritis M > 30.75 and       1.0564   1.0564   1.0566   0.9987       16       16       14       13
                                                 M  36.35......................
1302..........................................  Rheumatoid, other arthritis        1.1769   1.2792   1.2792   1.0379       17       17       14       13
                                                 M > 26.15 and M  48.85...............   0.9411   0.7535   0.6663   0.6026       10       10        9        8
1402..........................................  Cardiac M > 38.55 and              1.2638   1.0118   0.8947   0.8092       13       12       11       10
                                                 M  31.15 and              1.5263   1.2220   1.0806   0.9773       18       14       13       12
                                                 M  49.25.............   0.9610   0.8973   0.7734   0.7311       10       11        8        9
1502..........................................  Pulmonary M > 39.05 and            1.2094   1.1293   0.9734   0.9201       13       13       11       11
                                                 M  29.15 and            1.4914   1.3926   1.2003   1.1346       16       16       13       13
                                                 M  37.15.........   1.1177   0.8798   0.7721   0.7217       12       12       10       10
1602..........................................  Pain syndrome M > 26.75 and M  39.25......................
1702..........................................  Major multiple trauma without      1.3771   1.2256   1.1123   0.9723       13       15       14       13
                                                 brain or spinal cord injury
                                                 M > 31.05 and M  25.55 and M  40.85......................
1802..........................................  Major multiple trauma with brain   1.6515   1.3548   1.3080   1.1964       18       20       15       15
                                                 or spinal cord injury
                                                 M > 23.05 and M  35.95........   1.1498   1.0129   0.9189   0.8923       13       14       12       12
1902..........................................  Guillain Barre M > 18.05 and       2.1903   1.9296   1.7504   1.6999       22       22       21       21
                                                 M  49.15.........   0.8541   0.7547   0.6766   0.6079        9       10        9        8
2002..........................................  Miscellaneous M > 38.75 and M  27.85 and M  0.....................   2.5153   2.1771   1.7338   1.4053       34       23       19       18
5001..........................................  Short-stay cases, length of stay  .......  .......  .......   0.1475  .......  .......  .......        3
                                                 is 3 days or fewer
5101..........................................  Expired, orthopedic, length of    .......  .......  .......   0.5856  .......  .......  .......        7
                                                 stay is 13 days or fewer
5102..........................................  Expired, orthopedic, length of    .......  .......  .......   1.4718  .......  .......  .......       18
                                                 stay is 14 days or more
5103..........................................  Expired, not orthopedic, length   .......  .......  .......   0.6970  .......  .......  .......        8
                                                 of stay is 15 days or fewer
5104..........................................  Expired, not orthopedic, length   .......  .......  .......   1.8778  .......  .......  .......       23
                                                 of stay is 16 days or more
--------------------------------------------------------------------------------------------------------------------------------------------------------

V. Updates to the Facility-Level Adjustment Factors for FY 2012

A. Updates to the IRF Facility-Level Adjustment Factors

    Section 1886(j)(3)(A)(v) of the Act confers broad authority upon 
the Secretary to adjust the per unit payment rate ``by such * * * 
factors as the Secretary determines are necessary to properly reflect 
variations in necessary costs of treatment among rehabilitation 
facilities.'' For example, we adjust the Federal prospective payment 
amount associated with a CMG to account for facility-level 
characteristics such as an IRF's LIP, teaching status, and location in 
a rural area, if applicable, as described in Sec.  412.624(e).
    In the FY 2010 IRF PPS final rule (74 FR 39762), we updated the 
adjustment factors for calculating the rural, LIP, and teaching status 
adjustments based on the most recent 3 consecutive years worth of IRF 
claims data (at that time, FY 2006, FY 2007, and FY 2008) and the most 
recent available corresponding IRF cost report data. As discussed in 
the FY 2010 IRF PPS proposed rule (74 FR 21060 through 21061), we 
observed relatively large year-to-year fluctuations in the underlying 
data used to compute the adjustment factors, especially the teaching 
status adjustment factor. Therefore, we implemented a 3-year moving 
average approach to updating the facility-level adjustment factors in 
the FY 2010 IRF PPS final rule (74 FR 39762) to provide greater 
stability and predictability of Medicare payments for IRFs.
    Although the 3-year moving average approach that we implemented in 
FY 2010 improves the year-to-year stability and predictability of the 
facility-level adjustment factors, we have continued to find unusually 
large year-to-year fluctuations in the teaching status adjustment 
factor. To determine the underlying reasons for these large year-to-
year fluctuations in the teaching status adjustment factor, we analyzed 
the data and reviewed the methodology that we were using to estimate 
all three of the facility-level adjustment factors (that is, the rural, 
the LIP, and the teaching status adjustment factors). We found that the 
use of a weighting methodology, which assigns greater weight to some 
facilities than to others, applied to the regression analysis used to 
estimate the facility-level adjustment factors inappropriately 
exaggerated the differences among different types of IRF facilities. We 
proposed to remove the weighting methodology from our analysis of the 
facility-level adjustment factors and update the IRF facility-level 
adjustment factors for FY 2012 using an un-weighted regression 
analysis.
    We received 22 comments on the proposed updates to the facility-
level adjustment factors, which are summarized below.
    Comment: Several commenters requested that CMS release data that 
would enable facilities to replicate the calculation of the facility-
level adjustment factors, provide more information on how CMS 
calculates the 3-year moving average, and provide more information on 
CMS's research and computations used to support an un-weighted 
regression methodology.

[[Page 47845]]

    Response: We provided additional information on the calculation of 
the facility-level adjustment factors on the Inpatient Rehabilitation 
Facility PPS Web page under the ``Research'' link on the left hand side 
of the page: http://www.cms.gov/InpatientRehabFacPPS/09_Research.asp#TopOfPage. As we stated in the FY 2010 IRF PPS final rule, 
the 3-year moving average is computed by determining the adjustment 
factor for each year and then averaging those adjustment factors over 3 
years. For FY 2012, we used the adjustment factors generated from our 
analysis of claims data and the corresponding year's cost report data 
or, if unavailable, the most recent available cost report data for FY 
2008, FY 2009 and FY 2010. Our estimates of the proposed FY 2012 
adjustment factors, based on FY 2008, FY 2009, and FY 2010 data, are 
shown below in Table 2.

 Table 2--Facility-Level Adjustment Factors Using the Un-Weighted Regression Methodology, FY 2012 Proposed Rule
----------------------------------------------------------------------------------------------------------------
                                                                                                       FY 2012
                                                                FY 2008      FY 2009      FY 2010      proposed
----------------------------------------------------------------------------------------------------------------
LIP Adjustment Factor.......................................       0.1773       0.2158       0.1764       0.1897
Teaching Status Adjustment Factor...........................       0.3554       0.5183       0.6036       0.4888
Rural Adjustment............................................        0.192        0.188        0.182        0.187
----------------------------------------------------------------------------------------------------------------

    Comment: Several commenters supported the proposed update to the 
facility-level adjustment factors in the FY 2012 proposed rule, 
including the use of an un-weighted regression methodology to determine 
the facility-level adjustment factors, stating that they believe the 
changes will result in a more accurate payment system. However, several 
other commenters expressed concern about the resulting updates to the 
teaching status and LIP adjustment factors for FY 2012 from using an 
un-weighted regression methodology. The commenters stated that the 
proposed updates would create financial hardships for facilities with 
teaching programs and a higher disproportionate share of low-income 
patients. Several of the commenters, including the Medicare Payment 
Advisory Commission (MedPAC), suggested that CMS defer the 
implementation of the un-weighted regression methodology and conduct 
more analysis on the underlying causes of the instability in the 
teaching status adjustment factor and on the most appropriate 
methodology for calculating the facility-level adjustment factors. 
Several other commenters suggested that CMS mitigate the impact of any 
changes in the facility-level adjustment factors by phasing the changes 
in over several years, or by capping the amount that a facility 
adjustment can decrease in a given year.
    Response: We agree with the commenters that it is appropriate to 
defer implementation of the un-weighted regression methodology for an 
additional year so that we can further analyze some anomalies that 
appear to exist in the underlying data. We believe that these anomalies 
are causing the results of the weighted regression methodology to 
differ substantially from the results of the un-weighted regression 
methodology. Thus, we believe that the best course of action for FY 
2012 is to defer the implementation of the un-weighted regression 
methodology while we conduct more research into the reasons for these 
anomalies and alternative ways of computing the facility-level 
adjustments that will reduce the volatility in the teaching status 
adjustment factor and provide the most accurate reflection of cost 
differences among different types of facilities.
    Comment: One commenter offered several suggestions on ways to 
improve the computation of the facility-level adjustment factors 
without altering the weighting methodology. Those suggestions included: 
pooling three year's worth of data into a single data set to increase 
sample size; continuing to use existing weighted regression model, but 
with added control variables; and matching claims to corresponding cost 
report data, even if that creates a 3-year lag in the last data year 
used and the IRF PPS payment year.
    Response: We appreciate all of the suggestions that we received on 
ways to improve our methodology for computing the facility-level 
adjustments and will take those suggestions under advisement while we 
continue to research ways to ensure that we are using the best methods 
to determine the facility-level adjustments.
    Final Decision: After carefully considering all of the comments 
that we received on the proposed updates to the rural, LIP and teaching 
status adjustment factors for FY 2012, we are holding the facility-
level adjustment factors at FY 2011 levels for FY 2012 while we conduct 
further research on the underlying data and the best methodology for 
calculating the facility-level adjustment factors. Thus, the facility-
level adjustments factors for FY 2012 will be the same as those 
finalized in the FY 2011 IRF PPS notice (75 FR 42836 at 42848), which 
were the same as those finalized in the FY 2010 IRF PPS final rule (74 
FR 39762 at 39775). For the convenience of the reader, we reiterate the 
final adjustment factors (from the FY 2010 IRF PPS final rule) as 
follows: For FY 2012, the IRF PPS payments to IRFs in rural areas will 
be computed with an 18.4 percent upward adjustment for rural status. 
IRF PPS payments to eligible IRFs that qualify for the LIP adjustment 
for FY 2012 will be adjusted using a LIP adjustment formula of (1 + 
disproportionate share hospital (DSH) patient percentage) raised to the 
power of (0.4613), where the--
[GRAPHIC] [TIFF OMITTED] TR05AU11.013

    Finally, IRF PPS payments to eligible IRFs that qualify for the 
teaching status adjustment will be adjusted by the following formula 
for FY 2012: (1 + full-time equivalent (FTE) interns and residents/
average daily census) raised to the power of (0.6876).

[[Page 47846]]

    In section VI.C. of this final rule, we discuss the methodology for 
calculating the standard payment conversion factor for FY 2012.

B. Policy for Temporary Cap Adjustments To Reflect Interns and 
Residents Displaced Due to Closure of IRFs or IRF Residency Training 
Programs

1. Background
    In the FY 2006 IRF PPS final rule (70 FR 47880 at 47928 through 
47932), we implemented regulations at Sec.  412.624(e)(4) to establish 
a facility-level adjustment for IRFs that are, or are part of, teaching 
hospitals. The teaching status adjustment accounts for the higher 
indirect operating costs experienced by hospitals that participate in 
graduate medical education (GME) programs. The payment adjustments are 
made based on the number of FTE interns and residents training in the 
IRF and the IRF's average daily census.
    We established the IRF teaching status adjustment in a manner that 
limited the incentives for IRFs to add FTE interns and residents for 
the purpose of increasing their teaching status adjustment. We imposed 
a cap on the number of FTE interns and residents that may be counted 
for purposes of calculating the teaching status adjustment. The cap 
limits the number of FTE interns and residents that teaching IRFs may 
count for the purpose of calculating the IRF PPS teaching status 
adjustment, not the number of interns and residents teaching 
institutions can hire or train. We calculated the number of FTE interns 
and residents that trained in the IRF during a ``base year'' and used 
that FTE intern and resident number as the cap. An IRF's FTE intern and 
resident cap is ultimately determined based on the final settlement of 
the IRF's most recent cost reporting period ending on or before 
November 15, 2004. A complete discussion of how the IRF teaching status 
adjustment was calculated appears in the FY 2006 IRF PPS final rule (70 
FR 47880, 47928 through 47932).
2. FTE Intern and Resident Temporary Cap Adjustment
    Sometimes, interns and residents that are training in an IRF find 
themselves unable to complete their training in the IRF, either because 
the IRF closes or closes a residency training program (we refer to 
these interns and residents as ``displaced''). Although we have not 
heard of any instances where IRFs did not accept displaced interns and 
residents because the additional interns and residents would put the 
facility over the facility's FTE intern and resident cap, we believe 
that it is important to maintain consistent policies with other 
Medicare PPS systems, to the extent feasible. The IPPS indirect medical 
education (IME) adjustment and the direct GME policies contain 
provisions that allow for temporary adjustments to the IME/GME caps for 
IPPS hospitals that train interns and residents that are displaced 
because a hospital closes or closes a medical residency training 
program. We have recently implemented a similar temporary cap 
adjustment policy for the inpatient psychiatric facility (IPF) PPS 
teaching status adjustment outlined in the rate year 2012 IPF PPS final 
rule (76 FR 26432 at 26454 through 26456). Consistent with the IPPS and 
the IPF PPS, in the FY 2012 IRF PPS proposed rule (76 FR 24214), we 
proposed to permit a temporary increase in the FTE intern and resident 
cap when an IRF increases the number of FTE interns and residents it 
trains in order to accept displaced interns and residents because 
another IRF closes or closes a medical residency training program.
    When an IRF temporarily takes on interns and residents that are 
displaced because another IRF closes or closes a residency training 
program, we believe that a temporary adjustment to the cap would be 
appropriate. In these situations, interns and residents may have 
partially completed a residency training program at the IRF that has 
closed or closed a training program and may be unable to complete their 
training at another IRF that is already training interns and residents 
up to or in excess of its FTE intern and resident cap. We believe that 
it is appropriate to allow temporary adjustments to the FTE caps for an 
IRF that provides residency training to medical interns and residents 
who have partially completed a residency training program at an IRF 
that closes or at an IRF that discontinues training interns and 
residents in a residency training program(s). For this reason, we are 
adopting the following temporary intern and resident cap adjustment 
policies, similar to the temporary adjustments to the FTE cap used for 
acute care hospitals and the temporary adjustments to the FTE caps for 
IPFs.
    The cap adjustment will be temporary because it is intern and 
resident specific and will only apply to the displaced intern(s) or 
resident(s) until those intern(s) or resident(s) have completed their 
training in the program in which they were training at the time of the 
IRF closure or the closure of the program. As under the IPPS policy for 
displaced interns and residents, the IRF PPS temporary cap adjustment 
will apply only to interns and residents that were still training at 
the IRF at the time the IRF closed or at the time the IRF ceased 
training interns and residents in the residency training program(s). 
Interns and residents who leave the IRF, for whatever reason, before 
the closure of the IRF or the closure of the residency training program 
will not be considered displaced interns and residents for purposes of 
the IRF temporary cap adjustment policy. We are adopting the same 
definition of ``closure of a hospital residency training program'' as 
it is currently defined at Sec.  413.79(h)(1)(ii); that is, the 
hospital ceases to offer training for residents in a particular 
approved medical residency training program. Similarly, as under the 
IPPS policy, medical students who are accepted into a program at an IRF 
but the IRF or residency training program closes before the individual 
begins training at that IRF are also not considered displaced interns 
and residents for purposes of the IRF temporary cap adjustments. We 
note that although we are adopting a policy under the IRF PPS that is 
consistent with the policy applicable under the IPPS, the actual caps 
under the two payment systems are separate and distinct. This means, 
for example, if a program closes at an IPPS hospital that has an IRF 
unit, but the interns and residents from that closed program were not 
rotating into the IRF unit when the program closed, then there would be 
no temporary FTE cap adjustment under the IRF PPS, since the interns 
and residents were not displaced from the IRF. However, if an IPPS 
hospital that has an IRF unit closes a training program and interns and 
residents from that program were rotating into the IRF unit when the 
program closed, an IRF hospital or IRF unit may temporarily adjust 
their FTE intern and resident cap if they train the displaced interns 
and residents, but only for the portion of the training that has to be 
completed in the IRF setting and only if all of the requirements 
specified in section IV.C. of this final rule are met.
3. Temporary Adjustment to the FTE Cap To Reflect Interns and Residents 
Displaced Due to an IRF Closure
    We will allow an IRF to receive a temporary adjustment to the FTE 
cap to reflect interns and residents added because of another IRF's 
closure. The temporary cap adjustment is intended to account for 
medical interns and residents who have partially completed a medical 
residency training program at

[[Page 47847]]

the IRF that has closed and may be unable to complete their training at 
another IRF because that IRF is already training interns and residents 
up to or in excess of its cap. We are implementing this change because 
IRFs may be reluctant to accept additional interns and residents from a 
closed IRF without a temporary adjustment to their caps. For purposes 
of this policy, we are adopting the IPPS definition of ``closure of a 
hospital'' in Sec.  413.79(h)(1)(i) to mean the IRF terminates its 
Medicare provider agreement as specified in Sec.  489.52. Therefore, we 
will allow a temporary adjustment to an IRF's FTE cap to reflect 
interns and residents added because of an IRF's closure. The policy 
will be effective for cost reporting periods beginning on or after 
October 1, 2011, when an IRF trains an intern or resident from an IRF 
that closed. We will allow an adjustment to an IRF's FTE cap if the IRF 
meets the following criteria:
    (a) The IRF is training displaced interns and residents from an IRF 
that closed.
    (b) The IRF that is training the displaced interns and residents 
from the closed IRF submits a timely request for a temporary adjustment 
to its FTE cap to its Medicare contractor. Requests generally must be 
submitted no later than 60 days after the hospital first begins 
training the displaced interns and residents. In the case of an IRF 
that is already training the displaced interns and residents as of 
October 1, 2011, requests must be submitted by December 1, 2011. 
Requests must document that the IRF is eligible for this temporary 
adjustment to its FTE cap by identifying the interns and residents who 
have come from the closed IRF and have caused the IRF to exceed its 
cap, (or the IRF may already be over its cap), and specifies the length 
of time that the adjustment is needed.
    After the displaced interns and residents leave the IRF's training 
program or complete their residency program, the IRF's cap will revert 
to its original level. Therefore, the temporary adjustment to the FTE 
cap will be available to the IRF only for the period of time necessary 
for the displaced interns and residents to complete their training. 
Further, as under the IPPS policy, the total amount of temporary cap 
adjustment that can be allotted to all receiving IRFs cannot exceed the 
cap amount of the IRF that closed.
    We also note that section 5506 of the Affordable Care Act, 
``Preservation of Resident Cap Positions from Closed Hospitals,'' does 
not apply to IRFs that closed. Section 5506 of the Affordable Care Act 
only amends sections 1886(d) and (h) of the Act for direct GME and IPPS 
IME payments. Therefore, the IME FTE cap redistributions under section 
5506 of the Affordable Care Act only apply to ``subsection (d)'' IPPS 
hospitals. Section 5506 of the Affordable Care Act has no applicability 
to the teaching status adjustments under the IRF PPS (or the IPF PPS, 
for that matter).
4. Temporary Adjustment to FTE Cap to Reflect Interns and Residents 
Displaced Due to a Residency Program Closure
    If an IRF ceases training interns and residents in a residency 
training program(s) and agrees to temporarily reduce its FTE cap, 
another IRF may receive a temporary adjustment to its FTE cap to 
reflect the addition of the displaced interns and residents. For 
purposes of this policy on closed residency programs, we are adopting 
the IPPS definition of ``closure of a hospital residency training 
program'' as specified in Sec.  413.79(h)(1)(ii) which means that the 
hospital ceases to offer training for interns and residents in a 
particular approved medical residency training program. The methodology 
for adjusting the caps for the ``receiving IRF'' and the ``IRF that 
closed its program'' is described below.
a. Receiving IRF
    An IRF may receive a temporary adjustment to its FTE cap to reflect 
interns and residents added because of the closure of another IRF's 
residency training program for cost reporting periods beginning on or 
after October 1, 2011 if--
     The IRF is training displaced interns and residents from 
the residency training program of an IRF that closed its program; and
     The IRF that is training the displaced interns and 
residents from the closed program must submit a timely request for a 
temporary adjustment to its FTE cap to its Medicare contractor. 
Requests generally must be submitted no later than 60 days after the 
IRF begins to train the interns and residents. In the case of an IRF 
that is already training the displaced interns and residents as of 
October 1, 2011, requests must be submitted by December 1, 2011. 
Requests must document that the IRF is eligible for this temporary 
adjustment by identifying the interns and residents who have come from 
another IRF's closed program and have caused the IRF to exceed its cap 
(or the IRF may already be in excess of its cap), specifies the length 
of time the adjustment is needed, and, as explained in more detail 
below, submits to its Medicare contractor a copy of the FTE cap 
reduction statement by the IRF closing the residency training program.
    In general, the temporary adjustment criteria established for 
closed medical residency training programs at IRFs is similar to the 
criteria established for closed IRFs. More than 1 IRF may be eligible 
to apply for the temporary adjustment because interns and residents 
from one closed program may rotate to different IRFs, or they may 
complete their training at more than one IRF. Also, only to the extent 
to which an IRF would exceed its FTE cap by training displaced interns 
and residents would it be eligible for the temporary adjustment. Thus, 
for example, if the IRF has room below its cap to take 1 additional 
displaced FTE intern or resident but taking a second displaced FTE 
intern or resident would cause the IRF to exceed its FTE intern and 
resident cap, then the IRF would potentially qualify for a temporary 
cap adjustment for 1 FTE intern or resident, not 2.
b. IRF That Closed Its Program(s)
    An IRF that agrees to train interns and residents who have been 
displaced by the closure of another IRF's residency training program 
may receive a temporary FTE cap adjustment only if the IRF that closed 
its program meets the following criteria--
     Temporarily reduces its FTE cap by the number of FTE 
interns and residents in each program year training and in the program 
at the time of the program's closure. The yearly reduction would be 
determined by deducting the number of those interns and residents who 
would have been training in the program up to the IRF's cap during the 
year of the closure, had the program not closed; and
     Submits a timely statement to its Medicare contractor that 
has been signed and dated by its representative that specifies that it 
agrees to the temporary reduction in its FTE cap to allow the IRF 
training the displaced interns and residents to obtain a temporary 
adjustment to its cap. Statements generally must be submitted no later 
than 60 days after the interns and residents who were in the closed 
program begin training at another IRF. In the situation where another 
IRF is already training the displaced interns and residents as of 
October 1, 2011, statements must be submitted no later than December 1, 
2011. The statement must identify the interns and residents who were 
training at the time of the program's closure, identify the IRFs to 
which the interns and residents are transferring once the program 
closes,

[[Page 47848]]

and specify the reduction for the applicable program years.
    In addition, under this closed program policy, in order for the 
receiving IRF(s) to qualify for a temporary adjustment to their FTE 
cap, the IRFs that are closing their programs would need to reduce 
their FTE cap for the expected duration of time the displaced interns 
and residents would need to finish their training. We are implementing 
this because the IRF that closes the program still retains the FTE 
slots in its cap, even if the IRF chooses not to fill the slots with 
interns and residents. We believe that it is inappropriate to allow an 
increase to the receiving IRF's cap without an attendant decrease to 
the cap of the IRF with the closed program, because the IRF that ceased 
training the interns and residents could fill these slots with interns 
and residents from other programs even if the increase and related 
decrease is only temporary.
    The cap reduction for the IRF with the closed program will be based 
on the number of FTE interns and residents in each program year that 
were in the program at the IRF at the time of the program's closure, 
and who begin training at another IRF.
    We received 3 comments on the proposed temporary adjustment to the 
FTE cap to reflect interns and residents displaced due to an IRF 
closure or a residency training program closure, which are summarized 
below.
    Comment: One commenter suggested that the proposed temporary 
adjustment to the FTE cap would be too difficult for CMS to monitor. 
This commenter also stated that few IRFs with teaching programs have 
taken displaced interns and residents.
    Response: We believe that a policy allowing for temporary 
adjustments to the FTE caps for IRFs that take displaced interns and 
residents would be no more difficult to monitor than the similar policy 
that is already being administered for IPPS hospitals. Although we 
agree that few IRFs currently take displaced interns and residents, we 
believe that it is reasonable to allow for temporary adjustments to the 
FTE caps for those IRFs that do.
    Comment: Two commenters strongly supported our proposed policy to 
allow a temporary adjustment to the intern and resident cap when an IRF 
accepts interns or residents that are displaced due to an IRF closure 
or a residency training program closure. However, these commenters 
requested that CMS modify the proposed policy to allow IRFs to receive 
the temporary cap adjustment if they are training displaced interns or 
residents as of October 1, 2011.
    Response: We share the commenters' concern for those FTE interns 
and residents who have been displaced before October 1, 2011 due to 
closure of an IRF or a residency training program. We carefully 
considered the commenters' request that CMS modify the IRF temporary 
cap adjustment policy to allow IRFs that volunteered to train displaced 
interns and residents before October 1, 2011 to receive the temporary 
cap adjustment. In keeping with the similar policy for IPPS hospitals, 
we are revising our proposed policy to allow IRFs to receive temporary 
cap adjustments for cost reporting periods beginning on or after 
October 1, 2011 for displaced interns and residents that they are 
training as of October 1, 2011. For example, if an IRF closed or closed 
a residency training program on October 1, 2009, then an intern or 
resident who was in their first program year at that time would likely 
be in their third program year as of October 1, 2011 and thus would 
still be in the middle of their training. An IRF that assumed the 
training of this intern or resident who was displaced by the 2009 IRF 
or residency training program closure would be eligible to receive a 
temporary cap adjustment for cost reporting periods beginning on or 
after October 1, 2011. As noted above, an IRF that is requesting the 
temporary cap adjustment for the displaced interns and residents that 
it is training as of October 1, 2011 must submit the required 
documentation to CMS no later than December 1, 2011.
    Final Decision: After carefully considering the comments that we 
received on the proposed temporary adjustment to the FTE cap to reflect 
interns and residents displaced due to an IRF closure or the closure of 
a residency training program, we are implementing the new policy for 
IRFs as proposed, with the one exception noted above. We will allow 
IRFs to qualify for the temporary cap adjustment for cost reporting 
periods beginning on or after October 1, 2011 if they are already 
training interns and residents displaced by IRF closures or residency 
program closures that occurred prior to October 1, 2011. In these 
instances, all required documentation must be received by CMS no later 
than December 1, 2011. IRFs that meet the criteria will be eligible to 
receive temporary adjustments to their FTE caps for cost reporting 
periods beginning on or after October 1, 2011.

VI. FY 2012 IRF PPS Federal Prospective Payment Rates

A. Market Basket Increase Factor, Productivity Adjustment, and Labor-
Related Share for FY 2012

    Section 1886(j)(3)(C) of the Act requires the Secretary to 
establish an increase factor that reflects changes over time in the 
prices of an appropriate mix of goods and services included in the 
covered IRF services, which is referred to as a market basket index. 
According to section 1886(j)(3)(A)(i) of the Act, the increase factor 
shall be used to update the IRF Federal prospective payment rates for 
each FY. Sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the 
Act require the application of a 0.1 percentage point reduction to the 
market basket increase factor for FYs 2012 and 2013. In addition, 
section 1886(j)(3)(C)(ii)(I) of the Act requires the application of a 
productivity adjustment, as described below. Thus, in this final rule, 
we are updating the IRF PPS payments for FY 2012 by a market basket 
increase factor based upon the most current data available, with a 
productivity adjustment as required by section 1886(j)(3)(C)(ii)(I) of 
the Act as described below and a 0.1 percentage point reduction as 
required by sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the 
Act. Further, we are rebasing the RPL market basket from a 2002-based 
market basket to a 2008-based market basket. We typically rebase the 
RPL market basket every 5 to 7 years to ensure that it continues to 
reflect the most accurate account of the cost of relevant goods and 
services.
    Thus, in this final rule, we start with a rebased RPL market basket 
(updated from a 2002 base year to a 2008 base year) and then apply a 
productivity adjustment as required by section 1886(j)(3)(C)(ii)(I) of 
the Act and a 0.1 percentage point reduction as required by sections 
1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act. In section 
VI.A.1 of this final rule, we describe the methodology for rebasing the 
RPL market basket from a 2002 base year to a 2008 base year, and then 
in section VI.A.2 of this final rule, we describe the methodology for 
calculating the productivity adjustment as required by section 
1886(j)(3)(C)(ii)(I) of the Act. Finally, in section VI.A.3 of this 
final rule, we describe the calculation of the market basket increase 
factor to be used to adjust IRF PPS payments for FY 2012.

[[Page 47849]]

1. Rebasing and Revising of the RPL Market Basket Used for IRF PPS for 
FY 2012
a. Background
    The input price index (that is, the market basket) that was used to 
develop the IRF PPS was the Excluded Hospital with Capital market 
basket. This market basket was based on 1997 Medicare cost report data 
and included data for Medicare participating IRFs, IPFs, LTCHs, cancer 
hospitals, and children's hospitals. Although ``market basket'' 
technically describes the mix of goods and services used in providing 
hospital care, this term is also commonly used to denote the input 
price index (that is, cost category weights and price proxies combined) 
derived from that market basket. Accordingly, the term ``market 
basket'', as used in this document, refers to an input price index.
    Beginning with FY 2006, IRF PPS payments were updated using a FY 
2002-based RPL market basket reflecting the operating and capital cost 
structures for freestanding IRFs, freestanding IPFs, and LTCHs (70 FR 
47908). We excluded cancer and children's hospitals from the RPL market 
basket because their payments are based entirely on reasonable costs 
subject to rate-of-increase limits established under the authority of 
section 1886(b) of the Act, which is implemented at Sec.  413.40. 
Cancer and children's hospitals are not reimbursed through a PPS. Also, 
the FY 2002 cost structures for cancer and children's hospitals are 
noticeably different than the cost structures of freestanding IRFs, 
freestanding IPFs, and LTCHs. A complete discussion of the FY 2002-
based RPL market basket can be found in the FY 2006 IRF PPS final rule 
(70 FR 47908 through 47915).
    In the FY 2010 IRF PPS proposed rule (74 FR 21062), we expressed 
our interest in exploring the possibility of creating a stand-alone IRF 
market basket that reflects the cost structures of only IRF providers. 
We noted that, of the available options, one is to combine the Medicare 
cost report data from freestanding IRF providers (presently 
incorporated into the FY 2002-based RPL market basket) with data from 
hospital-based IRF providers. We indicated that an examination of the 
Medicare cost report data comparing freestanding and hospital-based 
IRFs revealed considerable differences between the two types of 
providers, both in terms of cost levels and cost structures. At that 
time, we were unable to fully understand the differences between these 
two types of IRF providers. As a result, we believed that further 
research was required and we solicited public comment for additional 
information that might help us to better understand the reasons for the 
variations in costs and cost structures, as indicated by the cost 
report data, between freestanding and hospital-based IRFs (74 FR 
21062).
    We summarized the public comments we received and our responses in 
the FY 2010 IRF PPS final rule (74 FR 39762, 39776 through 39777). 
Despite receiving comments from the public on this issue, we remain 
unable to sufficiently understand the observed differences in costs and 
cost structures between hospital-based and freestanding IRFs, and 
therefore we do not believe it is appropriate, at this time, to 
incorporate data from hospital-based IRFs with those of freestanding 
IRFs to create a stand-alone IRF market basket.
    Although we do not believe it would be appropriate to propose a 
stand-alone IRF market basket, we are currently exploring the viability 
of creating two separate market baskets from the current RPL, one of 
which would include freestanding IRFs and freestanding IPFs and would 
be used to update payments under both the IPF and IRF payment systems. 
The other would be a stand-alone LTCH market basket. Depending on the 
outcome of our research, we anticipate the possibility of proposing a 
rehabilitation and psychiatric (RP) market basket in the next update 
cycle.
    In the FY 2012 IRF PPS proposed rule (76 FR 24229), we invited 
public comment on the possibility of using this type of market basket 
to update IRF payments in the future.
    Comment: One commenter stated that CMS' ongoing work to develop a 
market basket that reflects freestanding IRF and freestanding IPF data 
should be research that CMS continues to explore. The commenter also 
stressed that a separate market basket which excludes LTC hospital 
costs must be contingent on the availability of reliable data from a 
representative group of IRF and IPF facilities.
    Response: We will consider the commenters' concerns as we continue 
to investigate the feasibility of developing a market basket derived 
using data from freestanding IPF and freestanding IRF providers. We 
agree that before moving away from the existing RPL market basket, we 
must be confident that we have reliable data gathered from a 
representative group of IRF and IPF providers. Any change to the market 
basket used to update IRF payments will also be subject to the 
rulemaking process.
    Comment: One commenter recommended that CMS proceed with caution in 
its efforts to create a market basket based solely on freestanding IRF 
and freestanding IPF data. They noted that there are substantial 
geographic differences in the location of RPL providers. Several 
commenters requested that CMS share its research with the industry in 
advance of any proposed rulemaking so that any unintended consequences 
of a change could be addressed by CMS and stakeholders.
    Response: We agree with the commenter's observation that there are 
substantial geographic differences in the location of IRF and IPF 
facilities. We would note that the CMS market baskets, including the 
RPL, necessarily reflect the relative costs of inputs for a given base 
year at the national level. We will continue to investigate the 
feasibility of creating a market basket that is nationally 
representative and is based on IPF and IRF data. Any changes to the 
market basket, including changes in methodology, would be subject to 
the rulemaking process.
    For this update cycle (FY 2012), we are finalizing our intent to 
continue to use an RPL market basket based on freestanding IRF, 
freestanding IPF, and long term care hospital (LTCH) data. We will 
continue to pursue the feasibility of creating two separate market 
baskets from the current RPL, one of which would include freestanding 
IRFs and freestanding IPFs and would be used to update payments under 
both the IPF and IRF payment systems. The other would be a stand-alone 
LTCH market basket.
    For this update cycle, we proposed to rebase and revise the FY 
2002-based RPL market basket to a FY 2008-based RPL market basket. In 
the following discussion, we provide an overview of the market basket 
and describe the methodologies we use for purposes of determining the 
operating and capital portions of the proposed FY 2008-based RPL market 
basket.
b. Overview of the FY 2008-Based RPL Market Basket
    The FY 2008-based RPL market basket is a fixed-weight, Laspeyres-
type price index. A Laspeyres price index measures the change in price, 
over time, of the same mix of goods and services purchased in the base 
period. Any changes in the quantity or mix of goods and services (that 
is, intensity) purchased over time relative to a base period are not 
measured.
    The index itself is constructed in three steps. First, a base 
period is selected (in the proposed rule, the base period is FY 2008) 
and total base period expenditures are estimated for a set of mutually 
exclusive and exhaustive

[[Page 47850]]

spending categories with the proportion of total costs that each 
category represents being calculated. These proportions are called cost 
or expenditure weights. Second, each expenditure category is matched to 
an appropriate price or wage variable, referred to as a price proxy. In 
nearly every instance, these price proxies are derived from publicly 
available statistical series that are published on a consistent 
schedule (preferably at least on a quarterly basis). Finally, the 
expenditure weight for each cost category is multiplied by the level of 
its respective price proxy. The sum of these products (that is, the 
expenditure weights multiplied by their price levels) for all cost 
categories yields the composite index level of the market basket in a 
given period. Repeating this step for other periods produces a series 
of market basket levels over time. Dividing an index level for a given 
period by an index level for an earlier period produces a rate of 
growth in the input price index over that timeframe.
    As noted above, the market basket is described as a fixed-weight 
index because it represents the change in price over time of a constant 
mix (quantity and intensity) of goods and services needed to furnish 
hospital services. The effects on total expenditures resulting from 
changes in the mix of goods and services purchased subsequent to the 
base period are not measured. For example, a hospital hiring more 
nurses to accommodate the needs of patients would increase the volume 
of goods and services purchased by the hospital, but would not be 
factored into the price change measured by a fixed-weight hospital 
market basket. Only when the index is rebased would changes in the 
quantity and intensity be captured, with those changes being reflected 
in the cost weights. Therefore, we rebase the market basket 
periodically so that the cost weights reflect recent changes in the mix 
of goods and services that hospitals purchase (hospital inputs) to 
furnish inpatient care between base periods.
c. Rebasing and Revising of the RPL Market Basket
    The terms ``rebasing'' and ``revising,'' while often used 
interchangeably, actually denote different activities. ``Rebasing'' 
means moving the base year for the structure of costs of an input price 
index (for example, in the proposed rule, we proposed to shift the base 
year cost structure for the RPL market basket from FY 2002 to FY 2008). 
``Revising'' means changing data sources, price proxies, or methods, 
used to derive the input price index. For FY 2012, we proposed to 
rebase and revise the market basket used to update the IRF PPS.
(1) Development of Cost Categories and Weights
(a) Medicare Cost Reports
    The FY 2008-based RPL market basket consists of several major cost 
categories derived from the FY 2008 Medicare cost reports for 
freestanding IRFs, freestanding IPFs, and LTCHs including wages and 
salaries, pharmaceuticals, professional liability insurance (PLI), 
capital, and a residual. This residual reflects all remaining costs 
that are not captured in the four cost categories listed above. The FY 
2008 cost reports include providers whose cost report begin date is on 
or between October 1, 2007, and September 30, 2008. We choose to use FY 
2008 as the base year because we believe that the Medicare cost reports 
for this year represent the most recent, complete set of Medicare cost 
report data available for IRFs, IPFs, and LTCHs. However, there is an 
issue with obtaining data specifically for benefits and contract labor 
from this set of FY 2008 Medicare cost reports since IRFs, IPFs, and 
LTCHs were not required to complete the Medicare cost report worksheet 
from which these data were collected (Worksheet S-3, part II). As a 
result, only a small number of providers (less than 30 percent) 
reported data for these categories, and we do not expect these data to 
improve over time. Furthermore, since IRFs, IPFs, and LTCHs were not 
required to submit data for Worksheet S-3, part II in previous cost 
reporting years, we have always had this issue of incomplete Medicare 
cost report data for benefits and contract labor (including when we 
finalized the FY 2002-based RPL market basket). Due to the incomplete 
benefits and contract labor data for IRFs, IPFs, and LTCHs, we will 
develop these cost weights using FY 2008 Medicare cost report data for 
IPPS hospitals (similar to the method that was used for the FY 2002-
based RPL market basket). Additional detail is provided later in this 
section.
    Since our goal is to measure cost shares that are reflective of 
case mix and practice patterns associated with providing services to 
Medicare beneficiaries, we proposed to limit our selection of Medicare 
cost reports to those from hospitals that have a Medicare average 
length of stay (LOS) that is within a comparable range of their total 
facility average LOS. We believe this provides a more accurate 
reflection of the structure of costs for Medicare covered days. We use 
the cost reports of IRFs and LTCHs with Medicare average LOS within 15 
percent (that is, 15 percent higher or lower) of the total facility 
average LOS for the hospital. This is the same edit applied to derive 
the FY 2002-based RPL market basket and generally includes those LTCHs 
and IRFs with Medicare LOS within approximately 5 days of the facility 
average LOS of the hospital.
    We use a less stringent measure of Medicare LOS for IPFs. For this 
provider-type, and in order to produce a robust sample size, we will 
use those facilities' Medicare cost reports whose average LOS is within 
30 or 50 percent (depending on the total facility average LOS) of the 
total facility average LOS. This is the same edit applied to derive the 
FY 2002-based RPL market basket.
    We applied these LOS edits to first obtain a set of cost reports 
for facilities that have a Medicare LOS within a comparable range of 
their total facility LOS. Using this set of Medicare cost reports, we 
then calculated cost weights for 4 cost categories and a residual as 
represented by all other costs directly from the FY 2008 Medicare cost 
reports for freestanding IRFs, freestanding IPFs, and LTCHs (see Table 
3 for these four cost categories and their associated weights). These 
Medicare cost report cost weights were then supplemented with 
information obtained from other data sources (explained in more detail 
below) to derive the proposed FY 2008-based RPL market basket cost 
weights.

   Table 3--Major Cost Categories and Their Respective Cost Weights as
         Calculated Directly From FY 2008 Medicare Cost Reports
------------------------------------------------------------------------
                                                           FY 2008-based
                                                            RPL market
                  Major cost categories                       basket
                                                             (percent)
------------------------------------------------------------------------
Wages and salaries......................................          47.371
Professional Liability Insurance (Malpractice)..........           0.764

[[Page 47851]]

 
Pharmaceuticals.........................................           6.514
Capital.................................................           8.392
All other...............................................          36.959
------------------------------------------------------------------------

(b) Other Data Sources
    In addition to the IRF, IPF and LTCH Medicare cost reports for 
freestanding IRFs and freestanding IPFs, and LTCHs, the other data 
sources we used to develop the proposed FY 2008-based RPL market basket 
cost weights were the FY 2008 IPPS Medicare cost reports and the 
Benchmark Input-Output (I-O) Tables created by the Bureau of Economic 
Analysis (BEA), U.S. Department of Commerce. The FY 2008 Medicare cost 
reports include providers whose cost report begin date is on or between 
October 1, 2007 and September 30, 2008.
    As noted above, the FY 2008-based RPL cost weights for benefits and 
contract labor were derived using FY 2008-based IPPS Medicare cost 
reports. We used these Medicare cost reports to calculate cost weights 
for Wages and Salaries, Benefits, and Contract Labor for IPPS hospitals 
for FY 2008. For the Benefits cost weight for the FY 2008-based RPL 
market basket, the ratio of the FY 2008 IPPS Benefits cost weight to 
the FY 2008 IPPS Wages and Salaries cost weight was applied to the RPL 
Wages and Salaries cost weight. Similarly, the ratio of the FY 2008 
IPPS Contract Labor cost weight to the FY 2008 IPPS Wages and Salaries 
cost weight was applied to the RPL Wages and Salaries cost weight to 
derive a Contract Labor cost weight for the proposed FY 2008-based RPL 
market basket.
    The All Other cost category is divided into other hospital 
expenditure category shares using the 2002 BEA Benchmark I-O data 
following the removal of the portions of the All Other cost category 
provided in Table 3 that are attributable to Benefits and Contract 
Labor. The BEA Benchmark I-O data are scheduled for publication every 5 
years. The most recent data available are for 2002. BEA also produces 
Annual I-O estimates; however, the 2002 Benchmark I-O data represent a 
much more comprehensive and complete set of data that are derived from 
the 2002 Economic Census. The Annual I-O is simply an update of the 
Benchmark I-O tables. For the FY 2002-based RPL market basket, we used 
the 1997 Benchmark I-O data. We use the 2002 Benchmark I-O data in the 
FY 2008-based RPL market basket. Instead of using the less detailed 
Annual I-O data, we inflated the 2002 Benchmark I-O data forward to 
2008. The methodology we used to inflate the data forward involves 
applying the annual price changes from the respective price proxies to 
the appropriate cost categories. We repeat this practice for each year.
    The ``All Other'' cost category expenditure shares are determined 
as being equal to each category's proportion to total ``all other'' 
based on the inflated 2002 Benchmark I-O data. For instance, if the 
cost for telephone services represented 10 percent of the sum of the 
``all other'' Benchmark I-O hospital expenditures, then telephone 
services would represent 10 percent of the RPL market basket's All 
Other cost category.
    Comment: One commenter supported using the latest available data to 
update the IRF PPS; however, the commenter observed that CMS relied on 
acute care hospital data for certain items (that is, Employee Benefits, 
Contract Labor) that were not collected in the RPL settings. The 
commenter recommend that CMS consider revisions to the cost report data 
for the RPL settings to collect this information in advance of the next 
rebasing to allow the use of specific RPL data for all cost categories, 
weights, and price proxies.
    Response: Effective for cost reports beginning on or after May 1, 
2010, we finalized a revised Hospital and Hospital Health Care Complex 
Cost Report, Form CMS 2552-10, which is available for download from the 
CMS Web page at http://www.cms.gov/Transmittals/2010Trans/list.asp?intNumPerPage=10 by clicking on the link to CMS Transmittal 
R1P240. Form CMS 2552-10 includes a new worksheet (Worksheet 
S-3, part V) which identifies the contract labor costs and benefit 
costs for the hospital complex and is applicable to sub-providers and 
units. We believe that all providers will report this data so that we 
will be able to include it in future market basket rebasings.
(2) Final Cost Category Computation
    As stated previously, for this rebasing we proposed to use the 
Medicare cost reports for IRFs, IPFs, and LTCHs to derive four major 
cost categories. The proposed FY 2008-based RPL market basket includes 
2 additional cost categories that were not broken out separately in the 
FY 2002-based RPL market basket: ``Administrative and Business Support 
Services'' and ``Financial Services''. The inclusion of these 2 
additional cost categories, which are derived using the Benchmark I-O 
data, is consistent with the addition of these two cost categories to 
the FY 2006-based IPPS market basket (74 FR 43845). We are breaking out 
both categories so we can better match their respective expenses with 
more appropriate price proxies. A thorough discussion of our rationale 
for each of these cost categories is provided in section VI.A.1.c.(3) 
of this final rule. Also, the FY 2008-based RPL market basket excludes 
1 cost category: Photo Supplies. The 2002 Benchmark I-O weight for this 
category is considerably smaller than the 1997 Benchmark I-O weight, 
presently accounting for less than one-tenth of one percentage point of 
the RPL market basket. Therefore, we will include the photo supplies 
costs in the Chemical cost category weight with other similar chemical 
products.
    We are not changing our definition of the labor-related share. 
However, we are renaming our aggregate cost categories from ``labor-
intensive'' and ``nonlabor-intensive'' services to ``labor-related'' 
and ``nonlabor-related'' services. This is consistent with the FY 2006-
based IPPS market basket (74 FR 43845). As discussed in more detail 
below and similar to the FY 2002-based RPL market basket, we classify a 
cost category as labor-related and include it in the labor-related 
share if the cost category is defined as being labor-intensive and its 
cost varies with the local labor market. In previous regulations, we 
grouped cost categories that met both of these criteria into labor-
intensive services. We believe the new labels more accurately reflect 
the concepts that they are intended to

[[Page 47852]]

convey. We are not changing our definition of the labor-related share 
because we continue to classify a cost category as labor-related if the 
costs are labor-intensive and vary with the local labor market.
(3) Selection of Price Proxies
    After computing the FY 2008 cost weights for the rebased RPL market 
basket, it was necessary to select appropriate wage and price proxies 
to reflect the rate of price change for each expenditure category. With 
the exception of the proxy for PLI, all of the proxies for the 
operating portion of the proposed FY 2008-based RPL market basket are 
based on Bureau of Labor Statistics (BLS) data and are grouped into one 
of the following BLS categories:
    (a) Producer Price Indexes--Producer Price Indexes (PPIs) measure 
price changes for goods sold in markets other than the retail market. 
PPIs are preferable price proxies for goods and services that hospitals 
purchase as inputs because these PPIs better reflect the actual price 
changes faced by hospitals. For example, we use a special PPI for 
prescription drugs, rather than the Consumer Price Index (CPI) for 
prescription drugs, because hospitals generally purchase drugs directly 
from a wholesaler. The PPIs that we use measure price changes at the 
final stage of production.
    (b) Consumer Price Indexes--CPIs measure change in the prices of 
final goods and services bought by the typical consumer. Because they 
may not represent the price faced by a producer, we used CPIs only if 
an appropriate PPI was not available, or if the expenditures were more 
similar to those faced by retail consumers in general rather than by 
purchasers of goods at the wholesale level. For example, the CPI for 
food purchased away from home is used as a proxy for contracted food 
services.
    (c) Employment Cost Indexes--Employment Cost Indexes (ECIs) measure 
the rate of change in employee wage rates and employer costs for 
employee benefits per hour worked. These indexes are fixed-weight 
indexes and strictly measure the change in wage rates and employee 
benefits per hour. Appropriately, these indexes are not affected by 
shifts in employment mix.
    We evaluated the price proxies using the criteria of reliability, 
timeliness, availability, and relevance. Reliability indicates that the 
index is based on valid statistical methods and has low sampling 
variability. Timeliness implies that the proxy is published regularly, 
preferably at least once a quarter. Availability means that the proxy 
is publicly available. Finally, relevance means that the proxy is 
applicable and representative of the cost category weight to which it 
is applied. The proposed CPIs, PPIs, and ECIs selected meet these 
criteria.
    Table 4 sets forth the proposed FY 2008-based RPL market basket 
including cost categories, and their respective weights and price 
proxies. For comparison purposes, the corresponding FY 2002-based RPL 
market basket cost weights are listed, as well. For example, Wages and 
Salaries are 49.447 percent of total costs in the proposed FY 2008-
based RPL market basket compared to 52.895 percent for the FY 2002-
based RPL market basket. Employee Benefits are 12.831 percent in the 
proposed FY 2008-based RPL market basket compared to 12.982 percent for 
the FY 2002-based RPL market basket. As a result, compensation costs 
(Wages and Salaries plus Employee Benefits) for the proposed FY 2008-
based RPL market basket are 62.278 percent of total costs compared to 
65.877 percent for the FY 2002-based RPL market basket.
    Following Table 4 is a summary outlining the choice of the proxies 
we are using for the operating portion of the FY 2008-based RPL market 
basket. The price proxies for the capital portion are described in more 
detail in the capital methodology section (see section VI.A.1.c.(4) of 
this final rule).
    We note that the proxies for the operating portion of the FY 2008-
based RPL market basket are the same as those used for the FY 2006-
based IPPS operating market basket. Because these proxies meet our 
criteria of reliability, timeliness, availability, and relevance, we 
believe they are the best measures of price changes for the cost 
categories. For further discussion on the FY 2006-based IPPS market 
basket, see the IPPS final rule published in the August 27, 2009 
Federal Register (74 FR 43843).

   Table 4--FY 2008-Based RPL Market Basket Cost Categories, Weights, and Price Proxies with FY 2002-Based RPL
                               Market Basket Cost Weights Included for Comparison
----------------------------------------------------------------------------------------------------------------
                                                 FY 2008-based   FY 2002-based
                                                  RPL market      RPL market     FY 2008-based RPL market basket
                Cost categories                   basket cost     basket cost             price proxies
                                                    weights         weights
----------------------------------------------------------------------------------------------------------------
1. Compensation...............................          62.278          65.877
A. Wages and Salaries\1\......................          49.447          52.895  ECI for Wages and Salaries,
                                                                                 Civilian Hospital Workers.
B. Employee Benefits\1\.......................          12.831          12.982  ECI for Benefits, Civilian
                                                                                 Hospital Workers.
2. Utilities..................................           1.578           0.656
A. Electricity................................           1.125           0.351  PPI for Commercial Electric
                                                                                 Power.
B. Fuel, Oil, and Gasoline....................           0.371           0.108  PPI for Petroleum Refineries.
C. Water and Sewage...........................           0.082           0.197  CPI-U for Water and Sewerage
                                                                                 Maintenance.
3. Professional Liability Insurance...........           0.764           1.161  CMS Hospital Professional
                                                                                 Liability Insurance Premium
                                                                                 Index.
4. All Other Products and Services............          26.988          22.158
A. All Other Products.........................          15.574          13.325
(1.) Pharmaceuticals..........................           6.514           5.103  PPI for Pharmaceutical
                                                                                 Preparations for Human Use
                                                                                 (Prescriptions).
(2.) Food: Direct Purchases...................           2.959           0.873  PPI for Processed Foods and
                                                                                 Feeds.
(3.) Food: Contract Services..................           0.392           0.620  CPI-U for Food Away From Home.
(4.) Chemicals \2\............................           1.100           1.100  Blend of Chemical PPIs.
(5.) Medical Instruments......................           1.795           1.014  PPI for Medical, Surgical, and
                                                                                 Personal Aid Devices.
(6.) Photographic Supplies....................                           0.096
(7.) Rubber and Plastics......................           1.131           1.052  PPI for Rubber and Plastic
                                                                                 Products.
(8.) Paper and Printing Products..............           1.021           1.000  PPI for Converted Paper and
                                                                                 Paperboard Products.
(9.) Apparel..................................           0.210           0.207  PPI for Apparel.
(10.) Machinery and Equipment.................           0.106           0.297  PPI for Machinery and Equipment.

[[Page 47853]]

 
(11.) Miscellaneous Products..................           0.346           1.963  PPI for Finished Goods less Food
                                                                                 and Energy.
B. All Other Services.........................          11.414           8.833
(1.) Labor-related Services...................           4.681           5.111
(a.) Professional Fees: Labor-related \3\.....           2.114           2.892  ECI for Compensation for
                                                                                 Professional and Related
                                                                                 Occupations.
(b.) Administrative and Business Support                 0.422             n/a  ECI for Compensation for Office
 Services \4\.                                                                   and Administrative Services.
(c.) All Other: Labor-Related Services \5\....           2.145           2.219  ECI for Compensation for Private
                                                                                 Service Occupations.
(2.) Nonlabor-Related Services................           6.733           3.722
(a.) Professional Fees: Nonlabor-Related \3\..           4.211             n/a  ECI for Compensation for
                                                                                 Professional and Related
                                                                                 Occupations.
(b.) Financial Services \5\...................           0.853             n/a  ECI for Compensation for
                                                                                 Financial Activities.
(c.) Telephone Services.......................           0.416           0.240  CPI-U for Telephone Services.
(d.) Postage..................................           0.630           0.682  CPI-U for Postage.
(e.) All Other: Nonlabor-Related Services \4\.           0.623           2.800  CPI-U for All Items less Food
                                                                                 and Energy.
5. Capital-Related Costs......................           8.392          10.149
A. Depreciation...............................           5.519           6.187
(1.) Fixed Assets.............................           3.286           4.250  BEA chained price index for
                                                                                 nonresidential construction for
                                                                                 hospitals and special care
                                                                                 facilities--vintage weighted
                                                                                 (26 years).
(2.) Movable Equipment........................           2.233           1.937  PPI for Machinery and Equipment--
                                                                                 vintage weighted (11 years).
B. Interest Costs.............................           1.954           2.775
(1.) Government/Nonprofit.....................           0.653           2.081  Average yield on domestic
                                                                                 municipal bonds (Bond Buyer 20
                                                                                 bonds)--vintage-weighted (26
                                                                                 years).
(2.) For Profit...............................           1.301           0.694  Average yield on Moody's Aaa
                                                                                 bonds--vintage-weighted (26
                                                                                 years).
C. Other Capital-Related Costs................           0.919           1.187  CPI-U for Residential Rent.
                                               ----------------                ---------------------------------
    Total.....................................         100.000         100.000
----------------------------------------------------------------------------------------------------------------
Note: Detail may not add to total due to rounding.
\1\ Contract Labor is distributed to Wages and Salaries and Employee Benefits based on the share of total
  compensation that each category represents.
\2\ To proxy the Chemicals cost category, we used a blended PPI composed of the PPI for Industrial Gases, the
  PPI for Other Basic Inorganic Chemical Manufacturing, the PPI for Other Basic Organic Chemical Manufacturing,
  and the PPI for Soap and Cleaning Compound Manufacturing. For more detail about this proxy, see section
  V.A.1.c.(3).(c).(x) of this proposed rule.
\3\ The Professional Fees: Labor-related and Professional Fees: Nonlabor-related cost categories were included
  in one cost category called Professional Fees in the FY 2002-based RPL market basket. For more detail about
  how these new categories were derived, we refer readers to sections VI.A.1.c.(3).(c).(xviii) and
  VI.A.1.c.(3).(c).(xxi) of this final rule.
\4\ The Administrative and Business Support Services cost category was contained within All Other: Labor-
  intensive Services cost category in the FY 2002-based RPL market basket. The All Other: Labor-intensive
  Services cost category is renamed the All Other: Labor-related Services cost category for the FY 2008-based
  RPL market basket.
\5\ The Financial Services cost category was contained within the All Other: Non-labor Intensive Services cost
  category in the FY 2002-based RPL market basket. The All Other: Non-labor Intensive Services cost category is
  renamed the All Other: Nonlabor-related Services cost category for the FY 2008-based RPL market basket.

(i) Wages and Salaries
    We use the ECI for Wages and Salaries for Hospital Workers (All 
Civilian) (BLS series code CIU1026220000000I) to measure the price 
growth of this cost category. This same proxy was used in the FY 2002-
based RPL market basket.
(ii) Employee Benefits
    We use the ECI for Employee Benefits for Hospital Workers (All 
Civilian) to measure the price growth of this cost category. This same 
proxy was used in the FY 2002-based RPL market basket.
(iii) Electricity
    We use the PPI for Commercial Electric Power (BLS series code 
WPU0542). This same proxy was used in the FY 2002-based RPL market 
basket.
(iv) Fuel, Oil, and Gasoline
    For the FY 2002-based RPL market basket, this category only 
included expenses classified under North American Industry 
Classification System (NAICS) 21 (Mining). We proxied this category 
using the PPI for Commercial Natural Gas (BLS series code WPU0552). For 
the FY 2008-based market basket, we add costs to this category that had 
previously been grouped in other categories. The added costs include 
petroleum-related expenses under NAICS 324110 (previously captured in 
the miscellaneous category), as well as petrochemical manufacturing 
classified under NAICS 325110 (previously captured in the chemicals 
category). These added costs represent 80 percent of the hospital 
industry's fuel, oil, and gasoline expenses (or 80 percent of this 
category). Because the majority of the industry's fuel, oil, and 
gasoline expenses originate from petroleum refineries (NAICS 324110), 
we use the PPI for Petroleum Refineries (BLS series code 
PCU324110324110) as the proxy for this cost category.

[[Page 47854]]

(v) Water and Sewage
    We use the CPI for Water and Sewerage Maintenance (All Urban 
Consumers) (BLS series code CUUR0000SEHG01) to measure the price growth 
of this cost category. This same proxy was used in the FY 2002-based 
RPL market basket.
(vi) Professional Liability Insurance
    We proxy price changes in hospital PLI premiums using percentage 
changes as estimated by the CMS Hospital Professional Liability Index. 
To generate these estimates, we collect commercial insurance premiums 
for a fixed level of coverage while holding non-price factors constant 
(such as a change in the level of coverage). This method is also used 
to proxy PLI price changes in the Medicare Economic Index (75 FR 
73268). This same proxy was used in the FY 2002-based RPL market 
basket.
(vii) Pharmaceuticals
    We use the PPI for Pharmaceuticals for Human Use, Prescription (BLS 
series code WPUSI07003) to measure the price growth of this cost 
category. We note that we are not making a change to the PPI that is 
used to proxy this cost category. There was a recent change to the BLS 
naming convention for this series; however, this is the same proxy that 
was used in the FY 2002-based RPL market basket.
(viii) Food: Direct Purchases
    We use the PPI for Processed Foods and Feeds (BLS series code 
WPU02) to measure the price growth of this cost category. This same 
proxy was used in the FY 2002-based RPL market basket.
(ix) Food: Contract Services
    We use the CPI for Food Away From Home (All Urban Consumers) (BLS 
series code CUUR0000SEFV) to measure the price growth of this cost 
category. This same proxy was used in the FY 2002-based RPL market 
basket.
(x) Chemicals
    We use a blended PPI composed of the PPI for Industrial Gas 
Manufacturing (NAICS 325120) (BLS series code PCU325120325120P), the 
PPI for Other Basic Inorganic Chemical Manufacturing (NAICS 325180) 
(BLS series code PCU32518-32518-), the PPI for Other Basic Organic 
Chemical Manufacturing (NAICS 325190) (BLS series code PCU32519-32519-
), and the PPI for Soap and Cleaning Compound Manufacturing (NAICS 
325610) (BLS series code PCU32561-32561-). Using the 2002 Benchmark I-O 
data, we found that these NAICS industries accounted for approximately 
90 percent of the hospital industry's chemical expenses.
    Therefore, we use this blended index because we believe its 
composition better reflects the composition of the purchasing patterns 
of hospitals than does the PPI for Industrial Chemicals (BLS series 
code WPU061), the proxy used in the FY 2002-based RPL market basket. 
Table 5 shows the weights for each of the four PPIs used to create the 
blended PPI, which we determined using the 2002 Benchmark I-O data.

                  Table 5--Blended Chemical PPI Weights
------------------------------------------------------------------------
                                         Weights (in
                Name                      percent)            NAICS
------------------------------------------------------------------------
PPI for Industrial Gas Manufacturing                35            325120
PPI for Other Basic Inorganic                       25            325180
 Chemical Manufacturing.............
PPI for Other Basic Organic Chemical                30            325190
 Manufacturing......................
PPI for Soap and Cleaning Compound                  10            325610
 Manufacturing......................
------------------------------------------------------------------------

(xi) Medical Instruments
    We use the PPI for Medical, Surgical, and Personal Aid Devices (BLS 
series code WPU156) to measure the price growth of this cost category. 
In the 1997 Benchmark I-O data, approximately half of the expenses 
classified in this category were for surgical and medical instruments. 
Therefore, we used the PPI for Surgical and Medical Instruments and 
Equipment (BLS series code WPU1562) to proxy this category in the FY 
2002-based RPL market basket. The 2002 Benchmark I-O data show that 
surgical and medical instruments now represent only 33 percent of these 
expenses and that the largest expense category is surgical appliance 
and supplies manufacturing (corresponding to BLS series code WPU1563). 
Due to this reallocation of costs over time, we are changing the price 
proxy for this cost category to the more aggregated PPI for Medical, 
Surgical, and Personal Aid Devices.
(xii) Photographic Supplies
    We eliminate the cost category specific to photographic supplies 
for the proposed FY 2008 based RPL market basket. These costs are now 
included in the Chemicals cost category because the costs are presently 
reported as all other chemical products. Notably, although we are 
eliminating the specific cost category, these costs are still accounted 
for within the RPL market basket.
(xiii) Rubber and Plastics
    We use the PPI for Rubber and Plastic Products (BLS series code 
WPU07) to measure price growth of this cost category. This same proxy 
was used in the FY 2002-based RPL market basket.
(xiv) Paper and Printing Products
    We use the PPI for Converted Paper and Paperboard Products (BLS 
series code WPU0915) to measure the price growth of this cost category. 
This same proxy was used in the FY 2002-based RPL market basket.
(xv) Apparel
    We use the PPI for Apparel (BLS series code WPU0381) to measure the 
price growth of this cost category. This same proxy was used in the FY 
2002-based RPL market basket.
(xvi) Machinery and Equipment
    We use the PPI for Machinery and Equipment (BLS series code WPU11) 
to measure the price growth of this cost category. This same proxy was 
used in the FY 2002-based RPL market basket.
(xvii) Miscellaneous Products
    We use the PPI for Finished Goods Less Food and Energy (BLS series 
code WPUSOP3500) to measure the price growth of this cost category. 
Using this index removes the double-counting of food and energy prices, 
which are already captured elsewhere in the market basket. This same 
proxy was used in the FY 2002-based RPL market basket.
(xviii) Professional Fees: Labor-Related
    We use the ECI for Compensation for Professional and Related 
Occupations (Private Industry) (BLS series code CIS2020000120000I) to 
measure the price growth of this category. It includes occupations such 
as legal, accounting, and engineering services. This same proxy was 
used in the FY 2002-based RPL market basket.

[[Page 47855]]

(xix) Administrative and Business Support Services
    We use the ECI for Compensation for Office and Administrative 
Support Services (Private Industry) (BLS series code CIU2010000220000I) 
to measure the price growth of this category. Previously these costs 
were included in the All Other: Labor-intensive category (now renamed 
the All Other: Labor-related Services category), and were proxied by 
the ECI for Compensation for Service Occupations. We believe that this 
compensation index better reflects the changing price of labor 
associated with the provision of administrative services and its 
incorporation represents a technical improvement to the market basket.
(xx) All Other: Labor-Related Services
    We use the ECI for Compensation for Service Occupations (Private 
Industry) (BLS series code CIU2010000300000I) to measure the price 
growth of this cost category. This same proxy was used in the FY 2002-
based RPL market basket.
(xxi) Professional Fees: Nonlabor-Related
    We use the ECI for Compensation for Professional and Related 
Occupations (Private Industry) (BLS series code CIS2020000120000I) to 
measure the price growth of this category. This is the same price proxy 
that we are using to use for the Professional Fees: Labor-related cost 
category.
(xxii) Financial Services
    We use the ECI for Compensation for Financial Activities (Private 
Industry) (BLS series code CIU201520A000000I) to measure the price 
growth of this cost category. Previously these costs were included in 
the All Other: Nonlabor-intensive category (now renamed the All Other: 
Nonlabor-related Services category), and were proxied by the CPI for 
All Items. We believe that this compensation index better reflects the 
changing price of labor associated with the provision of financial 
services and its incorporation represents a technical improvement to 
the market basket.
(xxiii) Telephone Services
    We use the CPI for Telephone Services (BLS series code 
CUUR0000SEED) to measure the price growth of this cost category. This 
same proxy was used in the FY 2002-based RPL market basket.
(xxiv) Postage
    We use the CPI for Postage (BLS series code CUUR0000SEEC01) to 
measure the price growth of this cost category. This same proxy was 
used in the FY 2002-based RPL market basket.
(xxv) All Other: Nonlabor-Related Services
    We use the CPI for All Items Less Food and Energy (BLS series code 
CUUR0000SA0L1E) to measure the price growth of this cost category. 
Previously these costs were proxied by the CPI for All Items in the FY 
2002-based RPL market basket. We believe that using the CPI for All 
Items Less Food and Energy removes the double counting of changes in 
food and energy prices, as they are already captured elsewhere in the 
market basket. Consequently, we believe that the incorporation of this 
proxy represents a technical improvement to the market basket.
    Comment: One commenter observed that the compensation cost weight 
showed a decline from the FY 2002 to FY 2008 base year. The commenter 
noted that these reductions may be a result of low salary increases 
salary freezes or other similar factors and are not necessarily 
indicative of a reduction in the labor intensity of the services 
provided by IRFs.
    Response: We agree with the commenter that a variety of factors and 
trends can influence changes in the cost shares of the RPL market 
basket. Relative to growth in nonlabor costs, slower growth in the cost 
of labor (due to low salary increases or freezes in salary), could 
result in a lower cost weight associated with wages and salaries. 
Likewise, stable growth in labor costs coupled with relatively faster 
growth in nonlabor costs could also result in a lower cost weight 
associated with wages and salaries. As the rebased and revised 2008-
based RPL market basket's cost weights reflect an updated distribution 
of costs and represent the best available data, we are finalizing this 
market basket in this final rule.
(4) Methodology for Capital Portion of the RPL Market Basket
    In the FY 2002-based RPL market basket, we did not have 
freestanding IRF, freestanding IPF, and LTCH 2002 Medicare cost report 
data for the capital cost weights, due to a change in the 2002 
reporting requirements. Therefore, we used these hospitals' 2001 
expenditure data for the capital cost categories of depreciation, 
interest, and other capital expenses, and inflated the data to a 2002 
base year using relevant price proxies.
    For the FY 2008-based RPL market basket, we calculate weights for 
the proposed RPL market basket capital costs using the same set of FY 
2008 Medicare cost reports used to develop the operating share for 
IRFs, IPFs, and LTCHs. To calculate the total capital cost weight, we 
first apply the same LOS edits as applied when calculating the 
operating cost weights as described above in section VI.A.1.c.(1)(a) of 
this final rule. The resulting capital weight for the FY 2008 base year 
is 8.392 percent.
    Lease expenses are unique in that they are not broken out as a 
separate cost category in the RPL market basket, but rather are 
proportionally distributed amongst the cost categories of Depreciation, 
Interest, and Other, reflecting the assumption that the underlying cost 
structure of leases is similar to that of capital costs in general. As 
was done in the FY 2002-based RPL market basket, we first assumed 10 
percent of lease expenses represents overhead and assigned those costs 
to the ``Other Capital-Related Costs'' category accordingly. The 
remaining lease expenses were distributed across the 3 cost categories 
based on the respective weights of depreciation, interest, and other 
capital not including lease expenses.
    Depreciation contains two subcategories: (1) Building and Fixed 
Equipment; and (2) Movable Equipment. The apportionment between 
building and fixed equipment and movable equipment was determined using 
the FY 2008 Medicare cost reports for freestanding IRFs, freestanding 
IPFs, and LTCHs. This methodology was also used to compute the 
apportionment used in the FY 2002-based RPL market basket (70 FR 
47912).
    The total Interest expense cost category is split between 
government/nonprofit interest and for-profit interest. The FY 2002-
based RPL market basket allocated 75 percent of the total Interest cost 
weight to government/nonprofit interest and proxied that category by 
the average yield on domestic municipal bonds. The remaining 25 percent 
of the Interest cost weight was allocated to for-profit interest and 
was proxied by the average yield on Moody's Aaa bonds (70 FR 47912). 
This was based on the FY 2002-based IPPS Capital input price index 
(CIPI) (70 FR 23406) due to insufficient Medicare cost report data for 
freestanding IRFs, freestanding IPFs, and LTCHs. For the FY 2008-based 
RPL market basket, we proposed to derive the split using the FY 2008 
Medicare cost report data on interest expenses for government/nonprofit 
and for-profit freestanding IRFs, freestanding IPFs, and LTCHs. Based 
on these data, we calculated a 33/67 split between government/nonprofit 
and for-profit interest. We believe it is important that

[[Page 47856]]

this split reflects the latest relative cost structure of interest 
expenses for RPL providers. As stated above, we first apply the LOS 
edits (as described in section VI.A.1.c.(1)(a) of this final rule) 
prior to calculating this split. Therefore, we are using cost reports 
that are reflective of case mix and practice patterns associated with 
providing services to Medicare beneficiaries. Using data specific to 
government/nonprofit and for-profit freestanding IRFs, freestanding 
IPFs, and LTCHs as well as the application of these LOS edits are the 
primary reasons for the difference in this split relative to the FY 
2002-based RPL market basket.
    Because capital is acquired and paid for over time, capital 
expenses in any given year are determined by both past and present 
purchases of physical and financial capital. The vintage-weighted 
capital portion of the FY 2008-based RPL market basket is intended to 
capture the long-term consumption of capital, using vintage weights for 
depreciation (physical capital) and interest (financial capital). These 
vintage weights reflect the proportion of capital purchases 
attributable to each year of the expected life of building and fixed 
equipment, movable equipment, and interest. We use the vintage weights 
to compute vintage-weighted price changes associated with depreciation 
and interest expense.
    Vintage weights are an integral part of the proposed FY 2008-based 
RPL market basket. Capital costs are inherently complicated and are 
determined by complex capital purchasing decisions, over time, based on 
such factors as interest rates and debt financing. In addition, capital 
is depreciated over time instead of being consumed in the same period 
it is purchased. The capital portion of the FY 2008-based RPL market 
basket reflects the annual price changes associated with capital costs, 
and would be a useful simplification of the actual capital investment 
process. By accounting for the vintage nature of capital, we are able 
to provide an accurate and stable annual measure of price changes. 
Annual nonvintage price changes for capital are unstable due to the 
volatility of interest rate changes and, therefore, do not reflect the 
actual annual price changes for Medicare capital-related costs. The 
capital component of the proposed FY 2008-based RPL market basket 
reflects the underlying stability of the capital acquisition process 
and provides hospitals with the ability to plan for changes in capital 
payments.
    To calculate the vintage weights for depreciation and interest 
expenses, we needed a time series of capital purchases for building and 
fixed equipment and movable equipment. We found no single source that 
provides an appropriate time series of capital purchases by hospitals 
for all of the above components of capital purchases. The early 
Medicare cost reports did not have sufficient capital data to meet this 
need. Data we obtained from the American Hospital Association (AHA) do 
not include annual capital purchases. However, AHA does provide a 
consistent database back to 1963. We used data from the AHA Panel 
Survey and the AHA Annual Survey to obtain a time series of total 
expenses for hospitals. We then used data from the AHA Panel Survey 
supplemented with the ratio of depreciation to total hospital expenses 
obtained from the Medicare cost reports to derive a trend of annual 
depreciation expenses for 1963 through 2008.
    To estimate capital purchases using data on depreciation expenses, 
the expected life for each cost category (building and fixed equipment, 
movable equipment, and interest) is needed to calculate vintage 
weights. For the FY 2002-based RPL market basket, due to insufficient 
Medicare cost report data for freestanding IRFs, freestanding IPFs, and 
LTCHs, we used 2001 Medicare Cost Reports for IPPS hospitals to 
determine the expected life of building and fixed equipment and movable 
equipment (70 FR 47913). The FY 2002-based RPL market basket was based 
on an expected life of building and fixed equipment of 23 years. It 
used 11 years as the expected life for movable equipment. We believed 
that this data source reflected the latest relative cost structure of 
depreciation expenses for hospitals at the time and was analogous to 
freestanding IRFs, freestanding IPFs, and LTCHs.
    The expected life of any piece of equipment can be determined by 
dividing the value of the asset (excluding fully depreciated assets) by 
its current year depreciation amount. This calculation yields the 
estimated useful life of an asset if depreciation were to continue at 
current year levels, assuming straight-line depreciation. Following a 
similar method to what was applied for the FY 2002-based RPL market 
basket, we use the expected life of building and fixed equipment to be 
equal to 26 years, and the expected life of movable equipment to be 11 
years. These expected lives are calculated using FY 2008 Medicare cost 
reports for IPPS hospitals since we are currently unable to obtain 
robust measures of the expected lives for building and fixed equipment 
and movable equipment using the Medicare cost reports from freestanding 
IRFs, freestanding IPFs, and LTCHs.
    We also use the building and fixed equipment and movable equipment 
weights derived from FY 2008 Medicare cost reports for freestanding 
IRFs, freestanding IPFs, and LTCHs to separate the depreciation 
expenses into annual amounts of building and fixed equipment 
depreciation and movable equipment depreciation. Year-end asset costs 
for building and fixed equipment and movable equipment were determined 
by multiplying the annual depreciation amounts by the expected life 
calculations. We then calculated a time series, back to 1963, of annual 
capital purchases by subtracting the previous year asset costs from the 
current year asset costs. From this capital purchase time series, we 
were able to calculate the vintage weights for building and fixed 
equipment and for movable equipment. Each of these sets of vintage 
weights is explained in more detail below.
    For the building and fixed equipment vintage weights, we used the 
real annual capital purchase amounts for building and fixed equipment 
to capture the actual amount of the physical acquisition, net of the 
effect of price inflation. This real annual purchase amount for 
building and fixed equipment was produced by deflating the nominal 
annual purchase amount by the building and fixed equipment price proxy, 
BEA's chained price index for nonresidential construction for hospitals 
and special care facilities. Because building and fixed equipment have 
an expected life of 26 years, the vintage weights for building and 
fixed equipment are deemed to represent the average purchase pattern of 
building and fixed equipment over 26-year periods. With real building 
and fixed equipment purchase estimates available from 2008 back to 
1963, we averaged twenty 26-year periods to determine the average 
vintage weights for building and fixed equipment that are 
representative of average building and fixed equipment purchase 
patterns over time. Vintage weights for each 26-year period are 
calculated by dividing the real building and fixed capital purchase 
amount in any given year by the total amount of purchases in the 26-
year period. This calculation is done for each year in the 26-year 
period, and for each of the twenty 26-year periods. We used the average 
of each year across the twenty 26-year periods to determine the average 
building and fixed equipment vintage weights for the FY 2008-based RPL 
market basket.
    For the movable equipment vintage weights, the real annual capital

[[Page 47857]]

purchase amounts for movable equipment were used to capture the actual 
amount of the physical acquisition, net of price inflation. This real 
annual purchase amount for movable equipment was calculated by 
deflating the nominal annual purchase amounts by the movable equipment 
price proxy, the PPI for Machinery and Equipment. This is the same 
proxy used for the FY 2002-based RPL market basket. Based on our 
determination that movable equipment has an expected life of 11 years, 
the vintage weights for movable equipment represent the average 
expenditure for movable equipment over an 11-year period. With real 
movable equipment purchase estimates available from 2008 back to 1963, 
thirty-five 11-year periods were averaged to determine the average 
vintage weights for movable equipment that are representative of 
average movable equipment purchase patterns over time. Vintage weights 
for each 11-year period are calculated by dividing the real movable 
capital purchase amount for any given year by the total amount of 
purchases in the 11-year period. This calculation was done for each 
year in the 11-year period and for each of the thirty-five 11-year 
periods. We used the average of each year across the thirty-five 11-
year periods to determine the average movable equipment vintage weights 
for the FY 2008-based RPL market basket.
    For the interest vintage weights, the nominal annual capital 
purchase amounts for total equipment (building and fixed, and movable) 
were used to capture the value of the debt instrument. Because we have 
determined that hospital debt instruments have an expected life of 26 
years, the vintage weights for interest are deemed to represent the 
average purchase pattern of total equipment over 26-year periods. With 
nominal total equipment purchase estimates available from 2008 back to 
1963, twenty 26-year periods were averaged to determine the average 
vintage weights for interest that are representative of average capital 
purchase patterns over time. Vintage weights for each 26-year period 
are calculated by dividing the nominal total capital purchase amount 
for any given year by the total amount of purchases in the 26-year 
period. This calculation is done for each year in the 26-year period 
and for each of the twenty 26-year periods. We used the average of each 
year across the twenty 26-year periods to determine the average 
interest vintage weights for the FY 2008-based RPL market basket. The 
vintage weights for the capital portion of the FY 2002-based RPL market 
basket and the FY 2008-based RPL market basket are presented in Table 
6.

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

    After the capital cost category weights were computed, it was 
necessary to select appropriate price proxies to reflect the rate-of-
increase for each expenditure category. We use the same price proxies 
for the capital portion of the FY 2008-based RPL market basket that 
were used in the FY 2002-based RPL market basket with the exception of 
the Boeckh Construction Index. We replaced the Boeckh Construction 
Index with BEA's chained price index for nonresidential construction 
for hospitals and special care facilities. The BEA index represents 
construction of facilities such as hospitals, nursing homes, hospices, 
and rehabilitation centers. Although these price indices move similarly 
over time, we believe that it is more technically appropriate to use an 
index that is more specific to the hospital industry. We believe these 
are the most appropriate proxies for hospital capital costs that meet 
our

[[Page 47858]]

selection criteria of relevance, timeliness, availability, and 
reliability.
    The price proxies (prior to any vintage weighting) for each of the 
capital cost categories are the same as those used for the FY 2006-
based CIPI as described in the IPPS FY 2010 final rule (74 FR at 
43857).
    We received no comments related to the proposed capital portion of 
the RPL methodology including the selection of cost categories, cost 
weights, and the price proxies. Therefore, we are finalizing the 
capital portion of the 2008-based RPL market basket as proposed with no 
further changes.
(5) FY 2012 RPL Market Basket Update Factor for IRFs
    For FY 2012 (that is, beginning October 1, 2011 and ending 
September 30, 2012), we will use an estimate of the FY 2008-based RPL 
market basket increase factor based on the best available data. 
Consistent with historical practice, we estimate the RPL market basket 
update for the IRF PPS based on IHS Global Insight's forecast using the 
most recent available data. IHS Global Insight (IGI), Inc. is a 
nationally recognized economic and financial forecasting firm that 
contracts with CMS to forecast the components of the market baskets.
    Based on IGI's 1st quarter 2011 forecast with historical data 
through the fourth quarter of 2010, the projected market basket 
increase factor for FY 2012 was 2.8 percent. Consistent with our 
historical practice of estimating market basket increases based on the 
best available data, we proposed a market basket increase factor of 2.8 
percent for FY 2012. We also proposed that if more recent data became 
subsequently available (for example, a more recent estimate of the 
market basket), we would use that data, if appropriate, to determine 
the FY 2012 update in the final rule.
    Based on IGI's second quarter 2011 forecast with history through 
the first quarter of 2011, the projected market basket update for FY 
2012 based on the 2008-based RPL market basket is 2.9 percent.
    Using the current FY 2002-based RPL market basket and IGI's second 
quarter 2011 forecast for the market basket components, the FY 2012 
update would be 3.0 percent (before taking into account any statutory 
adjustments). Table 7 compares the FY 2008-based RPL market basket and 
the FY 2002-based RPL market basket percent changes.

   Table 7--FY 2002-Based and FY 2008-Based RPL Market Basket Percent
                    Changes, FY 2006 Through FY 2014
------------------------------------------------------------------------
                                   FY 2002-based RPL   FY 2008-based RPL
                                     market basket       market basket
        Fiscal year (FY)             index percent       index percent
                                        change              change
------------------------------------------------------------------------
Historical data:
    FY 2006.....................                 3.9                 3.7
    FY 2007.....................                 3.4                 3.4
    FY 2008.....................                 3.8                 3.7
    FY 2009.....................                 2.5                 2.7
    FY 2010.....................                 2.3                 2.2
    Average 2006-2010...........                 3.2                 3.1
Forecast:
    FY 2011.....................                 2.7                 2.7
    FY 2012.....................                 3.0                 2.9
    FY 2013.....................                 3.0                 2.9
    FY 2014.....................                 3.0                 3.0
    Average 2011-2014...........                 2.9                 2.9
------------------------------------------------------------------------
Note that these market basket percent changes do not include any further
  adjustments as may be statutorily required.
Source: IHS Global Insight, Inc. 2nd quarter 2011 forecast.

    For FY 2012, the FY 2008-based RPL market basket update (2.9 
percent) is slightly lower than the FY 2002-based RPL market basket 
update (3.0 percent). The lower total compensation weight in the FY 
2008-based RPL market basket (62.278 percent) relative to the FY 2002-
based RPL market basket (65.877 percent), absent other factors, would 
have resulted in a slightly lower market basket update using the FY 
2008-based RPL market basket. This impact, however, is partially offset 
by the larger weight associated with the Professional Fees category. In 
both market baskets, these expenditures are proxied by the ECI for 
Compensation for Professional and Related Services. The weight for 
Professional Fees in the FY 2002-based RPL market basket is 2.892 
percent compared to 6.325 percent in the proposed FY 2008-based RPL 
market basket. The net effect is that the market basket update is 
slightly lower for FY 2012 based on the FY 2008-based RPL market basket 
relative to the FY 2002-based RPL market basket.
    Comment: Several commenters expressed support that CMS update the 
RPL market basket with more recent cost data. They note that using more 
up-to-date cost report data (2008) makes the RPL market basket more 
representative of the costs faced by IRF providers relative to more 
outdated cost report data (2002).
    Response: We agree that the use of more recent cost report data 
allows for the index to better reflect the actual costs faced by IRF 
providers. Based on the positive comments received regarding the 
rebasing of the RPL market basket, we are finalizing our proposal to 
rebase and revise the index. Based on IGI's second quarter 2011 
forecast with history through the first quarter of 2011, the projected 
market basket update for FY 2012 is 2.9 percent. Therefore, consistent 
with our historical practice of estimating market basket increases 
based on the best available data, we are finalizing a market basket 
update of 2.9 percent for FY 2012.
2. Productivity Adjustment
    According to section 1886(j)(3)(C)(i) of the Act, the Secretary 
shall establish an increase factor ``based on an appropriate percentage 
increase in a market basket of goods and services.'' As described in 
section VI.A.1 of this final rule, we estimate the IRF PPS increase 
factor for FY 2012 based on the FY 2008-based RPL market basket. 
Section 1886(j)(3)(C)(ii) of the Act then requires that, after 
establishing the increase

[[Page 47859]]

factor for a FY, ``the Secretary shall reduce such increase factor for 
FY 2012 and each subsequent FY, by the productivity adjustment 
described in section 1886(b)(3)(B)(xi)(II)'' of the Act. Section 
1886(b)(3)(B)(xi)(II) of the Act sets forth the definition of this 
productivity adjustment. The statute defines the productivity 
adjustment to be equal to the 10-year moving average of changes in 
annual economy-wide private nonfarm business multifactor productivity 
(MFP) (as projected by the Secretary for the 10-year period ending with 
the applicable FY cost reporting period, or other annual period) (the 
``MFP adjustment''). The Bureau of Labor Statistics (BLS) is the agency 
that publishes the official measure of private nonfarm business MFP. We 
refer readers to the BLS Web site at http://www.bls.gov/mfp to obtain 
the historical BLS-published MFP data.
    The projection of MFP is currently produced by IGI, an economic 
forecasting firm. In order to generate a forecast of MFP, IGI 
replicated the MFP measure calculated by the BLS using a series of 
proxy variables derived from IGI's U.S. macroeconomic models. These 
models take into account a very broad range of factors that influence 
the total U.S. economy. IGI forecasts the underlying proxy components 
such as Gross Domestic Product (GDP), capital, and labor inputs 
required to estimate MFP and then combines those projections according 
to the BLS methodology. In Table 8, we identify each of the major MFP 
component series employed by the BLS to measure MFP. We also provide 
the corresponding concepts forecasted by IGI and determined to be the 
best available proxies for the BLS series.

   Table 8--Multifactor Productivity Component Series Employed by the
            Bureau of Labor Statistics and IHS Global Insight
------------------------------------------------------------------------
               BLS series                           IGI series
------------------------------------------------------------------------
Real value-added output, constant 2005   Non-housing, non-government,
 dollars.                                 non-farm real GDP, Billions of
                                          chained 2005 dollars - annual
                                          rate.
Private non-farm business sector labor   Hours of all persons in private
 input; 2005 = 100.00.                    non-farm establishments, 2005
                                          = 100.00, adjusted for labor
                                          composition effects.
Aggregate capital inputs; 2005 = 100.00  Real effective capital stock
                                          used for full employment GDP,
                                          Billions of chained 2005
                                          dollars.
------------------------------------------------------------------------

    IGI found that the historical growth rates of the BLS components 
used to calculate MFP and the IGI components identified are consistent 
across all series and therefore suitable proxies for calculating MFP. 
We have included below a more detailed description of the methodology 
used by IGI to construct a forecast of MFP, which is aligned closely 
with the methodology employed by the BLS. For more information 
regarding the BLS method for estimating productivity, see the BLS Web 
site at http://www.bls.gov/mfp/mprtech.pdf.
    At the time of the development of the FY 2012 final rule, the BLS 
had published a historical time series of private nonfarm business MFP 
for 1987 through 2010, with 2010 being a preliminary value. Using this 
historical MFP series and the IGI forecasted series, IGI has developed 
a forecast of MFP for 2011 through 2021, as described below.
    To create a forecast of BLS' MFP index, the forecasted annual 
growth rates of the ``non-housing, non-government, non-farm, real 
GDP'', ``hours of all persons in private non-farm establishments 
adjusted for labor composition,'' and ``real effective capital stock'' 
series (ranging from 2011 to 2021) are used to ``grow'' the levels of 
the ``real value-added output,'' ``private non-farm business sector 
labor input,'' and ``aggregate capital inputs'' series published by the 
BLS. Projections of the ``hours of all persons'' measure are calculated 
using the difference between projections of the BLS index of output per 
hour and real GDP. This difference is then adjusted to account for 
changes in labor composition in the forecast interval.
    Using these 3 key concepts, MFP is derived by subtracting the 
contribution of labor and capital inputs from output growth. However, 
in order to estimate MFP, we need to understand the relative 
contributions of labor and capital to total output growth. Therefore, 2 
additional measures are needed to operationalize the estimation of the 
IGI MFP projection: Labor compensation and capital income. The sum of 
labor compensation and capital income represents total income. The BLS 
calculates labor compensation and capital income (in current dollar 
terms) to derive the nominal values of labor and capital inputs. IGI 
uses the ``non-government total compensation'' and ``flow of capital 
services from the total private non-residential capital stock'' series 
as proxies for the BLS' income measures. These two proxy measures for 
income are divided by total income to obtain the shares of labor 
compensation and capital income to total income. To estimate labor's 
contribution and capital's contribution to the growth in total output, 
the growth rates of the proxy variables for labor and capital inputs 
are multiplied by their respective shares of total income. These 
contributions, of labor and capital to output growth, are subtracted 
from total output growth to calculate the ``change in the growth rates 
of multifactor productivity'':

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

    The change in the growth rates (also referred to as the compound 
growth rates) of the IGI MFP are multiplied by 100 in order to 
calculate the percent change in growth rates (the percent change in 
growth rates are published by the BLS for its historical MFP measure). 
Finally, the growth rates of the IGI MFP are converted to index levels 
based to 2005 to be consistent with the BLS' methodology. For 
benchmarking purposes, the historical growth rates of IGI's proxy 
variables were used to estimate a historical measure of MFP, which was 
compared to the historical MFP estimate published by the BLS. The 
comparison revealed that the growth rates of the components were 
consistent across all series, and therefore validated the use of the 
proxy variables in generating the IGI MFP projections. The resulting 
MFP index was then interpolated to a quarterly frequency using the 
Bassie method for temporal disaggregation. The Bassie technique 
utilizes an indicator (pattern) series for its calculations. IGI uses 
the index of output per hour (published by the BLS) as an indicator 
when interpolating the MFP index.
3. Calculation of the IRF PPS Market Basket Increase Factor for FY 2012
    To calculate the MFP-adjusted IRF PPS increase factor for FY 2012, 
in accordance with section 1886(j)(3)(C) of

[[Page 47860]]

the Act, we start with the FY 2008-based RPL market basket increase 
factor described above in section VI.A.1. of this final rule and 
subtract from that the MFP percentage adjustment described in section 
VI.A.2. of this final rule. Additionally, in accordance with sections 
1886(j)(3)(C)(ii)(II) and (D)(ii) of the Act, we further proposed to 
reduce the MFP-adjusted IRF PPS increase factor by 0.1 percentage point 
for FY 2012.
    Specifically, in calculating the MFP percentage adjustment, the end 
of the 10-year moving average of changes in the MFP should coincide 
with the end of the appropriate FY update period. Since the market 
basket update is reduced by the MFP adjustment to determine the annual 
update for the IRF PPS, we believe it is appropriate for the numbers 
associated with both components of the calculation (the market basket 
and the productivity adjustment) to line up so that changes in market 
conditions are aligned. Therefore, for the FY 2012 update, the MFP 
adjustment is calculated as the 10-year moving average of changes in 
MFP for the period ending September 30, 2012. We round the final annual 
adjustment to the one-tenth of 1 percentage point level up or down as 
applicable according to conventional rounding rules (that is, if the 
number we are rounding is followed by 5, 6, 7, 8, or 9, we will round 
the number up; if the number we are rounding is followed by 0, 1, 2, 3, 
or 4, we will round the number down).
    Thus, in accordance with section 1886(j)(3)(C) of the Act, the 
proposed IRF PPS increase factor for FY 2012 was based on the 1st 
quarter 2011 forecast of the proposed FY 2008-based RPL market basket 
update, which was estimated to be 2.8 percent. This increase factor was 
then reduced by the proposed MFP adjustment (the 10-year moving average 
of MFP for the period ending FY 2012) of 1.2 percentage points, based 
on the methodology described above and IHS Global Insight's 1st quarter 
2011 forecast. The increase factor for FY 2012 was then further reduced 
by 0.1 percentage point in accordance with sections 
1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act. The resulting 
proposed IRF PPS increase factor reduced by the productivity adjustment 
and the ``other adjustment'' for FY 2012 was equal to 1.5 percent, or 
2.8 percent less 1.2 percentage points (for the MFP) less 0.1 
percentage point in accordance with sections 1886(j)(3)(C)(ii)(II) and 
1886(j)(3)(D)(ii) of the Act. Consistent with historical practice, we 
update the market basket increase factor estimate and the MFP 
adjustment in this final rule to reflect the most recent available 
data.
    Comment: Several commenters recognized that the productivity 
adjustment is mandated by law (section 3401(d) of the Affordable Care 
Act). However, they expressed concern about the negative impact that it 
could have on IRF providers and the beneficiaries they serve. They 
recommend that CMS takes steps to mitigate any negative effects caused 
by the MFP reduction.
    Response: Section 3401(d) of the Affordable Care Act mandates that 
the market basket used to update IRF payments be reduced by a 
productivity adjustment beginning in FY 2012. As a result, we have no 
discretionary authority in this area, and we are applying this 
reduction in this final rule.
    Comment: Several commenters stated that the provision of inpatient 
rehabilitation services is largely dependent on skilled rehabilitation 
physicians, therapists, nurses, and other highly trained personnel and 
that efficiencies which might result from use of advanced technology 
are more limited in this setting than may be observed in the general 
economy. One commenter noted that many of the treatment plans in the 
IRF setting do not lend themselves to continual productivity 
improvements. The commenter stated that it will be challenging for 
efficient providers, over time, to achieve continued efficiencies at a 
rate that will be required by ongoing application of productivity 
adjustments.
    Response: We recognize that a complex and sophisticated mix of 
inputs are required to provide care to IRF patients. However, the 
agency is required by law to apply the MFP adjustment to provider 
payments as stipulated by section 3401(d) of the Affordable Care Act.
    Comment: Several commenters suggested that CMS carefully monitor 
the impact that these MFP adjustments will have on the IRF hospital 
sector and provide feedback to Congress as appropriate.
    Response: We will continue to monitor the effect of the MFP 
adjustments and share the results with policymakers. That practice will 
continue as we implement other provisions mandated by the Affordable 
Care Act.
    Final Decision: After careful consideration of the public comments, 
we are finalizing our proposed method for calculating and applying the 
MFP adjustment. In accordance with section 1886(j)(3)(C) of the Act, as 
amended by section 3401(d) of the Affordable Care Act, we will base the 
FY 2012 market basket update, which is used to determine the applicable 
percentage increase for the IRF payments, on the second quarter 2011 
forecast of the FY 2008-based RPL market basket (estimated to be 2.9 
percent). This percentage increase will then be reduced by the MFP 
adjustment (the 10-year moving average of MFP for the period ending FY 
2012) of 1.0 percent, which was calculated as described above and based 
on IGI's second quarter 2011 forecast. Following application of the 
productivity adjustment, the applicable percentage increase will then 
be further reduced by 0.1 percentage point, as required by section 
1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act, as amended by 
sections 3401(d) of the Affordable Care Act. Therefore the final FY 
2012 IRF update is 1.8 percent (2.9 percent market basket update less 
1.0 percentage point MFP adjustment less 0.1 percentage point 
legislative adjustment).
4. Calculation of the Labor-Related Share for FY 2012
    Section 1886(j)(6) of the Act specifies that ``[t]he Secretary 
shall adjust the proportion (as estimated by the Secretary from time to 
time) of rehabilitation facilities' costs which are attributable to 
wages and wage-related costs, of the prospective payment rates computed 
under paragraph (3) for area differences in wage levels by a factor 
(established by the Secretary) reflecting the relative hospital wage 
level in the geographic area of the rehabilitation facility compared to 
the national average wage level for the facilities. Not later than 
October 1, 2001 (and at least every 36 months thereafter), the 
Secretary shall update the factor under the preceding sentence on the 
basis of information available to the Secretary (and updated as 
appropriate) of the wages and wage-related costs incurred in furnishing 
rehabilitation services. Any adjustments or updates made under this 
paragraph for a fiscal year shall be made in a manner that assures that 
the aggregated payments under this subsection in the fiscal year are 
not greater or less than those that would have been made in the year 
without such adjustment.''
    The labor-related share is determined by identifying the national 
average proportion of total costs that are related to, influenced by, 
or vary with the local labor market. We continue to classify a cost 
category as labor-related if the costs are labor-intensive and vary 
with the local labor market. Given this, based on our definition of the 
labor-related share, we proposed to include in the labor-related share 
the sum of the relative

[[Page 47861]]

importance of Wages and Salaries, Employee Benefits, Professional Fees: 
Labor-related, Administrative and Business Support Services, All Other: 
Labor-related Services (previously referred to in the FY 2002-based RPL 
market basket as labor-intensive), and a portion of the Capital-Related 
cost weight.
    Consistent with previous rebasings, the ``All Other'' Labor-related 
Services cost category is mostly comprised of building maintenance and 
security services (including, but not limited to, commercial and 
industrial machinery and equipment repair, nonresidential maintenance 
and repair, and investigation and security services). Because these 
services tend to be labor-intensive and are mostly performed at the 
hospital facility (therefore, unlikely to be purchased in the national 
market), we believe that they meet our definition of labor-related 
services.
    As stated in the FY 2006 IRF PPS final rule (70 FR 47880, 47915), 
the labor-related share was defined as the sum of the relative 
importance of Wages and Salaries, Fringe Benefits, Professional Fees, 
Labor-intensive Services, and a portion of the capital share from an 
appropriate market basket. Therefore, to determine the labor-related 
share for the IRF PPS for FY 2011, we used the FY 2002-based RPL market 
basket cost weights relative importance to determine the labor-related 
share for the IRF PPS.
    For the FY 2008-based RPL market basket rebasing, the inclusion of 
the Administrative and Business Support Services cost category into the 
labor-related share remains consistent with the current labor-related 
share because this cost category was previously included in the Labor-
intensive cost category. As previously stated, we establish a separate 
Administrative and Business Support Service cost category so that we 
can use the ECI for Compensation for Office and Administrative Support 
Services to more precisely proxy these specific expenses.
    For the FY 2002-based RPL market basket, we assumed that all 
nonmedical professional services (including accounting and auditing 
services, engineering services, legal services, and management and 
consulting services) were purchased in the local labor market and, 
therefore, all of their associated fees varied with the local labor 
market. As a result, we previously included 100 percent of these costs 
in the labor-related share. In an effort to more accurately determine 
the share of professional fees that should be included in the labor-
related share, we surveyed hospitals regarding the proportion of those 
fees that go to companies that are located beyond their own local labor 
market (the results are discussed below).
    We continue to look for ways to refine our market basket approach 
to more accurately account for the proportion of costs influenced by 
the local labor market. To that end, we conducted a survey of hospitals 
to empirically determine the proportion of contracted professional 
services purchased by the industry that are attributable to local firms 
and the proportion that are purchased from national firms. We notified 
the public of our intent to conduct this survey on December 9, 2005 (70 
FR 73250) and received no comments.
    With approval from the OMB (Control Number 0938-1036), we contacted 
a sample of IPPS hospitals and received responses to our survey from 
108 hospitals. We believe that these data serve as an appropriate proxy 
for the purchasing patterns of professional services for IRFs as they 
are also institutional providers of health care services. Using data on 
FTEs to allocate responding hospitals across strata (region of the 
country and urban/rural status), we calculated post-stratification 
weights. Based on these weighted results, we determined that hospitals 
purchase, on average, the following portions of contracted professional 
services outside of their local labor market:
     34 percent of accounting and auditing services.
     30 percent of engineering services.
     33 percent of legal services.
     42 percent of management consulting services.
    We applied each of these percentages to its respective Benchmark I-
O cost category underlying the professional fees cost category to 
determine the Professional Fees: Nonlabor-related costs. The 
Professional Fees: Labor-related costs were determined to be the 
difference between the total costs for each Benchmark I-O category and 
the Professional Fees: Nonlabor-related costs. This is the methodology 
that we used to separate the FY 2008-based RPL market basket 
professional fees category into Professional Fees: Labor-related and 
Professional Fees: Nonlabor-related cost categories. In addition to the 
professional services listed above, we also classified expenses under 
NAICS 55, Management of Companies and Enterprises, into the 
Professional Fees cost category as was done in previous rebasings. The 
NAICS 55 data are mostly comprised of corporate, subsidiary, and 
regional managing offices, or otherwise referred to as home offices. 
Formerly, all of the expenses within this category were considered to 
vary with, or be influenced by, the local labor market and were thus 
included in the labor-related share. Because many hospitals are not 
located in the same geographic area as their home office, we analyzed 
data from a variety of sources in order to determine what proportion of 
these costs should be appropriately included in the labor-related 
share.
    Using data primarily from the Medicare cost reports and a CMS 
database of Home Office Medicare Records (HOMER) (a database that 
provides city and State information (addresses) for home offices), we 
were able to determine that 19 percent of the total number of 
freestanding IRFs, IPFs, and LTCHs that had home offices had those home 
offices located in their respective local labor markets--defined as 
being in the same Metropolitan Statistical Area (MSA).
    The Medicare cost report requires hospitals to report their home 
office provider numbers. Using the HOMER database to determine the home 
office location for each home office provider number, we compared the 
location of the provider with the location of the hospital's home 
office. We then placed providers into one of the following three 
groups:
     Group 1--Provider and home office are located in different 
States.
     Group 2--Provider and home office are located in the same 
State and same city.
     Group 3--Provider and home office are located in the same 
State and different city.
    We found that 63 percent of the providers with home offices were 
classified into Group 1 (that is, different State) and, thus, these 
providers were determined to not be located in the same local labor 
market as their home office. Although there were a very limited number 
of exceptions (that is, providers located in different States but the 
same MSA as their home office), the 63 percent estimate was unchanged.
    We found that 9 percent of all providers with home offices were 
classified into Group 2 (that is, same State and same city and, 
therefore, the same MSA). Consequently, these providers were determined 
to be located in the same local labor market as their home offices.
    We found that 27 percent of all providers with home offices were 
classified into Group 3 (that is, same State and different city). Using 
data from the Census Bureau to determine the specific MSA for both the 
provider and its home office, we found that 10

[[Page 47862]]

percent of all providers with home offices were identified as being in 
the same State, a different city, but the same MSA.
    Pooling these results, we were able to determine that approximately 
19 percent of providers with home offices had home offices located 
within their local labor market (that is, 9 percent of providers with 
home offices had their home offices in the same State and city (and, 
thus, the same MSA), and 10 percent of providers with home offices had 
their home offices in the same State, a different city, but the same 
MSA). We proposed to apportion the NAICS 55 expense data by this 
percentage. Thus, we proposed to classify 19 percent of these costs 
into the Professional Fees: Labor-related cost category and the 
remaining 81 percent into the Professional Fees: Nonlabor-related 
Services cost category.
    Using this method and the IGI forecast for the first quarter 2011 
of the FY 2008-based RPL market basket, the proposed IRF labor-related 
share for FY 2012 was the sum of the FY 2012 relative importance of 
each labor-related cost category. Consistent with our policy for 
updating the labor-related share with the most recent available data, 
the labor-related share for this final rule reflects IGI's second 
quarter 2011 forecast of the FY 2008-based RPL market basket. Table 9 
shows the FY 2012 relative importance labor-related share using the FY 
2008-based RPL market basket and the FY 2002-based RPL market basket.

  Table 9--Comparison of the FY 2011 Relative Importance Labor-Related
   Share Based on the FY 2002-Based RPL Market Basket and the FY 2012
 Relative Importance Labor-Related Share Based on the FY 2008-Based RPL
                              Market Basket
------------------------------------------------------------------------
                                FY 2011 relative      FY 2012 relative
                                importance labor-     importance labor-
                                related share \1\     related share \2\
------------------------------------------------------------------------
Wages and Salaries..........                52.449                48.984
Employee Benefits...........                13.971                12.998
Professional Fees: Labor-                    2.855                 2.072
 Related....................
Administrative and Business   ....................                 0.416
 Support Services...........
All Other: Labor-Related                     2.109                 2.094
 Services...................
Subtotal....................                71.384                66.564
Labor-Related Portion of                     3.887                 3.635
 Capital Costs (46%)........
                             -------------------------------------------
    Total Labor-Related                     75.271                70.199
     Share..................
------------------------------------------------------------------------
\1\ Published in the FY 2011 IRF PPS Notice (75 FR 42849) and based on
  the second quarter 2010 IGI forecast.
\2\ Based on the second quarter 2011 IGI forecast.

    The labor-related share for FY 2012 is the sum of the FY 2012 
relative importance of each labor-related cost category, and would 
reflect the different rates of price change for these cost categories 
between the base year (FY 2008) and FY 2012. The sum of the relative 
importance for FY 2012 for operating costs (Wages and Salaries, 
Employee Benefits, Professional Fees: Labor-Related, Administrative and 
Business Support Services, and All Other: Labor-related Services) would 
be 66.564 percent, as shown in Table 9.
    The portion of Capital that is influenced by the local labor market 
is estimated to be 46 percent, which is the same percentage applied to 
the FY 2002-based RPL market basket. Since the relative importance for 
Capital-Related Costs would be 7.903 percent of the proposed FY 2008-
based RPL market basket in FY 2012, we take 46 percent of 7.903 percent 
to determine the proposed labor-related share of Capital for FY 2012. 
The result would be 3.635 percent, which we add to 66.564 percent for 
the operating cost amount to determine the total labor-related share 
for FY 2012. Thus, the labor-related share that we use for the IRF PPS 
in FY 2012 will be 70.199 percent. This labor-related share is 
determined using the same methodology that we used to calculate all 
previous IRF labor-related shares.
    Comment: One commenter stated that the CMS proposal to no longer 
include 100 percent of certain types of costs in the labor-related 
share calculation does not coincide with the application of the area 
wage index. This commenter noted that costs captured in the ``Other 
Services'' cost category in the RPL, whether employees, local 
contractors, national contractors, or home office allocations, 
represent personal services, which are in essence labor-related. The 
commenter also noted that the labor-related portion of the base rate is 
adjusted by the area wage index. The IPPS wage index includes in its 
calculation of the local (CBSA) wage index not a portion based on 
location relative to the provider, but 100 percent of the allocated 
home office wages, benefits, and hours. The commenter noted that the 
hospital wage index also includes contracted administrative and general 
services, which would include those categories in CMS' survey such as 
accounting, legal, etc. The commenter suggested that if these costs are 
included in the IPPS wage index, then they should also be included in 
full in the labor-related portion of the base rate that will be 
multiplied by the adjustment factor for the IRF calculation.
    Response: We appreciate the commenter's suggestion. However, we 
disagree that we should allocate 100 percent of service costs as labor-
related. The wage index that is applied to the labor-related portion of 
any payment system measures the variation in labor costs based on 
geographic differences. Therefore, it is appropriate that the wage 
index would include all relative cost differences for various labor 
categories. The labor-related share is defined as the proportion of 
total costs that are related to, influenced by, or vary with the local 
labor market. A cost category is defined as labor-related if both the 
costs of the service are labor-intensive and those costs vary with the 
local labor market. That is, the labor-related share must only include 
the proportion of costs that are determined to vary with the local 
labor market. The apportionment of some of the costs associated with 
various nonmedical professional fees and home office expenses into 
nonlabor-related categories reflects the findings of our analyses that 
concluded portions of those costs are purchased (or paid for) beyond 
the organization's local labor market and thus, are not related to or 
influenced by the local labor market.
    Comment: One commenter expressed concerns regarding the drop in the 
labor-related share from around 75

[[Page 47863]]

percent to 70 percent. The commenter asked CMS to articulate the 
driving factors contributing to the drop in the estimated labor-related 
share and consider the appropriateness of those factors.
    Response: Of the decrease in the labor-related share from about 75 
percent to 70 percent, over 3-quarters of that decrease is the result 
of the decrease in the compensation cost weight. As displayed in Table 
4, the 2008-based RPL market basket compensation cost weight is 62.278 
percent while the 2002-based RPL market basket compensation cost weight 
is 65.877 percent, a decrease of about 3.6 percentage points. The 
compensation cost weights for both the 2002-based and the 2008-based 
RPL market baskets were calculated using the Medicare cost reports for 
freestanding IRFs, IPFs, and LTCHS. We found during our most-recent 
rebasing process that the compensation cost weight had begun gradually 
decreasing over the 2003 to 2008 time period. The new labor-related 
share reflects the most recently available and complete set of Medicare 
cost reports, and thus reflects the updated and appropriate proportion 
of costs that are related to, influenced by, or vary with the local 
labor market for IRFs, IPFs, and LTCHs.
    The remaining difference between the 2002-based and the 2008-based 
labor-related shares is primarily attributable to the classification of 
costs as labor-related and nonlabor-related using an empirically based 
apportionment of professional fees and home office costs. We believe 
the data and methods used to derive this apportionment were technically 
appropriate and result in a more accurate updated labor-related share.
    Comment: One commenter pointed out that Table 9 in the FY 2012 IRF 
Proposed Rule showed a reduction in the labor-related share of 4.937 
percent. The commenter attributed this change to the change in the 
methodology for how CMS classified professional fees and home office 
costs. The commenter noted that CMS only counted 19 percent of costs 
for professional fees and home office costs as labor-related and 
subject to the area wage index adjustment. The commenter noted their 
support for the use of new data to ensure the IRF PPS accurately 
reimburses IRFs for the services they provide, but expressed concern 
that the survey upon which CMS based its decision to make a change to 
the labor-related share was conducted with acute care hospitals paid 
under the IPPS. The commenter expressed concern that the results of the 
professional fees survey may not accurately reflect the percentage of 
nonmedical professional services provided by entities outside the local 
labor market utilized by IRFs. The commenter requested in the future 
that CMS conduct a study of nonmedical professional services using only 
IRFs, IPFs, and LTCHs.
    Response: The overall proposed labor-related share as shown in 
Table 9 of the FY 2012 IRF proposed rule (76 FR 24243) showed a decline 
of 4.937 percent. The commenter attributed the entire change in the 
labor-related share from the 2002-based RPL market basket to the 2008-
based market basket to our change in the professional fees and home 
office cost labor-related designations. We disagree that this is the 
principal driver for the decline in the labor-related share. The 
majority of the decline is based on a decline in relative compensation 
costs from 2002 to 2008 as reported on the Medicare cost reports. In 
particular, this accounts for over 3-quarters of the difference in the 
labor-related share. The remaining decrease in the labor-related share 
is primarily the result of the treatment of professional fees as labor-
related or nonlabor-related. Finally, we did not use 19 percent as the 
value to determine the professional fees that were purchased within the 
local labor market. That is the percentage of home office costs that 
was determined to be purchased within the local labor market. For 
estimates associated with the apportionment of professional fees, we 
refer the reader to the discussion of the use of the survey results and 
how they were applied to determine the labor-related portions. This 
discussion can be found in the FY 2012 IRF PPS proposed rule at (76 FR 
at 24241 through 24242). We note that while this survey was conducted 
using responses from IPPS hospitals, we would expect that these data 
serve as an appropriate proxy for the purchasing patterns of 
professional services for IRFs as they are also institutional providers 
of health care services.
    Comment: Several commenters recommended that CMS phase-in the 
change to the labor-related share over a 2 year period to allow IRFs a 
longer period of time to absorb the impact of this reduction to the 
labor-related share.
    Response: We do not believe that a phase-in of the labor-related 
share is necessary. We estimate that only 3 IRFs would lose more than 5 
percent in payments from this change, with the maximum estimated loss 
being 7.85 percent. While significant, this is similar to percentage 
changes in payments due to annual wage index fluctuations, and we do 
not typically provide phase-ins for the standard wage index 
fluctuations that occur from year to year.
    Final Decision: After consideration of the public comments 
received, we are finalizing our methodology for calculating the labor-
related share for FY 2012 using the 2008-based RPL market basket and 
the most recent forecast data available at the time of this final rule 
which is IHS Global Insight Inc.'s second quarter 2011 forecast. This 
is also the same forecast we are using to derive the FY 2012 market 
basket update for this final rule. As the updated labor-related share 
reflects the current proportion of costs that are related to, are 
influenced by, or vary with the local labor market, we believe it is 
appropriate to incorporate the results in full into the FY 2012 payment 
update. Table 9 shows the relative importance of the FY 2012 labor-
related share using the FY 2008-based RPL market basket and the FY 2011 
relative importance labor-related share using the FY 2002-based RPL 
market basket.

B. Area Wage Adjustment

    Section 1886(j)(6) of the Act requires the Secretary to adjust the 
proportion of rehabilitation facilities' costs attributable to wages 
and wage related costs (as estimated by the Secretary from time to 
time) by a factor (established by the Secretary) reflecting the 
relative hospital wage level in the geographic area of the 
rehabilitation facility compared to the national average wage level for 
those facilities. The Secretary is required to update the IRF PPS wage 
index on the basis of information available to the Secretary on the 
wages and wage-related costs to furnish rehabilitation services. Any 
adjustment or updates made under section 1886(j)(6) of the Act for a FY 
are made in a budget neutral manner.
    In the FY 2009 IRF PPS final rule (73 FR 46378), we maintained the 
methodology described in the FY 2006 IRF PPS final rule to determine 
the wage index, labor market area definitions and hold harmless policy 
consistent with the rationale outlined in the FY 2006 IRF PPS final 
rule (70 FR 47880, 47917 through 47926).
    For FY 2012, we are maintaining the policies and methodologies 
described in the FY 2009 IRF PPS final rule (73 FR 46378) relating to 
the labor market area definitions and the wage index methodology for 
areas with wage data. Thus, we are using the CBSA labor market area 
definitions and the FY 2011 pre-reclassification and pre-floor hospital 
wage index data. In accordance with section 1886(d)(3)(E) of the Act, 
the FY 2011 pre-reclassification and

[[Page 47864]]

pre-floor hospital wage index is based on data submitted for hospital 
cost reporting periods beginning on or after October 1, 2006, and 
ending September 30, 2007 (that is, FY 2007 cost report data).
    The labor market designations made by the OMB include some 
geographic areas where there are no hospitals and, thus, no hospital 
wage index data on which to base the calculation of the IRF PPS wage 
index. We will continue to use the same methodology discussed in the FY 
2008 IRF PPS final rule (72 FR 44299) to address those geographic areas 
where there are no hospitals and, thus, no hospital wage index data on 
which to base the calculation for the FY 2012 IRF PPS wage index.
    Additionally, we will incorporate the CBSA changes published in the 
most recent OMB bulletin that applies to the hospital wage data used to 
determine the current IRF PPS wage index. The changes were nominal and 
did not represent substantive changes to the CBSA-based designations. 
Specifically, OMB added or deleted certain CBSA numbers and revised 
certain titles. The OMB bulletins are available at http://www.whitehouse.gov/omb/bulletins/index.html.
    To calculate the wage-adjusted facility payment for the payment 
rates set forth in this final rule, we multiply the unadjusted Federal 
payment rate for IRFs by the FY 2012 labor-related share based on the 
FY 2008-based RPL market basket (70.199 percent) to determine the 
labor-related portion of the standard payment amount. We then multiply 
the labor-related portion by the applicable IRF wage index from the 
tables in the addendum to this final rule. Table A is for urban areas 
and Table B is for rural areas.
    Adjustments or updates to the IRF wage index made under section 
1886(j)(6) of the Act must be made in a budget neutral manner. We 
calculate a budget neutral wage adjustment factor as established in the 
FY 2004 IRF PPS final rule (68 FR 45689), codified at Sec.  
412.624(e)(1), as described in the steps below. We use the listed steps 
to ensure that the FY 2012 IRF standard payment conversion factor 
reflects the update to the wage indexes (based on the FY 2007 hospital 
cost report data) and the labor-related share in a budget neutral 
manner:
    Step 1. Determine the total amount of the estimated FY 2011 IRF PPS 
rates, using the FY 2011 standard payment conversion factor and the 
labor-related share and the wage indexes from FY 2011 (as published in 
the FY 2011 IRF PPS final rule (75 FR 42836)).
    Step 2. Calculate the total amount of estimated IRF PPS payments 
using the FY 2011 standard payment conversion factor and the proposed 
FY 2012 labor-related share and CBSA urban and rural wage indexes.
    Step 3. Divide the amount calculated in step 1 by the amount 
calculated in step 2. The resulting quotient is the FY 2012 budget 
neutral wage adjustment factor of 0.9988 percent.
    Step 4. Apply the FY 2012 budget neutral wage adjustment factor 
from step 3 to the FY 2011 IRF PPS standard payment conversion factor 
after the application of the adjusted market basket update to determine 
the FY 2012 standard payment conversion factor.
    We received 2 comments on the proposed FY 2012 IRF PPS wage index, 
which are summarized below.
    Comment: Several commenters recommended that CMS develop a new 
methodology for area wage adjustment that eventually eliminates 
hospital wage index reclassifications for all hospitals and that 
reduces the problems associated with unreasonable annual fluctuations 
in wage indices and across geographic boundaries. These commenters also 
recommended that CMS consider wage index policies under the current 
IPPS because IRFs compete in a similar labor pool as acute care 
hospitals. The IPPS wage index policies would allow IRFs to benefit 
from the IPPS reclassification and/or floor policies. The commenters 
further recommended that until a new wage index system is implemented, 
CMS institute a ``smoothing'' variable to the current process to reduce 
the fluctuations IRFs annually experience.
    Response: We note that the IRF PPS does not account for geographic 
reclassification under sections 1886(d)(8) and (d)(10) of the Act, and 
does not apply the ``rural floor'' under section 4410 of the BBA. As we 
do not have an IRF-specific wage index, we are unable to determine at 
this time the degree, if any, to which a geographic reclassification 
adjustment or a ``rural floor'' policy under the IRF PPS is 
appropriate. The rationale for our current wage index policies is fully 
described in the FY 2006 final rule (70 FR 47880, 47926 through 47928).
    Although some commenters recommended that we adopt the IPPS wage 
index policies such as reclassification and floor policies, we note 
that Medicare Payment Advisory Commission (MedPAC's) June 2007 report 
to the Congress, titled ``Report to Congress: Promoting Greater 
Efficiency in Medicare,'' recommends that Congress ``repeal the 
existing hospital wage index statute, including reclassification and 
exceptions, and give the Secretary authority to establish new wage 
index systems.'' We believe that adopting the IPPS wage index policies, 
such as reclassification or floor, would not be prudent at this time 
because MedPAC suggests that the reclassification and exception 
policies in the IPPS wage index alters the wage index values for one-
third of IPPS hospitals.
    As one commenter noted, we have research currently under way to 
examine alternatives to the wage index methodology, including the 
issues the commenters mentioned about ensuring that the wage index 
minimizes fluctuations, matches the costs of labor in the market, and 
provides for a single wage index policy. Section 3137(b) of the 
Affordable Care Act requires CMS to submit a report to Congress by 
December 31, 2011 that includes a plan to reform the hospital wage 
index system. That report is to take MedPAC's 2009 recommendations on 
the Medicare wage index classification system into account, and is to 
include a proposal to revise the IPPS wage index system. MedPAC's 
recommendations were presented in the FY 2009 IPPS final rule (http://edocket.access.gpo.gov/2008/pdf/E8-17914.pdf). The proposal is to 
consider each of the following:
     The use of Bureau of Labor Statistics data or other data 
or methodologies to calculate relative wages for each geographic areas.
     Minimizing variations in wage index adjustments between 
and within MSAs and statewide rural areas.
     Methods to minimize the volatility of wage index 
adjustments while maintaining the principle of budget neutrality.
     The effect that the implementation of the proposal would 
have on health care providers in each region of the country.
     Issues relating to occupational mix, such as staffing 
practices and any evidence on quality of care and patient safety, 
including any recommendations for alternative calculations to the 
occupational mix.
     The provision of a transition period.
    CMS enlisted the help of Acumen, LLC to assist us in meeting the 
requirements of section 106(b)(2) of the Tax Relief and Health Care Act 
of 2006 (Pub. L. 109-432, enacted on December 2006) (TRCA). In February 
2008, we awarded a Task Order under the Expedited Research and 
Demonstration Contract to Acumen, LLC. Acumen, LLC conducted a study of 
both the current methodology used to construct the Medicare wage index 
and the recommendations reported to Congress

[[Page 47865]]

by MedPAC. Parts 1 and 2 of Acumen's final report, which analyzes the 
strengths and weaknesses of the data sources used to construct the CMS 
and MedPAC indexes, is available online at http://www.acumenllc.com/reports/cms.
    MedPAC's recommendations were presented in the FY 2009 IPPS final 
rule (http://edocket.access.gpo.gov/2008/pdf/E8-17914.pdf). We plan to 
monitor the efforts to develop an alternative wage index system for the 
IPPS closely, and determine the impact or influence they may have to 
the IRF PPS wage index.
    Final Decision: Having considered the public comments received, we 
have decided to continue to use the policies and methodologies 
described in the FY 2009 IRF PPS final rule relating to the labor 
market area definitions and the wage index methodology for areas 
without wage data. Therefore, this final rule continues to use the 
Core-Based Statistical Area (CBSA) labor market area definitions and 
the pre-reclassification and pre-floor hospital wage index data based 
on 2007 cost report data. However, we will continue to monitor progress 
on the revisions to the IPPS wage index to identify any policy changes 
that may be appropriate for IRFs.
    We discuss the calculation of the standard payment conversion 
factor for FY 2012 in section VI.C of this final rule.

C. Description of the Final IRF Standard Payment Conversion Factor and 
Payment Rates for FY 2012

    To calculate the standard payment conversion factor for FY 2012, as 
illustrated in Table 10, we begin by applying the adjusted market 
basket increase factor for FY 2012 that was adjusted in accordance with 
sections 1886(j)(3)(C) and (D) of the Act (1.8 percent, or 2.9 percent 
less a cumulative total adjustment of 1.1 percentage points, as 
described in section VI.A.3. of this final rule), to the standard 
payment conversion factor for FY 2011 ($13,860). Applying the 1.8 
percent adjusted market basket increase factor for FY 2012 to the 
standard payment conversion factor for FY 2011 of $13,860 yields a 
standard payment amount of $14,109. Then, we apply the budget 
neutrality factor for the FY 2012 wage index and labor-related share of 
0.9988, which results in a standard payment amount of $14,093. Finally, 
we apply the budget neutrality factor for the revised CMG relative 
weights of 0.9988, which results in a final standard payment conversion 
factor of $14,076 for FY 2012.

    Table 10--Calculations To Determine the FY 2012 Standard Payment
                            Conversion Factor
------------------------------------------------------------------------
             Explanation for adjustment                  Calculations
------------------------------------------------------------------------
Standard Payment Conversion Factor for FY 2011......             $13,860
Payment Update Factor for FY 2012 (1.8 percent),                 x 1.018
 which reflects a 2.9 percent market basket
 increase, reduced by a 1.0 percentage point
 productivity adjustment, and reduced by 0.1
 percentage point in accordance with sections
 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the
 Act................................................
Budget Neutrality Factor for the Wage Index and                 x 0.9988
 Labor-Related Share................................
Budget Neutrality Factor for the Revisions to the               x 0.9988
 CMG Relative Weights...............................
FY 2012 Standard Payment Conversion Factor..........           = $14,076
------------------------------------------------------------------------

    After the application of the CMG relative weights described in 
section IV of this final rule, to the FY 2012 standard payment 
conversion factor ($14,076), the resulting unadjusted IRF prospective 
payment rates for FY 2012 are shown in Table 11, ``FY 2012 Payment 
Rates.''

                                         Table 11--FY 2012 Payment Rates
----------------------------------------------------------------------------------------------------------------
                                   Payment rate tier   Payment rate tier   Payment rate tier    Payment rate no
               CMG                         1                   2                   3              comorbidity
----------------------------------------------------------------------------------------------------------------
0101............................          $10,804.74          $10,109.38           $9,080.43           $8,589.18
0102............................           13,410.21           12,545.94           11,270.65           10,659.75
0103............................           16,014.27           14,982.49           13,459.47           12,728.93
0104............................           16,636.42           15,565.24           13,983.10           13,224.40
0105............................           19,330.57           18,086.25           16,246.52           15,365.36
0106............................           22,261.19           20,826.85           18,708.41           17,694.94
0107............................           25,204.49           23,581.52           21,182.97           20,034.37
0108............................           31,217.75           29,206.29           26,236.26           24,814.58
0109............................           28,867.06           27,009.03           24,261.39           22,946.70
0110............................           37,208.50           34,811.36           31,271.24           29,576.49
0201............................           10,514.77            8,631.40            7,995.17            7,260.40
0202............................           14,938.86           12,263.01           11,359.33           10,313.49
0203............................           17,003.81           13,959.17           12,928.81           11,740.79
0204............................           17,813.18           14,622.15           13,543.93           12,298.20
0205............................           22,496.26           18,467.71           17,105.16           15,532.87
0206............................           28,004.20           22,988.92           21,294.17           19,334.79
0207............................           37,868.66           31,086.85           28,793.87           26,144.76
0301............................           14,886.78           13,391.91           11,881.55           10,880.75
0302............................           18,851.99           16,958.76           15,045.84           13,779.00
0303............................           22,414.62           20,163.87           17,889.19           16,384.46
0304............................           31,034.76           27,918.34           24,768.13           22,684.88
0401............................           14,903.67           12,407.99           11,287.54            9,903.87
0402............................           19,427.70           16,174.73           14,713.64           12,909.10
0403............................           34,710.01           28,896.62           26,286.93           23,064.93
0404............................           61,648.66           51,322.50           46,688.68           40,963.98
0405............................           54,454.41           45,333.17           41,239.86           36,183.77
0501............................            9,232.45            8,863.66            7,905.08            7,005.63

[[Page 47866]]

 
0502............................           13,815.59           13,263.81           11,829.47           10,483.80
0503............................           17,538.70           16,837.71           15,016.28           13,308.86
0504............................           21,146.37           20,301.81           18,105.96           16,046.64
0505............................           24,714.64           23,726.51           21,160.45           18,754.86
0506............................           34,636.81           33,253.14           29,656.72           26,284.11
0601............................           13,311.67           11,249.54           10,260.00            9,274.68
0602............................           17,617.52           14,888.19           13,580.52           12,275.68
0603............................           22,752.45           19,227.82           17,538.70           15,853.80
0604............................           30,167.68           25,494.45           23,254.96           21,021.10
0701............................           11,262.21           11,087.67           10,678.05            9,532.27
0702............................           14,737.57           14,508.13           13,973.25           12,472.74
0703............................           17,734.35           17,457.06           16,813.78           15,007.83
0704............................           22,919.95           22,562.42           21,731.94           19,396.73
0801............................            8,086.66            8,086.66            7,536.29            6,880.35
0802............................           10,873.71           10,873.71           10,133.31            9,252.15
0803............................           14,992.35           14,992.35           13,971.84           12,755.67
0804............................           13,241.29           13,241.29           12,340.43           11,266.43
0805............................           16,305.64           16,305.64           15,195.04           13,873.31
0806............................           19,909.09           19,909.09           18,553.58           16,939.06
0901............................            1,918.15           10,500.70            9,502.71            8,608.88
0902............................           15,939.66           14,045.03           12,709.22           11,514.17
0903............................           20,414.42           17,987.72           16,277.49           14,747.43
0904............................           26,450.21           23,305.63           21,090.07           19,108.17
1001............................           14,547.55           12,790.86           11,428.30           10,213.55
1002............................           19,102.54           16,794.08           15,005.02           13,411.61
1003............................           28,222.38           24,813.17           22,169.70           19,814.79
1101............................           14,581.33           14,581.33           13,831.08           12,980.89
1102............................           21,938.85           21,938.85           20,808.55           19,530.45
1201............................           11,404.38           11,404.38           11,407.19           10,782.22
1202............................           14,869.89           14,869.89           14,872.70           14,057.70
1203............................           18,342.44           18,342.44           18,345.25           17,340.22
1301............................           12,579.72           13,673.43           13,673.43           11,094.70
1302............................           16,566.04           18,006.02           18,006.02           14,609.48
1303............................            1,411.00           23,271.85           23,271.85           18,882.95
1401............................           13,246.92           10,606.27            9,378.84            8,482.20
1402............................           17,789.25           14,242.10           12,593.80           11,390.30
1403............................           21,484.20           17,200.87           15,210.53           13,756.47
1404............................           27,828.25           22,279.49           19,702.18           17,818.81
1501............................           13,527.04           12,630.39           10,886.38           10,290.96
1502............................           17,023.51           15,896.03           13,701.58           12,951.33
1503............................           20,992.95           19,602.24           16,895.42           15,970.63
1504............................           26,519.18           24,762.50           21,343.44           20,175.13
1601............................           15,732.75           12,384.06           10,868.08           10,158.65
1602............................           21,074.59           16,588.57           14,557.40           13,607.27
1603............................           27,234.24           21,437.75           18,812.57           17,585.15
1701............................           14,689.71           13,075.20           11,866.07           10,372.60
1702............................           19,384.06           17,251.55           15,656.73           13,686.09
1703............................           22,859.42           20,345.45           18,463.49           16,140.95
1704............................           29,266.82           26,047.64           23,639.23           20,664.98
1801............................           16,913.72           13,876.12           13,396.13           12,253.16
1802............................           23,246.51           19,070.16           18,411.41           16,840.53
1803............................           39,854.79           32,695.73           31,565.43           28,872.69
1901............................           16,184.58           14,257.58           12,934.44           12,560.01
1902............................           30,830.66           27,161.05           24,638.63           23,927.79
1903............................           51,689.89           45,537.27           41,310.24           40,118.01
2001............................           12,022.31           10,623.16            9,523.82            8,556.80
2002............................           16,090.28           14,216.76           12,747.23           11,452.23
2003............................           20,318.71           17,953.94           16,097.31           14,461.68
2004............................           27,245.51           24,075.59           21,585.55           19,392.51
2101............................           35,405.36           30,644.86           24,404.97           19,781.00
5001............................  ..................  ..................  ..................            2,076.21
5101............................  ..................  ..................  ..................            8,242.91
5102............................  ..................  ..................  ..................           20,717.06
5103............................  ..................  ..................  ..................            9,810.97
5104............................  ..................  ..................  ..................           26,431.91
----------------------------------------------------------------------------------------------------------------

[[Page 47867]]

D. Example of the Methodology for Adjusting the Federal Prospective 
Payment Rates

    Table 12 illustrates the methodology for adjusting the Federal 
prospective payments (as described in sections VI.A. through VI.C. of 
this final rule). The following examples are based on two hypothetical 
Medicare beneficiaries, both classified into CMG 0110 (without 
comorbidities). The unadjusted Federal prospective payment rate for CMG 
0110 (without comorbidities) appears in Table 11.

    Example: One beneficiary is in Facility A, an IRF located in 
rural Spencer County, Indiana, and another beneficiary is in 
Facility B, an IRF located in urban Harrison County, Indiana. 
Facility A, a rural non-teaching hospital has a DSH percentage of 5 
percent (which would result in a LIP adjustment of 1.0228), a wage 
index of 0.8391, and a rural adjustment of 18.4 percent. Facility B, 
an urban teaching hospital, has a DSH percentage of 15 percent 
(which would result in a LIP adjustment of 1.0666 percent), a wage 
index of 0.8896, and a teaching status adjustment of 0.0610.

    To calculate each IRF's labor and non-labor portion of the Federal 
prospective payment, we begin by taking the unadjusted Federal 
prospective payment rate for CMG 0110 (without comorbidities) from 
Table 11. Then, we multiply the labor-related share for FY 2012 (70.199 
percent) described in section VI.A.4 of this final rule by the 
unadjusted Federal prospective payment rate. To determine the non-labor 
portion of the Federal prospective payment rate, we subtract the labor 
portion of the Federal payment from the unadjusted Federal prospective 
payment.
    To compute the wage-adjusted Federal prospective payment, we 
multiply the labor portion of the Federal payment by the appropriate 
wage index found in the addendum in Tables A and B. The resulting 
figure is the wage-adjusted labor amount. Next, we compute the wage-
adjusted Federal payment by adding the wage-adjusted labor amount to 
the non-labor portion.
    Adjusting the wage-adjusted Federal payment by the facility-level 
adjustments involves several steps. First, we take the wage-adjusted 
Federal prospective payment and multiply it by the appropriate rural 
and LIP adjustments (if applicable). Second, to determine the 
appropriate amount of additional payment for the teaching status 
adjustment (if applicable), we multiply the teaching status adjustment 
(0.0610, in this example) by the wage-adjusted and rural-adjusted 
amount (if applicable). Finally, we add the additional teaching status 
payments (if applicable) to the wage, rural, and LIP-adjusted Federal 
prospective payment rates. Table 12 illustrates the components of the 
adjusted payment calculation.

   Table 12--Example of Computing the IRF FY 2012 Federal Prospective
                                 Payment
------------------------------------------------------------------------
                                   Rural facility A    Urban facility B
    Steps                          (Spencer Co., IN)  (Harrison Co., IN)
------------------------------------------------------------------------
1............  Unadjusted                 $29,576.49          $29,576.49
                Federal
                Prospective
                Payment.
2............  Labor Share......           x 0.70199           x 0.70199
3............  Labor Portion of         = $20,762.40        = $20,762.40
                Federal Payment.
4............  CBSA Based Wage              x 0.8391            x 0.8896
                Index (shown in
                the Addendum,
                Tables 1 and 2).
5............  Wage-Adjusted            = $17,421.73        = $18,470.23
                Amount.
6............  Nonlabor Amount..         + $8,814.09         + $8,814.09
7............  Wage-Adjusted            = $26,235.82        = $27,284.32
                Federal Payment.
8............  Rural Adjustment.             x 1.184             x 1.000
9............  Wage- and Rural-         = $31,063.21        = $27,284.32
                Adjusted Federal
                Payment.
10...........  LIP Adjustment...            x 1.0228            x 1.0666
11...........  FY 2012 Wage-,           = $31,771.45        = $29,101.46
                Rural-, and LIP-
                Adjusted Federal
                Prospective
                Payment Rate.
12...........  FY 2012 Wage- and          $31,063.21          $27,284.32
                Rural-Adjusted
                Federal
                Prospective
                Payment.
13...........  Teaching Status              x 0.0000            x 0.0610
                Adjustment.
14...........  Teaching Status               = $0.00         = $1,664.34
                Adjustment
                Amount.
15...........  FY2012 Wage-,            + $31,771.45        + $29,101.46
                Rural-, and LIP-
                Adjusted Federal
                Prospective
                Payment Rate.
16...........  Total FY 2012            = $31,771.45        = $30,765.80
                Adjusted Federal
                Prospective
                Payment.
------------------------------------------------------------------------

Thus, the adjusted payment for Facility A would be $31,771.45 and the 
adjusted payment for Facility B would be $30,765.80.

VII. Update to Payments for High-Cost Outliers Under the IRF PPS

A. Update to the Outlier Threshold Amount for FY 2012

    Section 1886(j)(4) of the Act provides the Secretary with the 
authority to make payments in addition to the basic IRF prospective 
payments for cases incurring extraordinarily high costs. A case 
qualifies for an outlier payment if the estimated cost of the case 
exceeds the adjusted outlier threshold. We calculate the adjusted 
outlier threshold by adding the IRF PPS payment for the case (that is, 
the CMG payment adjusted by all of the relevant facility-level 
adjustments) and the adjusted threshold amount (also adjusted by all of 
the relevant facility-level adjustments). Then, we calculate the 
estimated cost of a case by multiplying the IRF's overall CCR by the 
Medicare allowable covered charge. If the estimated cost of the case is 
higher than the adjusted outlier threshold, we make an outlier payment 
for the case equal to 80 percent of the difference between the 
estimated cost of the case and the outlier threshold.
    In the FY 2002 IRF PPS final rule (66 FR 41362 through 41363), we 
discussed our rationale for setting the outlier threshold amount for 
the IRF PPS so that estimated outlier payments would equal 3 percent of 
total estimated payments. For the 2002 IRF PPS final rule, we analyzed 
various outlier policies using 3, 4, and 5 percent of the total 
estimated payments, and we concluded that an outlier policy set at 3 
percent of total estimated payments would optimize the extent to which 
we could reduce the financial risk to IRFs of caring for high-cost 
patients, while still providing for adequate payments for all other 
(non-high cost outlier) cases.
    Subsequently, we updated the IRF outlier threshold amount in the 
FYs 2006 through 2010 IRF PPS final rules and the FY 2011 notice (70 FR 
47880, 71 FR 48354, 72 FR 44284, 73 FR 46370, 74 FR 39762, and 75 FR 
42836, respectively) to maintain estimated outlier payments at 3 
percent of total estimated payments. We also stated in the FY 2009 
final rule (73 FR 46370 at 46385) that we would continue to analyze the 
estimated outlier payments

[[Page 47868]]

for subsequent years and adjust the outlier threshold amount as 
appropriate to maintain the 3 percent target.
    To update the IRF outlier threshold amount for FY 2012, we use FY 
2010 claims data and the same methodology that we used to set the 
initial outlier threshold amount in the FY 2002 IRF PPS final rule (66 
FR 41316 and 41362 through 41363), which is also the same methodology 
that we used to update the outlier threshold amounts for FYs 2006 
through 2011. Based on an analysis of the most recent FY 2010 IRF 
claims data, the IRF outlier payments as a percentage of total 
estimated payments were approximately 2.6 percent in FY 2011.
    We received 3 comments on the update to the outlier threshold 
amount for FY 2012, which are summarized below:
    Comment: One commenter expressed support for continuing to 
establish outlier payments at 3 percent of total payments. However, 
several commenters requested more information on why the proposed 
outlier threshold increased from $11,410 in FY 2011 to $11,822 in the 
FY 2012 proposed rule when only 2.7 percent of the 3 percent outlier 
payments were projected to be paid out in FY 2011.
    Response: We proposed to move to an un-weighted regression 
methodology in the FY 2012 proposed rule, which caused a reduction to 
the LIP and Teaching adjustment factors. Our facility-level adjustment 
factors are budget neutral, meaning that any reduction in the 
adjustment factors results in an increase to the standard payment 
conversion factor. Therefore, the standard payment conversion factor 
was estimated to increase from $13,860 in FY 2011 to $14,528 in the FY 
2012 proposed rule (this has changed to $14,076 in this final rule, as 
discussed below). The large increase in the proposed standard payment 
conversion factor resulted in an increase to the outlier threshold, 
rather than the decrease anticipated by the commenters.
    However, as we are not adopting the proposed revisions to the 
facility-level adjustments in this final rule, the increase in the 
standard payment conversion factor from FY 2011 to FY 2012 is smaller. 
The final standard payment conversion factor for FY 2012 is $14,076. 
Consequently, the FY 2012 outlier threshold that we are finalizing in 
this final rule is lower than the FY 2011 outlier threshold amount.
    Comment: One commenter stated that the calculation of the CCRs in 
other settings has been identified as a potential reason for those 
settings' difficulties in establishing an appropriate outlier 
threshold, which may also be the case for the IRF PPS. The commenter 
suggested that CMS assess whether this is a problem for the IRF PPS and 
release more information on the role that the CCRs play in establishing 
the outlier threshold.
    Response: We appreciate the commenter's concerns. However, we do 
not believe that the calculation of the CCRs creates a problem in 
setting the outlier threshold for the IRF PPS. In order to set the 
outlier threshold, we first estimate the cost of a case in the current 
fiscal year by multiplying an overall facility-specific cost-to-charge 
ratio by charges and by the market basket for the current fiscal year 
(without any adjustments). The outlier threshold for the upcoming 
fiscal year is then calculated by simulating aggregate payments with 
and without a change in the outlier threshold, and applying an 
iterative process that accounts for changes in the market basket, wage 
index and labor-share, CMG relative weights, and facility-level 
adjustment factors, to determine a threshold for the upcoming fiscal 
year that would result in outlier payments being equal to 3 percent of 
total payments under the simulation.
    We note, too, that we implemented a new outlier reconciliation 
process for IRFs (and other settings) beginning April 1, 2011 that we 
believe will improve the accuracy and reliability of the IRF CCRs. For 
more information on the new outlier reconciliation process, please view 
the ``Outlier Reconciliation'' link on the IRF PPS Web site at (http://www.cms.gov/InpatientRehabFacPPS/03_OutlierR.asp#TopOfPage).
    Comment: One commenter suggested that CMS evaluate the distribution 
of outlier payments. If CMS determines that low-volume facilities, 
rather than facilities treating patients of a higher acuity level, are 
mostly receiving the outlier payments then CMS should reduce the 
outlier pool and add the amount back to the standard payment conversion 
factor.
    Response: We will continue to monitor our IRF outlier policies to 
ensure that they appropriately compensate IRFs for treating unusually 
high-cost patients and, thereby, promote access to care of patients who 
are likely to require unusually high-cost care. At this time, however, 
we do not find any indications to suggest that low-volume facilities 
are disproportionately receiving outlier payments. We believe that the 
outlier policy of 3 percent of total estimated payments optimizes the 
extent to which we can encourage facilities to continue to take 
patients that are likely to have unusually high costs, while still 
providing adequate payment for all other cases. In addition, as we have 
explained before, we do not make adjustments to PPS payment rates to 
account for differences between projected and actual outlier payments 
in a previous year. We believe that our outlier policies are consistent 
with the statute and the goals of the prospective payment system, and 
that they are equitable. We will carefully consider the commenter's 
suggestions, and will consider proposing additional refinements to the 
IRF outlier policies in the future if we find that such refinements are 
necessary.
    Final Decision: After carefully considering all of the comments we 
received on the proposed update to the outlier threshold amount for FY 
2012, we are reducing the outlier threshold amount to $10,660 to 
maintain estimated outlier payments at 3 percent of total estimated 
aggregate IRF payments for FY 2012.

B. Update to the IRF Cost-to-Charge Ratio Ceilings

    In accordance with the methodology stated in the FY 2004 IRF PPS 
final rule (68 FR 45674, 45692 through 45694), we apply a ceiling to 
IRFs' CCRs. Using the methodology described in that final rule, we 
update the national urban and rural CCRs for IRFs, as well as the 
national CCR ceiling for FY 2012, based on analysis of the most recent 
data that is available. We apply the national urban and rural CCRs in 
the following situations:
     New IRFs that have not yet submitted their first Medicare 
cost report.
     IRFs whose overall CCR is in excess of the national CCR 
ceiling for FY 2012, as discussed below.
     Other IRFs for which accurate data to calculate an overall 
CCR are not available.
    Specifically, for FY 2012, the national average CCR for rural IRFs 
is 0.669, which we calculated by taking an average of the CCRs for all 
rural IRFs using their most recently submitted cost report data. 
Similarly, the national average CCR for urban IRFs is 0.520, which we 
calculated by taking an average of the CCRs for all urban IRFs using 
their most recently submitted cost report data. We apply weights to 
both of these averages using the IRFs' estimated costs, meaning that 
the CCRs of IRFs with higher costs factor more heavily into the 
averages than the CCRs of IRFs with lower costs. For this final rule, 
we used the most recent available cost report data (FY 2009). This 
includes all IRFs whose cost reporting periods begin

[[Page 47869]]

on or after October 1, 2008, and before October 1, 2009. If, for any 
IRF, the FY 2009 cost report was missing or had an ``as submitted'' 
status, we used data from a previous fiscal year's (that is, FY 2004 
through FY 2008) settled cost report for that IRF. We do not use cost 
report data from before FY 2004 for any IRF because changes in IRF 
utilization since FY 2004 resulting from the 60 percent rule and IRF 
medical review activities suggest that these older data do not 
adequately reflect the current cost of care.
    In accordance with past practice, we set the national CCR ceiling 
at 3 standard deviations above the mean CCR. Using this method, the 
national CCR ceiling is set at 1.55 for FY 2012. This means that, if an 
individual IRF's CCR exceeds this ceiling of 1.55 for FY 2012, we would 
replace the IRF's CCR with the appropriate national average CCR (either 
rural or urban, depending on the geographic location of the IRF). We 
calculate the national CCR ceiling by:
    Step 1. Taking the national average CCR (weighted by each IRF's 
total costs, as discussed above) of all IRFs for which we have 
sufficient cost report data (both rural and urban IRFs combined).
    Step 2. Calculating the standard deviation of the national average 
CCR computed in step 1.
    Step 3. Multiplying the standard deviation of the national average 
CCR computed in step 2 by a factor of 3 to compute a statistically 
significant reliable ceiling.
    Step 4. Adding the result from step 3 to the national average CCR 
of all IRFs for which we have sufficient cost report data, from step 1.
    We did not receive any comments on the proposed updates to the IRF 
CCR Ceilings.
    Final Decision: We did not receive any comments on the IRF cost-to-
charge ratio ceiling. Therefore, we are finalizing the national average 
urban CCR at 0.520, the national average rural CCR at 0.669, and the 
national CCR ceiling at 1.55 percent for FY 2012.

VIII. Impact of the IPPS Data Matching Process Changes on the IRF PPS 
Calculation of the Low-Income Percentage Adjustment Factor

    Section 1886(j)(3)(A)(v) of the Act confers broad authority upon 
the Secretary to adjust the per unit payment rate ``by such * * * 
factors as the Secretary determines are necessary to properly reflect 
variations in necessary costs of treatment among rehabilitation 
facilities.'' For example, we adjust the Federal prospective payment 
amount associated with a CMG to account for facility-level 
characteristics such as an IRF's LIP, teaching status, and location in 
a rural area, if applicable, as described in Sec.  412.624(e).
    In the FY 2002 IRF PPS final rule (66 FR 41359 through 41361) that 
implemented the IRF PPS, we established the IRF LIP adjustment. In that 
final rule, we said that we would calculate the LIP adjustment by using 
the same DSH patient percentage used in the acute IPPS DSH adjustment.
    The DSH patient percentage is equal to the sum of the 
``Supplemental Security Income (SSI) fraction'' and the ``Medicaid 
Fraction.'' We compute the SSI fraction (also known as the ``SSI 
ratio'' or the ``Medicare fraction'') by dividing the number of the 
facility's inpatient days that are furnished to patients who were 
entitled to both Medicare Part A (including patients who are enrolled 
in a Medicare Advantage (Part C) plan) and SSI benefits by the 
facility's total number of patient days furnished to patients entitled 
to benefits under Medicare Part A (including patients who are enrolled 
in a Medicare Advantage (Part C) plan). To determine the number of 
inpatient days for individuals entitled to both Medicare Part A and 
SSI, as required for calculation of the numerator of the SSI fraction, 
we match the Medicare records and SSI eligibility records for each 
IRF's patients during the FY. The data underlying the match process are 
drawn from: (a) The Medicare Provider Analysis and Review (MedPAR) data 
file; and (b) SSI eligibility data provided by the Social Security 
Administration (SSA). We recently revised this data match. See the FY 
2011 IPPS final rule (75 FR 50041, 50276).
    As previously stated, it is our policy to calculate the LIP 
adjustment using the same DSH patient percentage used in the acute IPPS 
DSH adjustment. In keeping with this long-standing policy, we will use 
the same matching process as IPPS for calculating the SSI fractions for 
FYs 2011 and beyond. This process is described in the FY 2011 IPPS 
final rule, and will be used to calculate IRFs' SSI fractions for FY 
2011. The FY 2011 IPPS final rule (75 FR 50277 through 50286) gives 
information on this revised data matching process.
    We received 2 comments on our stated policy to use the same data 
matching process as IPPS for calculating the SSI fractions for FYs 2011 
and beyond, which are summarized below.
    Comment: The commenters supported our use of the same data matching 
process for IRFs that we use for IPPS. However, one commenter asked 
whether CMS plans to use the new data matching process for calculating 
the IRF SSI ratios for any cost reporting periods prior to FY 2011. 
Specifically, the commenter requested information on whether or not CMS 
plans to apply the new data matching process to any existing appeals of 
the IRF SSI ratios, regardless of the cost reporting period.
    Response: As we discussed in the FY 2012 IRF PPS proposed rule (76 
FR 24214 at 24249 through 24250), in keeping with our long-standing 
policy of using the same DSH patient percentage used in the acute IPPS 
DSH adjustment, we will use the same matching process as IPPS for 
calculating the IRF SSI ratios for FYs 2011 and beyond. The comment 
about the data matching process for existing appeals of the SSI ratio 
for cost reporting periods prior to FY 2011 is outside the scope of the 
FY 2012 IRF PPS proposed rule. We will continue our ongoing analysis to 
determine the most appropriate methodologies to use in addressing open 
appeals, in both the IPPS and the IRF settings.

IX. Updates to the Policies in 42 CFR Part 412

    Prior to the implementation of the IRF PPS on January 1, 2002, IRFs 
were paid based on the costs that they reported on their Medicare cost 
reports, subject to some limits. To simplify the cost reporting 
process, both for providers and for CMS and the Medicare contractors 
that monitored the cost reports, regulations were put into place that 
carefully defined, for example, when and how providers could be 
considered ``new'' and when and how they could expand their bed size 
and square footage. Under the IRF PPS, however, Medicare pays IRFs 
according to Federal prospective payment rates that are no longer tied 
to an individual IRF's Medicare cost reports. This new payment 
methodology has made some of the requirements regarding new IRFs and 
IRF expansions obsolete.
    Prior to 2002, the regulations distinguished between freestanding 
rehabilitation hospitals and rehabilitation units of acute care 
hospitals, with separate regulatory sections for the two types of 
facilities even though many of the same requirements applied to both. 
Under the IRF PPS, the distinctions between freestanding IRFs and IRF 
units are no longer relevant because both types of facilities are paid 
the same and are subject to the same rules and requirements. The 
separation of the regulatory sections resulted in unnecessary 
repetition and confusion about which regulations applied to which types 
of facilities.

[[Page 47870]]

    In addition, we added new IRF coverage requirements to Sec.  
412.622(a)(3), (4), and (5) in the FY 2010 IRF PPS final rule (74 FR 
39762 at 39811 through 39812) for IRF discharges occurring on or after 
January 1, 2010. Several of the IRF conditions of payment in the 
existing Sec.  412.23(b)5 and Sec.  412.29, including the requirements 
for preadmission screenings to be conducted on all prospective 
patients, the requirements for IRF patients to receive close medical 
supervision, the requirements for plans of care to be developed for all 
IRF patients, and the requirements for patients to receive an 
interdisciplinary approach to care in the IRF, mirror some of the IRF 
coverage requirements in Sec.  412.622(a)(3), (4), and (5).
    Finally, in recent years, we have observed an increase in the 
number and complexity of acquisitions and mergers occurring in this 
industry. In some cases, the Medicare rules and requirements for IRFs 
did not adequately address the number and complexity of acquisitions 
and mergers because they simply did not occur when the regulations were 
written. In other cases, regulations were written to address issues 
that do not exist today.
    For all of these reasons, in this final rule we consolidate, 
clarify, and revise the regulations for inpatient rehabilitation 
facilities at Sec.  412.23(b), Sec.  412.25(b), Sec.  412.29, and Sec.  
412.30 to update and simplify the policies, to eliminate unnecessary 
repetition and confusion, and to enhance the consistency with the IRF 
coverage requirements in Sec.  412.622(a)(3), (4), and (5). The 
modifications will eliminate regulations that are no longer necessary 
under the IRF PPS, and they will enable IRFs to more easily adjust to 
beneficiary changes in demand for IRF services, which will improve 
beneficiary access to these services. Many of the modifications will 
also reduce costs for providers and for the government by reducing the 
amount of time and expenditures devoted to adhering to (for providers) 
and enforcing (for the government) regulations that are no longer 
necessary. As we have no way of determining how many IRFs might take 
advantage of the added flexibility these regulations afford to expand 
or change their operations, we are not able to quantify the potential 
savings that may result from these changes. For example, each time an 
IRF unit submitted a request to add beds to its facility under the 
prior regulations; the Medicare contractor had to determine whether or 
not the added IRF beds would be considered ``new.'' To be considered 
``new,'' the beds must have been added at the start of a cost reporting 
period, and the hospital must have ``obtained approval, under State 
licensure and Medicare certification, for an increase in its hospital 
bed capacity that is greater than 50 percent of the number of beds it 
seeks to add to the unit.'' We believe that the first requirement (that 
beds can only be added at the start of a cost reporting period) was 
difficult, and potentially costly, for IRFs that were expanding through 
new construction because the exact timing of the end of a construction 
project is often difficult to predict. Construction delays can hamper 
an IRF's ability to have the construction completed exactly at the 
start of a cost reporting period, which can lead to significant revenue 
loss for the facility if the IRF is unable to add beds until the next 
cost reporting period. We believe that it is no longer necessary to 
require IRF beds to be added at the start of a cost reporting period. 
Further, the regulations required Medicare contractors to expend 
unnecessary resources determining whether the IRF met the second 
criteria, which required the hospital to have ``obtained approval, 
under State licensure and Medicare certification, for an increase in 
its hospital bed capacity that is greater than 50 percent of the number 
of beds it seeks to add to the unit.'' The modifications to the 
regulations in this final rule are designed to simplify the regulations 
in order to minimize the amount of effort that Medicare contractors 
would need to spend enforcing them. Finally, the modifications will 
enhance the consistency between the IRF coverage and payment 
requirements.
    We note that Sec.  412.25(b) applies to both IRFs and inpatient 
psychiatric facilities (IPFs), so the revisions to Sec.  412.25(b) will 
also affect IPFs in similar ways.

A. Consolidation of the Requirements for Rehabilitation Hospitals and 
Rehabilitation Units

    Under the IRF PPS, rehabilitation hospitals and rehabilitation 
units of acute care hospitals (and critical access hospitals (CAHs)) 
are paid the same and, with very few exceptions, are subject to the 
same Medicare rules and requirements. For this reason, we believe that 
it is no longer necessary to have separate sections in 42 CFR part 412 
that define the requirements for rehabilitation hospitals and 
rehabilitation units of acute care hospitals (and CAHs). This leads to 
excessive repetition and potential confusion about which rules apply to 
which types of facilities.
    Thus, we are revising and consolidating the regulations for 
rehabilitation facilities that are currently in Sec.  412.23(b) (for 
rehabilitation hospitals), Sec.  412.29 (for rehabilitation units), and 
Sec.  412.30 (for rehabilitation units) into a revised Sec.  412.29 
that contains the requirements for all IRFs, whether they be 
freestanding rehabilitation hospitals or rehabilitation units of acute 
care hospitals (or CAHs). We believe that this will simplify the 
regulations by consolidating the majority of the requirements for IRFs 
into just one sub-section of 42 CFR part 412.
    Although we are making slight modifications to the regulations in 
Sec.  412.25(b), as discussed in section IX of this final rule, we are 
not moving the IRF regulations in Sec.  412.25 to Sec.  412.29 in this 
final rule. The regulations in Sec.  412.25, such as the requirement to 
have beds that are physically separate from the rest of the hospital, 
the requirement that the unit be serviced by the same Medicare 
contractor as the rest of the hospital, and the requirement that the 
unit be treated as a separate cost center for cost finding and 
apportionment purposes, by their nature apply uniquely to units that 
are part of another hospital. While these requirements are not 
applicable to freestanding IRFs, we do not believe that it would be 
appropriate to include them with the rest of the IRF regulations in 
Sec.  412.29 that are intended to apply to both freestanding IRF 
hospitals and to IRF units of hospitals. Further, we are not making 
modifications to Sec.  412.25, other than the changes to Sec.  
412.25(b) as discussed in section IX of this final rule, because the 
regulations in Sec.  412.25(a) through (g) (excluding (b)) remain 
relevant and important for defining IRF units of hospitals for payment 
purposes.
    However, we are replacing the text that was located at Sec.  
412.23(b) with text that simply refers the reader to the requirements 
in Sec.  412.29, and moving the rest of Sec.  412.23(b) and all of 
Sec.  412.30 to Sec.  412.29. We are leaving text in Sec.  412.23(b) 
that refers IRFs to the requirements they must meet in Sec.  412.29 
only so that we do not disturb the ordering of the rest of Sec.  412.23 
that contain the Medicare regulations for inpatient psychiatric 
facilities, children's hospitals, and long-term care hospitals. 
Specifically, we are moving all of the text in Sec.  412.23(b) to Sec.  
412.29 except for a new paragraph that refers to the requirements in 
Sec.  412.29, which would read as follows: ``(b) Rehabilitation 
hospitals. A rehabilitation hospital must meet the requirements 
specified in Sec.  412.29 to be excluded from the prospective payment

[[Page 47871]]

systems specified in Sec.  412.1(a)(1) and to be paid under the 
prospective payment system specified in Sec.  412.1(a)(3) and in 
subpart P of this part.''

B. Revisions to the Regulations at Proposed Sec.  412.29

    As described in section IX.A. of this final rule, we are replacing 
the text that was located at Sec.  412.23(b) with text that simply 
refers the reader to the requirements in Sec.  412.29, and moving the 
rest of Sec.  412.23(b) and all of Sec.  412.30 to Sec.  412.29. To 
eliminate any unnecessary repetition, and to update and clarify the 
regulations, we are also making revisions to the language from all 
three of the prior sections, Sec.  412.23(b), Sec.  412.29, and Sec.  
412.30. As stated in the prior Sec.  412.30, a rehabilitation unit can 
only be considered ``new'' if the hospital has never had a 
rehabilitation unit before. We have encountered circumstances in which 
a hospital closed a rehabilitation unit over 20 years ago and is now 
seeking to re-open the rehabilitation unit, and we believe that it 
would be reasonable to consider the rehabilitation unit to be ``new.'' 
Thus, we are revising the requirements for an IRF to be considered 
``new'' to indicate that an IRF can be considered ``new'' if it has not 
been paid under the IRF PPS in 42 CFR part 412, subpart P for at least 
5 calendar years. These requirements will now apply equally to both 
rehabilitation hospitals and rehabilitation units of acute care 
hospitals (or CAHs), and will be located in Sec.  412.29(c)(1). We 
believe that 5 calendar years will allow a sufficient amount of time 
between an IRF closing and an IRF reopening to prevent IRFs from 
closing and reopening annually to avoid meeting certain requirements, 
while allowing IRFs more flexibility to meet changing demand for IRF 
services.
    In addition, we clarify and simplify the rules regarding change of 
ownership (including mergers) or leasing, as defined in Sec.  489.18. 
Changes of ownership or leasing, as defined in Sec.  489.18, and 
mergers in which the new owner(s) accept assignment of the previous 
owner's provider agreements are transfers of the provider agreement. 
Therefore, IRFs in these situations will retain their excluded status 
and will continue to be paid under the IRF PPS before and after the 
change, as long as the IRF continues to meet all of the requirements 
specified in Sec.  412.29. However, we clarify that a change of 
ownership (including merger) or leasing in which the new owner(s) do 
not accept assignment of the previous owner's provider agreement would 
be considered a voluntary termination of the provider agreement, and 
the new owner(s) will need to reapply to the Medicare program as an 
initial applicant to operate a new IRF. In the case of changes of 
ownership (including mergers) or leasing, the new owner(s) will not be 
required to wait for 5 calendar years to reapply to operate a new IRF, 
but will be required to complete the initial hospital or critical 
access hospital certification process to participate in Medicare as a 
new IRF.
    Further, we revise the regulations regarding new IRF beds. The 
regulations formerly in Sec.  412.30(d), which required an IRF to 
obtain ``approval, under State licensure and Medicare certification, 
for an increase in its hospital bed capacity that is greater than 50 
percent of the number of beds it seeks to add to the unit,'' have 
become less and less relevant under a prospective payment system in 
which payments are no longer based on IRFs' reported costs. Thus, we 
eliminate these requirements and, instead, state in Sec.  412.29(c)(2) 
that IRF beds would be considered ``new'' if they meet all applicable 
State Certificate of Need and State licensure laws and if they get 
written approval from the appropriate CMS regional office (RO), as 
described below. New IRF beds can be added one time at any point during 
a cost reporting period (instead of at the start of a cost reporting 
period), but we require that a full 12-month cost reporting period 
elapse before an IRF that has had beds delicensed or decertified can 
add new beds. The reason for this requirement is to prevent IRFs from 
decreasing and increasing bed size every year to avoid having to meet 
certain requirements. We require the IRF to obtain written approval 
from the appropriate CMS RO for the addition of the new beds in order 
to allow the CMS RO to verify that a full 12-month cost reporting 
period has elapsed before an IRF that has had beds delicensed or 
decertified can add new beds.

C. Revisions to the Requirements for Changes in Bed Size and Square 
Footage

    Prior to the IRF PPS and the IPF PPS, excluded units (IRFs and 
IPFs) were paid based on their costs, as reported on their Medicare 
cost reports, subject to certain facility-specific cost limits. These 
cost-based payments were determined separately for operating and 
capital costs. Thus, under cost-based payments, the facilities' capital 
costs were determined, in part, by their bed size and square footage. 
Changes in the bed size and square footage would complicate the 
facilities' capital cost allocation. Thus, the Medicare regulations at 
Sec.  412.25 limited the situations under which an IRF or IPF could 
change its bed size and square footage.
    Under the IRF PPS and IPF PPS, however, a facility's bed size and 
square footage is not relevant for determining the individual 
facility's Medicare payment. Thus, we believe it is appropriate to 
modify some of the restrictions on a facility's ability to change its 
bed size and square footage. We are therefore relaxing the restrictions 
on a facility's ability to increase its bed size and square footage. 
Under the revised requirements we are adopting in this final rule in 
Sec.  412.25(b), an IRF or IPF can change (either increase or decrease) 
its bed size or square footage one time at any point in a given cost 
reporting period as long as it notifies the CMS RO at least 30 days 
before the date of the proposed change, and maintains the information 
needed to accurately determine costs that are attributable to the 
excluded units. As we have in prior years, we also include an exception 
to these requirements for special circumstances. We note that any IRF 
beds that are added to an existing IRF during the IRF's cost reporting 
period will only be considered new through the end of that cost 
reporting period. Further, the new IRF beds will be included in the 
IRF's compliance review calculations under the 60 percent rule 
specified in Sec.  412.29(b) beginning on the date that they are first 
added to the IRF.

D. Revisions To Enhance Consistency Between the IRF Coverage and 
Payment Requirements

    In the FY 2010 IRF PPS final rule (74 FR 39762 at 39788 through 
39798), we implemented new IRF coverage requirements in Sec.  
412.622(a)(3),(4), and (5). These new IRF coverage requirements 
replaced coverage requirements that were 25 years old and no longer 
reflected current medical practice. In updating these coverage 
requirements, we added further specificity to some of the terms that 
had been discussed in the old coverage requirements. For example, we 
more clearly defined in the new IRF coverage requirements what we mean 
by an IRF preadmission screening, care planning, and close medical 
supervision. In the revisions to Sec.  412.23(b) and Sec.  412.29, we 
enhance the consistency between the IRF coverage and payment 
requirements by incorporating some of the added specificity from the 
coverage requirements into the same requirements for payment. 
Specifically, we clarify that, as in the IRF coverage requirements, IRF 
preadmission screenings must be reviewed and

[[Page 47872]]

approved by a rehabilitation physician prior to each prospective 
patient's admission to an IRF. As we said in the FY 2010 IRF PPS final 
rule (74 FR 39791), we believe that it is important to require that a 
rehabilitation physician document the reasoning behind the decision to 
admit a patient to an IRF, to enable medical reviewers to understand 
the rationale for the decision.
    Further, we clarify, as we did in the coverage requirements at 
Sec.  412.622(a)(3)(iv), that close medical supervision in an IRF means 
that the patient receives at least 3 face-to-face visits per week by a 
licensed physician with specialized training and experience in 
inpatient rehabilitation to assess the patient both medically and 
functionally, as well as to modify the course of treatment as needed to 
maximize the patient's capacity to benefit from the rehabilitation 
process. As we stated in the FY 2010 IRF PPS final rule (74 FR 39796), 
we believe that at least 3 face-to-face rehabilitation physician visits 
per week are necessary to coordinate the patient's medical needs with 
his or her functional rehabilitation needs while in the facility.
    We received 12 comments on the proposed updates to the policies in 
42 CFR part 412, which are summarized below.
    Comment: Several commenters requested that CMS not make the 
proposed changes to the regulation text in 42 CFR 412.29(d) and (e). 
Although one commenter agreed with the proposed changes to the 
regulation text to align portions of the IRF coverage requirements with 
the corresponding portions of the IRF classification requirements, the 
rest of the commenters on these provisions expressed concerns. The 
concerns expressed were primarily that the proposed changes could blur 
the distinctions between the IRF coverage and the IRF classification 
requirements, and could potentially lead to inappropriate revocations 
of an IRF's classification for payment under the IRF PPS based on only 
a single claim denial (or a small number of claims denials). The 
commenters suggested that CMS restate its previous position that the 
failure of an IRF to meet the IRF coverage requirements for one 
individual case should not be used to declassify an IRF for payment 
under the IRF PPS. Some of these commenters also asked for further 
explanation of how these proposed changes would reduce costs for IRFs 
and for the government.
    Response: We agree with the commenters that, as we have stated 
previously, failure to meet the IRF coverage requirements in one 
individual case should not be used to decertify an entire facility for 
payment under the IRF PPS. However, the intent of the proposed 
revisions is to make the 2 sets of requirements consistent with each 
other to eliminate any potential for confusion or ambiguity. We believe 
that we would be remiss in not making it clear that, in the IRF 
context, we require the preadmission screening documentation to be 
reviewed and approved by a rehabilitation physician prior to the IRF 
admission. Under the IRF coverage requirements, this is required for 
all IRF admissions, so it also must be built into the preadmission 
screening procedures that all IRFs must have in place. Similarly, we 
believe that we would be remiss in not clarifying that, in the IRF 
context, we define close medical supervision to mean at least 3 face-
to-face visits per week by a rehabilitation physician to assess the 
patient both medically and functionally. We established this definition 
for the IRF coverage requirements in the FY 2010 IRF PPS final rule (74 
FR 39762 at 39795 through 39796), and we simply proposed to clarify in 
Sec.  412.29(e) that the term means the same thing in the IRF 
classification requirements that it means in the IRF coverage 
requirements.
    Reinforcing the identical concepts (and, in most cases, the 
identical wording) from the IRF coverage criteria to the IRF 
classification criteria can only serve to clarify exactly what we mean, 
so that there is no confusion or ambiguity. In our opinion, this aligns 
with our stated goals in the FY 2012 IRF PPS proposed rule (76 FR 24214 
at 24250) of updating and simplifying the policies, eliminating 
unnecessary repetition and confusion, and enhancing the consistency 
between the IRF classification and the IRF coverage requirements. This 
particular change does not reduce costs for IRFs or for the government, 
but does promote clarity and consistency among Medicare's regulations.
    As we do not intend for an IRF to be declassified for the purposes 
of receiving payment under the IRF PPS based on a small number of IRF 
claims denials, we agree with some of the commenters who suggested 
revisions to the language to focus the requirements on whether the IRFs 
have the correct processes in place to meet the requirements, rather 
than on whether the IRFs meet the requirements in each individual case. 
We agree that failure to meet the IRF coverage requirements in one 
individual case is not a reason to declassify an entire IRF from 
receiving payment under the IRF PPS. Thus, we are adopting slight 
revisions to the regulation text, suggested by commenters, that we 
believe will clarify that an IRF cannot be declassified as an IRF for 
failing to meet the coverage criteria in just one or two cases. The 
revised regulation text is included in the ``Regulation Text'' section 
of this final rule.
    Even though we believe that an IRF should not lose its IRF 
classification because one individual case (or even a small number of 
cases) fails to meet the IRF coverage requirements, we note that we do 
believe that it is reasonable to conclude that an IRF's preadmission 
screening procedure is not adequate if a large percentage of the IRF's 
claims are denied because the preadmission screening information was 
not reviewed and approved by a rehabilitation physician prior to the 
IRF admission. Similarly, we believe that it is reasonable to conclude 
that an IRF's procedure for ensuring that patients receive close 
medical supervision is not adequate if a large proportion of the IRF's 
claims are denied because the patients were not seen and assessed by a 
rehabilitation physician at least 3 times per week.
    Comment: Several commenters requested that CMS change the 
regulations to treat the acquisition of an IRF unit the same as the 
acquisition of a freestanding IRF hospital.
    Response: We appreciate the commenters' suggestion and will 
carefully consider this for the future. However, we believe that this 
suggestion is outside the scope of the FY 2012 IRF PPS proposed rule 
(76 FR 24214) because it involves the issue of whether an entity can 
purchase a hospital's payment status under Medicare. While an entity 
can purchase physical assets, Medicare payment status is assigned to a 
particular provider based on a review of the provider's eligibility for 
payment under a particular Medicare payment system. We do not believe 
that a facility's Medicare payment status or its provider agreement can 
be bought, sold, or transferred. If a different hospital other than the 
one to which the Medicare payment status was assigned wants to obtain 
the same Medicare payment status, it must apply and demonstrate that it 
meets the requirements for payment under the particular Medicare 
payment system.
    Comment: While several commenters supported the proposed 
regulations regarding ``new'' IRFs, changes of ownership, and mergers, 
some of these commenters requested that CMS specify that certain 
``internal corporate restructuring transactions'' not involving 
external entities are not

[[Page 47873]]

changes of ownership. For example, these commenters said that they do 
not believe that the purchase of a hospital by another hospital, where 
both hospitals are owned by the same corporate entity, should be 
treated as a change of ownership for Medicare purposes.
    Response: We believe that this suggestion is outside the scope of 
the FY 2012 IRF PPS proposed rule (76 FR 24214) because it involves how 
Medicare defines a hospital. For Medicare purposes, hospitals are 
separate entities if they have separate Medicare provider agreements, 
regardless of whether they might both be owned by the same corporate 
entity. If one hospital with a Medicare provider agreement purchases 
another hospital with a Medicare provider agreement, regardless of 
whether the hospitals are owned by the same corporate entity or not, 
Medicare would consider this a change of ownership, which would be 
governed by the new regulations in 42 CFR 412.29(c)(3) discussed in the 
``Regulation Text'' section of this final rule. Similarly, if hospitals 
with separate Medicare provider agreements merge their operations, 
regardless of whether they are owned by the same corporate entity or 
not, then the new regulations regarding mergers in 42 CFR 412.29(c)(4) 
discussed in the ``Regulation Text'' section of this final rule would 
apply.
    Comment: Several commenters agreed with the proposed changes to 
Sec.  412.25(b) to allow expansions of bed size or square footage at 
any time during a cost reporting period. However, some commenters 
suggested that CMS should allow new IRF units or new IPF units to open 
and begin being paid under their respective IRF PPS or IPF PPS at any 
time during a cost reporting period, rather than requiring that they 
could only begin being paid under the IRF PPS or the IPF PPS at the 
start of a cost reporting period.
    Response: We appreciate the commenters' suggestion that we relax 
the requirement that IRF and IPF units can only begin being paid under 
their respective IRF PPS or IPF PPS at the start of a cost reporting 
period. However, we believe that this suggestion is outside the scope 
of the FY 2012 IRF PPS proposed rule (76 FR 24214) because we did not 
propose any changes to the regulations in Sec.  412.25(c). However, we 
will consider this suggestion for possible inclusion in future 
rulemaking.
    Final Decision: After carefully considering all of the comments we 
received on the proposed updates to the policies in 42 CFR part 412, we 
are finalizing the regulation text changes as proposed, except for the 
following revisions in response to comment:
     Instead of the proposed revision to Sec.  412.29(d), the 
paragraph will instead read, ``(d) Have in effect a preadmission 
screening procedure under which each prospective patient's condition 
and medical history are reviewed to determine whether the patient is 
likely to benefit significantly from an intensive inpatient hospital 
program. This procedure must ensure that the preadmission screening is 
reviewed and approved by a rehabilitation physician prior to the 
patient's admission to the IRF.''
     Instead of the proposed revision to Sec.  412.29(e), the 
paragraph will instead read, ``(e) Have in effect a procedure to ensure 
that patients receive close medical supervision, as evidenced by at 
least 3 face-to-face visits per week by a licensed physician with 
specialized training and experience in inpatient rehabilitation to 
assess the patient both medically and functionally, as well as to 
modify the course of treatment as needed to maximize the patient's 
capacity to benefit from the rehabilitation process.'' The specific 
changes to the regulations at 42 CFR part 412 are shown in the 
``Regulation Text'' of this final rule.

X. Quality Reporting Program for IRFs

A. Background and Statutory Authority

    CMS seeks to promote higher quality and more efficient health care 
for Medicare beneficiaries. Our efforts are, in part, effectuated by 
quality reporting programs coupled with the public reporting of data 
collected under those programs. The quality reporting programs exist 
for various settings such as hospital inpatient services (the Hospital 
Inpatient Quality Reporting (Hospital IQR) Program), hospital 
outpatient services (the Hospital Outpatient Quality Reporting 
(Hospital OQR) Program), and physicians and other eligible 
professionals (the Physician Quality Reporting System (formerly called 
the Physician Quality Reporting Initiative, or PQRI)). We have also 
implemented quality reporting programs for home health agencies and 
skilled nursing facilities that are based on conditions of 
participation, and an end-stage renal disease quality incentive program 
(ESRD QIP) that links payment to performance.
    Section 3004(b) of the Affordable Care Act added section 1886(j)(7) 
to the Act, which requires the Secretary to implement a quality 
reporting program for IRFs, including freestanding IRF hospitals and 
IRF units within hospitals. Beginning in FY 2014, section 
1886(j)(7)(A)(i) of the Act requires the Secretary to reduce the 
increase factor to a fiscal year by 2 percentage points for any IRFs 
that do not submit data to the Secretary in accordance with 
requirements established by the Secretary for that fiscal year. Section 
1886(j)(7)(A)(ii) of the Act notes that this reduction may result in 
the increase factor being less than 0.0 for a fiscal year, and in 
payment rates under this subsection for a fiscal year being less than 
the payment rates for the preceding fiscal year. Any reduction based on 
failure to comply with the reporting requirements is, in accordance 
with section 1886(j)(7)(B) of the Act, limited to the particular fiscal 
year involved. The reductions are not to be cumulative and will not be 
taken into account in computing the payment amount under subsection (j) 
for a subsequent fiscal year.
    Section 1886(j)(7)(C) of the Act requires that each IRF submit data 
to the Secretary on quality measures specified by the Secretary. The 
data must be submitted in a form and manner, and at a time, specified 
by the Secretary. The Secretary is generally required to specify 
measures that have been endorsed by the entity with a contract under 
section 1890(a) of the Act. This contract is currently held by the 
National Quality Forum (NQF). The NQF is a voluntary consensus 
standard-setting organization with a diverse representation of 
consumer, purchaser, provider, academic, clinical, and other health 
care stakeholder organizations. The NQF was established to standardize 
health care quality measurement and reporting through its consensus 
development process. We have generally adopted NQF-endorsed measures in 
our reporting programs. However, section 1886(j)(7)(D)(ii)of the Act 
provides that ``in the case of a specified area or medical topic 
determined appropriate by the Secretary for which a feasible and 
practical measure has not been endorsed by the entity with a contract 
under section 1890(a) of the Act, the Secretary may specify a measure 
that is not so endorsed as long as due consideration is given to 
measures that have been endorsed or adopted by a consensus-based 
organization identified by the Secretary.'' Under section 
1886(j)(7)(D)(iii) of the Act, the Secretary must publish the selected 
measures that will be applicable to FY 2014 no later than October 1, 
2012.
    Section 1886(j)(7)(E) of the Act requires the Secretary to 
establish procedures for making data submitted under the IRF quality 
reporting program

[[Page 47874]]

available to the public. The Secretary must ensure that an IRF is given 
the opportunity to review the data that is to be made public prior to 
the data being made public. The Secretary must report quality measures 
that relate to services furnished in inpatient settings in 
rehabilitation facilities on the CMS Web site.

B. Quality Measures for IRF Quality Reporting Program for FY 2014

1. General
    As described below, we adopt 2 quality measures for FY 2014. These 
quality measures are: (1) Urinary Catheter-Associated Urinary Tract 
Infections (CAUTI); and (2) Pressure Ulcers that are New or Have 
Worsened. We also discuss below a third measure that we are currently 
developing and intend to propose to adopt for FY 2014 in future 
rulemaking. That measure will be the 30-day Comprehensive All-Cause 
Risk-Standardized Readmission Measure.
2. Considerations in the Selection of the Proposed Quality Measures
    In implementing the IRF Quality Reporting Program, we seek to 
collect data on measures that will provide information on the full 
spectrum of the quality of care being furnished by IRFs while imposing 
as little burden as possible on IRFs. We seek to collect data on valid, 
reliable, and relevant quality measures and to make that data available 
to the public in accordance with applicable law.
    We also seek to align new Affordable Care Act reporting 
requirements for IRFs with HHS' broader goals of targeting high 
priority conditions and topics, as reflected in the National Quality 
Strategy released by the Secretary available at (http://www.healthcare.gov/center/reports/quality03212011a.html#es) and, 
ultimately, to provide a comprehensive assessment of the quality of 
healthcare delivered. We note that adopting a comprehensive set of 
measures may take multiple years because of the time, effort and 
resources required by IRFs and CMS to develop and implement the data 
collection and reporting infrastructure needed to support an expanded 
quality reporting program. Current areas of high priority for HHS 
include patient safety, healthcare associated infections, and reduction 
of avoidable readmissions. These priorities are consistent with the aim 
of providing safe, sound care for all patients receiving services in 
any healthcare setting including IRFs.
    In our consideration and selection of a comprehensive set of 
quality measures, we have several objectives. First, the measures 
should align with CMS' three-part aim for better care for individuals, 
better health for populations, and lower cost through improvement. 
Second, the measures should relate to specific priorities in the care 
setting for which they are adopted. For IRFs, these include improving 
patient safety (such as avoiding healthcare associated infections 
(HAI)), reducing adverse events, and encouraging better coordination of 
care and person-and-family-centered care. Third, the measures should 
address improved quality for the primary role of IRFs, which is to 
address the rehabilitation needs of the individual including improved 
functional status and achievement of successful return to the community 
post-discharge.
    Other considerations in selecting quality measures include 
alignment with other Medicare quality reporting programs and other 
private sector initiatives; suggestions and input received from 
multiple stakeholders and national subject matter experts; seeking 
measures that have a low probability of causing unintended adverse 
consequences; and considering measures that are feasible, that is, 
measures that can be technically implemented within the capacity of the 
CMS infrastructure for data collection, analyses, and calculation of 
reporting and performance rates as applicable.
3. FY 2014 Measure 1: Healthcare Associated Infection Measure 
(HAI): Urinary Catheter-Associated Urinary Tract Infections (CAUTI)
    The first measure we proposed for purposes of calculating the FY 
2014 Increase Factor for IRFs is an application of the NQF-endorsed 
measure developed by the Centers for Disease Control (CDC) for 
hospitals entitled (NQF 0138)''Urinary Catheter-Associated 
Urinary Tract Infection (CAUTI) for Intensive Care Unit Patients'' to 
the IRF setting. This measure was developed by the CDC to measure the 
percentage of patients with urinary catheter associated urinary tract 
infections in the ICU context. We believe that this measure is highly 
relevant to IRFs in that urinary catheters are commonly used in the IRF 
setting. Section 1886(j)(7)(D)(ii) of the Act provides that ``in the 
case of a specified area or medical topic determined appropriate by the 
Secretary for which a feasible and practical measure has not been 
endorsed by the entity with a contract under section 1890(a) of the 
Act, the Secretary may specify a measure that is not so endorsed as 
long as due consideration is given to measures that have been endorsed 
or adopted by a consensus-based organization identified by the 
Secretary.'' We reviewed the NQF's consensus endorsed measures, and 
were unable to identify any NQF-endorsed measures for catheter-
associated urinary tract infections for the IRF setting. We are unaware 
of any other measures of urinary tract infections that have been 
approved by voluntary consensus standards bodies. Having given due 
consideration to other measures that have been endorsed or adopted by a 
consensus entity, we proposed to adopt an application of the NQF-
endorsed CAUTI measure under the Secretary's authority to select non-
NQF endorsed measures where NQF-endorsed measures do not exist for a 
specified area or medical topic. While we proposed to adopt the measure 
under the exception authority provided in section 1886(j)(7)(D)(ii) of 
the Act, we noted that we intended to seek formal extension of the 
existing CAUTI measure to the IRF setting.\1\
---------------------------------------------------------------------------

    \1\ We inadvertently said in the FY 2012 IRF PPS proposed rule 
(76 FR 24214) that we (CMS) would ask NQF to formally extend its 
endorsement of the existing CAUTI measure to the IRF setting. We 
should have stated that we would ask CDC, as the measure steward, to 
ask NQF to formally extend its endorsement of the existing CAUTI 
measure to the IRF setting.
---------------------------------------------------------------------------

    Urinary tract infections (UTIs) are a common cause of morbidity and 
mortality. The urinary tract is the most common site of healthcare-
associated infection, accounting for more than 30 percent of infections 
reported by acute care hospitals \2\. Healthcare-associated UTIs are 
commonly attributed to catheterization of the urinary tract.
---------------------------------------------------------------------------

    \2\ Klevens RM, Edward JR, et al. Estimating health care-
associated infections and deaths in U.S. hospitals, 2002. Public 
Health Reports 2007;122:160-166.
---------------------------------------------------------------------------

    CAUTI can lead to complications such as cystitis, pyelonephritis, 
gram-negative bacteremia, prostatitis, epididymitis, and orchitis in 
males and, less commonly, endocarditis, vertebral osteomyelitis, septic 
arthritis, endophthalmitis, and meningitis in all patients. 
Complications associated with CAUTI include discomfort to the patient, 
prolonged hospital stay, and increased cost and mortality. Each year, 
more than 13,000 deaths are associated with UTIs \3\. Prevention of 
CAUTIs is discussed in the CDC/HICPAC document, Guideline for 
Prevention of Catheter-associated Urinary Tract Infections\4\. The NQF-
endorsed CAUTI

[[Page 47875]]

measure we proposed is currently collected by the CDC's National 
Healthcare Safety Network (NHSN), a secure Internet-based health 
surveillance system, and we note that the CDC is also collecting data 
on this measure from IRFs. NHSN is currently used, in part, as one 
means by which certain State-mandated reporting and surveillance data 
are collected.
---------------------------------------------------------------------------

    \3\ Ibid.
    \4\ Wong ES. Guideline for prevention of catheter-associated 
urinary tract infections. Infect Control 1981;2:126-30.
---------------------------------------------------------------------------

    The HHS National Action Plan to Prevent HAIs located at (http://www.hhs.gov/ash/initiatives/hai/actionplan/index.html) identified 
catheter-associated urinary tract infections as the leading type of HAI 
that is largely preventable. The technical expert panel (TEP) convened 
by the CMS measure-developer-contractor on February 4, 2011 (https://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/) also identified CAUTI 
as a high priority quality issue for IRFs.
    We received 23 public comments on the Urinary Catheter-Associated 
Urinary Tract Infections (CAUTI) quality measure, which are summarized 
below.
    Comment: Several commenters generally acknowledged CAUTI as an 
important safety and quality issue across care settings. However, 
several commenters expressed concern with the applicability of this 
measure to the IRF setting. They stated that the relatively small 
number of new UTIs in IRFs may reflect that the indicator is not the 
best choice as a quality indicator in the IRF setting.
    Response: Although patients with CAUTI in the IRF setting may be a 
minority, we believe that the CAUTI measure is an important indicator 
of quality in IRF settings and that promoting safe care in all settings 
is an important goal for quality reporting programs. Additionally, it 
is important to note that the HHS National Action Plan to Prevent HAIs 
located at (http:[sol][sol]www.hhs.gov/ash/initiatives/hai/actionplan/
index.html) indicated that catheter-associated urinary tract infections 
are a leading type of HAI that is largely preventable. Also, the 
technical expert panel that was convened by the CMS contractor that was 
tasked with assisting with the development of measures identified CAUTI 
as a high priority issue for IRFs.
    Comment: One commenter specifically supported the adoption of CAUTI 
reporting in the IRF context through the National Healthcare Safety 
Network (NHSN). They noted that hospitals in their State, including 
IRFs, have been required by State law-based reporting requirements to 
use NHSN to report all health care-associated infections since February 
2008. The commenter also stated that, based on the health care-
associated infection data collected and analyzed in that State, urinary 
tract infection is the most prevalent type of infection reported in 
that State's IRFs.
    Response: We appreciate the commenter's observation that UTIs are 
both the most prevalent and preventable form of infection in the IRF 
setting, and believe that CAUTI is an important quality measure to 
adopt for the IRF quality reporting program.
    Comment: One commenter stated that CAUTI is a much less relevant 
marker of quality in IRFs with short lengths of stay, where catheters 
come out almost immediately. The commenter additionally stated that it 
is sometimes difficult to find supporting documentation of catheter use 
within transfer documents. The commenter also stated that lack of 
documentation could lead to additional testing of patients on 
admission, resulting in increased time burden and cost to IRFs.
    Response: We acknowledge the challenges providers may initially 
encounter in finding supporting documentation in transfer documents of 
catheter use. However, we believe that implementation of this 
requirement will encourage better documentation of catheter use over 
time. The CDC provides educational and outreach materials to help 
promote communication of such information. Additionally, we believe 
such information may be provided by other sources, such as the patient. 
Finally, the specifications for the measure, which are available at 
http://www.cdc.gov.nhsn/forms/instr/57_114.pdf, do not require all 
patients to be tested on admission. We agree with this approach because 
clinical experts generally agree that identification of CAUTI rests 
upon a constellation of patient symptoms, as well as on the results of 
clinical and laboratory data. Quality care in IRFs requires close 
medical monitoring of all patients, and we believe that such monitoring 
will appropriately identify the subset of IRF patients who are most at 
risk for CAUTI and therefore should be tested.
    Comment: Some commenters expressed concern that the CAUTI measure 
was originally created for use in the inpatient ICU setting and 
questioned the use of a measure that was not specifically endorsed for 
the IRF setting. In contrast, another commenter noted that, although 
the CAUTI measure was originally created for use in the inpatient ICU 
setting, its use is also well established in other inpatient settings. 
Moreover, they asserted that this measure is an appropriate measure for 
the IRF setting. The commenter also said that they were pleased to see 
that only indwelling catheters are included for this measure, versus 
``straight in-and-out'' (intermittent) catheters which are frequently 
used by spinal cord injury patients who often require extensive IRF 
services.
    Response: We acknowledge that the CAUTI measure, for which CDC is 
the measure steward, is currently endorsed by NQF for ICUs, and not 
specifically endorsed for the IRF setting. However, given the 
importance and preventability of CAUTIs in all settings including IRFs, 
we proposed to adopt an application of the NQF-endorsed measure under 
the Secretary's authority to select non-NQF endorsed measures where 
measures do not exist for a specified area or medical topic. We also 
noted that we would seek NQF endorsement of the measure for application 
in the IRF setting.
    Comment: One commenter urged CMS to refine the CAUTI measure for 
specific use in IRFs. Additionally this commenter cited the potential 
need for testing the measure in IRFs and agreed with several other 
commenters, who recommended delaying reporting CAUTI until CMS obtains 
NQF endorsement of this measure specifically for the IRF setting.
    Response: CAUTI has been well tested in the ICU setting, and we see 
no reason why the IRF setting would produce different results since 
presence or absence of CAUTI is not dependent upon setting type, but 
rather clinical findings, signs, and symptoms.
    As stated above, we proposed to adopt the measure under the 
exception authority provided in section 1886(j)(7)(D)(ii) of the Act, 
and we note that the quality measure steward, the CDC, is seeking NQF's 
expansion of its endorsement of the CAUTI measure to IRFs.
    Comment: Several commenters expressed concern with potential 
erroneous attribution of infections that may have resulted from 
catheter use in a previous setting. However, one commenter expressed 
support for the CAUTI measure's ``transfer rule exception,'' defined as 
transfers within an inpatient facility or transfers to a new facility, 
which may alleviate some of the perceived issues with attribution.
    Response: We thank the commenters for their remarks and we 
acknowledge their concerns. As the commenter noted, the CAUTI measure's 
``transfer rule exception'' excludes patients with CAUTI present on 
admission (POA) or who develop CAUTI within 48 hours of transfer to the 
IRF setting. Such CAUTIs are attributed to the transferring

[[Page 47876]]

location, rather than the admitting location. We believe that this 
appropriately addresses the potential risk of erroneous attribution for 
transferred patients. Additional information on the ``Transfer Rule'' 
can be found at http://www.cdc.gov/nhsn/PDFs/slides/CAUTI.pdf.
    Comment: Several commenters also expressed their concern with the 
lack of a ``present on admission'' (POA) indicator, and stated that the 
absence of a POA indicator may result in incorrect tallies. 
Additionally, one commenter recommended that CMS pursue development of 
a timeline and implementation plan for a POA indicator for CAUTI prior 
to finalizing the proposed IRF measures.
    Response: We do not believe that the absence of a POA indicator 
will lead to erroneous tabulation of UTIs. The ``transfer rule'' that 
is discussed in the NHSN patient safety module clearly indicates that, 
``If the UTI develops in a patient within 48 hours of discharge from a 
location, indicate the discharging location on the infection report, 
not the current location of the patient.'' We believe that this 
guidance allows IRFs to accurately tabulate the number of CAUTIs that 
develop in the IRF, even without a POA indicator for this measure. 
However, we will consider working with the CDC to determine whether the 
application of a claims-based POA indicator in addition to 
implementation of the ``transfer rule'' would be useful. If our work 
with the CDC finds that this would potentially be useful, we will 
consider this for future rulemaking.
    Comment: One commenter recommended that health care-associated 
infection rates and standardized infection rates for IRFs be evaluated 
separately from any data reported by general acute care hospitals and 
long term care hospitals.
    Response: We appreciate the commenter's concern that health care-
associated infection rates and standardized infection rates for IRFs be 
evaluated separately from any data reported by general acute care 
hospitals and long term care hospitals. As the IRF quality reporting 
program is separate from these other quality reporting programs, we do 
plan to evaluate CAUTI data reported by IRFs separately from CAUTI data 
reported by hospitals and long term care hospitals.
    Comment: Several commenters strongly urged CMS to share how it 
plans to perform HAI data validation since this was not addressed in 
the proposed rule.
    Response: As we agree that data validation is important, we do plan 
to perform HAI data validation prior to the public reporting of any HAI 
data, and are actively working with the CDC regarding their data 
validation process. As part of this process, we are sharing the public 
comments that we received on this issue with the CDC. We will continue 
to work with the CDC to develop an HAI data validation strategy, and 
will address that aspect of the quality reporting program in future 
rulemaking.
    Comment: Several commenters highlighted the need to risk adjust the 
CAUTI measure. They also stated that certain patients, such as those 
with spinal cord injury or neurogenic bladder, were at much higher risk 
of developing CAUTI than other lower risk patients. Furthermore, 
several commenters expressed concern that the lack of risk adjustment 
could possibly lead to unintended consequences such as reduced access 
to IRFs for higher risk patients. One commenter also recommended the 
adoption of the CDC definition of symptomatic UTI.
    Response: We recognize that risk adjustment is an important 
consideration for outcome quality measures, and that certain patients 
may have higher risks for complications such as UTIs. The CAUTI measure 
specifications use facility type (including IRF) and location type 
information (including an identifier of whether the facility is a 
freestanding hospital or a unit of a hospital) for risk adjustment, and 
these data are captured in the NHSN reporting system. As we take the 
appropriate access to care in IRFs very seriously, we intend to monitor 
closely whether the quality reporting program has any unintended 
consequences on access to care for higher risk patients. Should we find 
any, we will take appropriate steps to address these issues in future 
rulemaking. Also, we agree with the commenter's suggestion that we 
adopt the CDC definition of symptomatic UTI, and are planning to adopt 
this definition in future rulemaking.
    Final Decision: Having carefully considered the comments received, 
we adopt as final an application of the NQF-endorsed measure that was 
developed by the CDC for ICUs entitled (NQF 0138) ``Catheter-
Associated Urinary Tract Infection [CAUTI] for Intensive Care Unit 
Patients'' for the IRF setting.
4. FY 2014 Measure 2: Percent of Patients With Pressure Ulcers 
That Are New or Worsened
    The second measure we proposed for IRFs for purposes of calculating 
the FY 2014 increase factor is an application of a CMS-developed NQF-
endorsed measure for short-stay nursing home patients; (NQF 
0678, formerly assigned as NQF NH-012-10) ``Percent 
of Residents with Pressure Ulcers that Are New or Worsened.'' This is 
the percentage of patients who have one or more stage 2 to 4 pressure 
ulcers that are new or worsened, when assessed at the time of discharge 
as compared with the patient's condition at admission. We recognized 
that NQF endorsement of this measure is currently limited to short-stay 
nursing home patients in the proposed rule, but we noted our belief 
that this measure is also highly relevant to patients in any setting 
who are at risk of pressure ulcer development and a high priority 
quality issue in the care of IRF patients. Currently, there are no 
other NQF-endorsed pressure ulcer measures that are applicable to IRFs 
and we were unable to identify other measures for pressure ulcers that 
have been endorsed or adopted for the IRF context by a consensus 
organization. We were also unaware of any other measures of pressure 
ulcers that had been approved by voluntary consensus standards bodies. 
For these reasons, we proposed to adopt an application of this NQF-
endorsed measure under the Secretary's authority to select non-NQF 
endorsed measures where measures do not exist for a specified area or 
medical topic. We also stated that we intend to ask NQF to extend its 
endorsement of the existing short-stay nursing home pressure ulcer 
measure to the IRF setting.
    Pressure ulcers are high-volume and high-cost adverse events across 
the spectrum of health care settings from acute hospitals to home 
health. Patients in the IRF setting may have medically complex 
conditions and severe functional limitations, and are therefore at high 
risk for the development, or worsening, of pressure ulcers. Pressure 
ulcers are serious medical conditions and an important measure of 
quality. Pressure ulcers can lead to serious, life-threatening 
infections, which substantially increase the total cost of care. As 
reported in the August 22, 2007, Inpatient Hospital PPS Final Rule for 
FY 2008 (72 FR 47205) in 2006 there were 322,946 reported cases of 
Medicare patients with a pressure ulcer as a secondary diagnosis in 
acute care hospitals.
    We received 26 comments on the Percent of Patients with Pressure 
Ulcers that are New or Worsening quality measure, which are summarized 
below.
    Comment: A few commenters expressed concerns about whether pressure 
ulcers are really relevant to the IRF setting, citing the small number 
of

[[Page 47877]]

IRF patients that develop a new or worsening pressure ulcer. They 
stated that more relevant measures were those focusing on the output of 
the rehabilitative process, such as change in function or discharge to 
community.
    Response: We agree that functional restoration and return to 
community are also key aims for IRFs and central to patient-centered 
care. We plan to add such measures through future rulemaking, as the 
measures are further developed.
    However, we believe that the percent of patients with new or 
worsening pressure ulcers is an important indicator of quality in the 
IRF setting. Even if the proportion of patients in IRFs with new or 
worsening pressure ulcers is small, any such cases are particularly 
troubling given the requirement that IRF patients receive an intensive 
rehabilitation therapy program throughout their IRF stay, which would 
tend to require patients to be out-of-bed and active throughout their 
stay.
    Comment: Some commenters expressed concern over the ambiguity of 
the definition of ``worsening'' pressure ulcers and requested 
clarification of the definition. Some commenters cited the difficulty 
in accurately differentiating between worsening pressure ulcers and 
pressure ulcers that are changing as part of the healing process. 
Several commenters suggested that ``worsening'' be removed from the 
description and CMS base the quality measure solely on the appearance 
of ``new'' pressure ulcers. Some commenters questioned why unstageable 
pressure ulcers and suspected deep tissue injuries were not included in 
the measure.
    Response: The new or worsening pressure ulcer measure is based on 
changes in skin integrity between the admission and discharge 
assessments. Pressure ulcer ``worsening'' is defined in the measure 
specifications as a pressure ulcer that has progressed to a deeper 
level of tissue damage and is therefore staged at a higher number using 
a numerical scale of 1 through 4 (using the staging assessment 
determinations assigned to each stage; starting at the stage 1, and 
increasing in severity to stage 4) on the discharge assessment as 
compared to the admission assessment.
    The National Pressure Ulcer Advisory Panel (NPUAP) has specific, 
well-established clinical criteria for determining the current stage of 
a wound (stages I through IV). These criteria, which are incorporated 
into the measure specifications, are used by clinicians in determining 
whether or not a wound has changed stages, and thereby worsened or 
improved. We believe that appropriate application of these guidelines 
should enable clinicians to identify pressure ulcers that have 
``worsened''. Thus, we do not believe that the idea of ``worsening'' 
pressure ulcers should be removed from the measure.
    Unstageable wounds, including deep tissue injuries, are not 
currently included in this measure since the presence of worsening 
cannot be determined if they are unstageable. Furthermore, a pressure 
ulcer that presents with slough or eschar cannot be staged, and is not 
considered worsened. Only after, and if, debridement occurs, whereby 
dead tissue is removed, can the wound be staged. If after wound 
debridement, the wound is evaluated to have increased in the stage, the 
wound is considered worsened.
    If the patient was admitted with a deep tissue injury, and/or an 
unstageable pressure ulcer, the deep tissue injury and/or unstageable 
pressure ulcer would be documented as present on admission. As stated 
above, if after debridement the wound is evaluated to have increased in 
the stage, the wound is considered worsened but is considered to have 
been present on admission.
    Although the presence of new pressure ulcers is an indicator of 
adverse quality in IRFs, we believe that the presence of worsening 
pressure ulcers is also an important aspect of the measure because 
worsening pressure ulcers can indicate a lack of both appropriate 
medical monitoring and appropriate clinical treatment. In addition, as 
noted previously, the existence of worsening pressure ulcers in the IRF 
setting is particularly troubling given the requirement that IRF 
patients receive an intensive rehabilitation therapy program throughout 
their IRF stay, which would tend to require patients to be out-of-bed 
and active throughout their stay. Thus, we believe that it is 
imperative to include both new and worsening pressure ulcers in the 
measure.
    Comment: Several commenters expressed concern that the proposed 
measure does not adequately address the issue of pressure ulcers that 
are present on admission. These commenters recommended that CMS develop 
a timeline and implementation plan for a POA indicator for the pressure 
ulcer measure, with consideration of an appropriate attribution window 
to avoid IRFs being penalized for pressure ulcers that were present on 
admission or acquired from another facility prior to the IRF admission.
    Response: The measure that we are adopting in this final rule is 
the Percent of Patients with Pressure Ulcers that are New or Worsening 
between the IRF admission assessment and the discharge assessment. The 
measure accounts for any relevant pressure ulcers that were present on 
admission because it requires IRFs to supply data on the number of 
stage 2, stage 3, and stage 4 pressure ulcers that were present on 
admission. In addition, the measure asks IRFs to report any pressure 
ulcers that were present on admission. Thus, we believe that the 
pressure ulcer measure that we are adopting in this final rule already 
contains sufficient present on admission information and will not lead 
to inappropriate attribution to an IRF of a pressure ulcer that 
developed in another inpatient setting.
    Comment: One commenter suggested that CMS harmonize the IRF and the 
inpatient prospective payment system (IPPS) versions of the pressure 
ulcer measures so that both capture the same range of wound staging. 
While the IRF quality reporting program measure includes wound stages 2 
though 4, the Hospital IQR Program measure only includes stages 3 
through 4.
    Response: We agree that harmonizing the measures is a good 
suggestion. This will take significant development work as the data 
elements, data sources, and measure specifications differ for the IRF 
and IPPS quality reporting programs. We will take the commenter's 
suggestions into consideration for future quality measurement 
development work, which will be considered for implementation through 
future rulemaking.
    Comment: One commenter suggested that the Pressure Ulcer Scale for 
Healing Tool (PUSH) tool, which provides clinicians with a scale for 
assessing wound healing or deterioration, is more appropriate for 
recording wounds. Another commenter said that they do not recommend the 
PUSH tool, but recognized its superiority to the proposed measure in 
that it allows addressing of wound healing in a standardized manner. 
This commenter also stated that if measurement of pressure ulcers is a 
quality measure, that the measure used should incorporate the NPUAP 
guidelines regarding wound healing.
    Response: We recognize that the PUSH tool is one of the instruments 
sometimes used by clinicians to assess healing or deterioration of 
pressure ulcers. However, CMS developed the New or Worsening Pressure 
Ulcer measure in consultation with our measure-developer contractor, 
which further consulted with NPUAP and

[[Page 47878]]

other nationally recognized subject matter experts. Based on the input 
we received from these experts, we believe that the pressure ulcer 
measure that we are requiring IRFs to report beginning October 1, 2012 
most appropriately captures this aspect of care provided in IRFs. In 
response to the commenter that suggested that any measure of pressure 
ulcers that is used in the IRF setting should be incorporate the NPUAP 
guidelines regarding wound staging, we note that the ``New or Worsening 
Pressure Ulcer'' measure that we are adopting in this final rule does 
incorporate the NPUAP guidelines regarding wound staging.
    Comment: Several commenters objected to the proposed application of 
a pressure ulcer measure that has been NQF-endorsed for short-stay 
residents in nursing homes but has not specifically been endorsed for 
the IRF setting.
    Response: We are using the authority to adopt non-NQF endorsed 
measures in cases where there is not an NQF-endorsed measure for a 
particular area or topic. We do not believe that there are substantive 
issues that would make it inappropriate to apply the pressure ulcer 
measure that has been NQF-endorsed for short-stay nursing home 
residents to IRFs.
    Comment: One commenter suggested that CMS include stage 1 wounds in 
the pressure ulcer measure. They stated that, if stage 1 wounds are not 
adequately treated, they will progress to more serious wounds.
    Response: We agree with the commenter about the importance of 
clinicians recognizing the presence of stage 1 wounds and adequately 
treating them so that they do not progress to more serious wounds. 
However, based on the CMS contractor's extensive analysis of the issue, 
in consultation with national subject matter experts, we believe that 
the additional burden on providers of collecting and reporting 
information on stage 1 pressure ulcers outweighs the benefits of 
requiring such reporting. Thus, in an effort to minimize the reporting 
burden on providers, we have decided not to require reporting on stage 
1 pressure ulcers.
    Comment: Some commenters stated that patients treated in IRFs have 
a higher level of medical complexity and receive more intense services 
than nursing home patients, highlighting the need for CMS to risk 
adjust the pressure ulcer measure.
    Response: We agree that some patients are at higher risk for 
pressure ulcers than others. The pressure ulcer measure (NQF 
0678, formerly assigned as NQF NH-012-10) that we are 
adopting for the IRF setting already includes a risk adjustment 
component. For example, the measure accounts for the higher risk of 
pressure ulcers among patients with low body mass index (BMI), 
diabetes, Peripheral Vascular Disease, bowel incontinence, and 
immobility. These clinical factors are known to increase the risk of 
pressure ulcer development for patients regardless of their setting of 
care.
    Comment: Several commenters expressed support of CMS' adoption of 
the NPUAP stance that measurement of pressure ulcers not be based on 
``reverse staging''.
    Response: We appreciate the commenters for their supportive 
comments and agree that it is not appropriate to ``reverse-stage'' 
pressure ulcers because staging only refers to the level of tissue 
damage. So, for example, a stage 3 pressure ulcer with full thickness 
tissue loss will always have that amount of damage present. If that 
pressure ulcer should heal and resurface with a new epithelial layer 
and later reopen, it is still a stage 3 pressure ulcer, even if it 
appears to meet the criteria for a stage 2 pressure ulcer.
    Final Decision: Having carefully considered the comments, we adopt 
as final an application of the CMS-developed NQF-endorsed measure for 
short-stay nursing home patients (NQF 0678, formerly assigned 
as NQF NH-012-10) for the IRF setting.
5. Potential FY 2014 Measure 3: 30-Day Comprehensive All-Cause 
Risk-Standardized Readmission Measure
    In the proposed rule, we stated our intent to propose a 30-day 
comprehensive all-cause risk-standardized readmission measure when one 
is developed. Addressing avoidable hospital readmissions is a high 
priority for HHS and CMS. We are currently developing setting-specific 
risk adjusted 30-day all-condition all-cause risk-standardized 
readmission measures for hospitals, IRFs, long term care hospitals and 
nursing homes.
    The main features of the measure methodology will be consistent 
with that of the NQF-endorsed CMS hospital risk-adjusted 30-day 
readmission measures for the Acute Myocardial Infarction (AMI), Heart 
Failure (HF), Pneumonia and Percutaneous Coronary Intervention (PCI). 
We plan to cover the maximum number of patient conditions possible in 
the all-condition measures. We will consult existing literature and 
solicit input from national experts and conduct analyses on the types 
and comorbidities of the patients of each setting in order to establish 
appropriate risk-adjustment for the measures as well as appropriate 
specification of the meaning/definition of readmission and the 
appropriate time-window for readmission for each care setting. To 
expand beyond the condition-specific measures to an all-condition 
readmission measure for each setting, we will conduct analyses to 
determine whether it is statistically and clinically sound to derive 
the all-condition measures from one single risk adjustment model, or if 
it would be better to form a composite of multiple models for multiple 
conditions. We plan to use hierarchical logistic regression modeling to 
take into account the effects of the clustering of patients and the 
sample size in the IRF setting. The IRF readmission measure is expected 
to be completed in late 2011, at which time it will be submitted to the 
entity with a contract under section 1890(a) of the Act for 
endorsement.
    We received 19 comments on our intent to propose a 30-day 
Comprehensive All-Cause Risk-Standardized Readmission Measure for IRFs, 
which are summarized below.
    Comment: Several commenters stated that risk adjustment will be an 
important consideration as CMS develops this readmission measure. 
Several commenters suggested that only preventable readmissions should 
be measured, and that planned readmissions should be excluded. Several 
commenters also stated that the causes of readmissions are complex and 
that there are no solutions that could be applied globally to reduce 
readmissions.
    Response: We appreciate the input. As indicated, the measure will 
be risk-standardized. We will take these comments into consideration as 
we further develop the measure. As part of development, the measure 
developer will provide an opportunity to the public to comment on 
specific aspects of the measure, including risk adjustment. Although we 
agree that the factors that are related to readmission are varied, 
readmission rates among Medicare beneficiaries are high, and we believe 
that they can be significantly improved through improved quality.

C. Data Submission Requirements

1. Method of Data Submission for HAI Measure (CAUTI)
    In the proposed rule, we proposed to require that IRFs submit data 
on the Catheter-Associated Urinary Tract Infection (CAUTI) measure 
through the Centers for Disease Control (CDC)/National Healthcare 
Safety Network (NHSN). As we noted above, the NHSN is a secure, 
Internet-based surveillance system maintained by the CDC that can

[[Page 47879]]

be utilized by all types of healthcare facilities in the United States, 
including acute care hospitals, long term acute care hospitals, 
psychiatric hospitals, rehabilitation hospitals, outpatient dialysis 
centers, ambulatory surgery centers, and long term care facilities. The 
NHSN enables healthcare facilities to collect and use data about HAIs, 
including information on clinical practices known to prevent HAIs, 
information on the incidence or prevalence of multidrug-resistant 
organisms within their organizations, and information on other adverse 
events. Some States use the NHSN as a means of collecting State law 
mandated HAI reporting. NHSN collects data via a Web-based tool hosted 
by the CDC (http://www.cdc.gov/). This reporting service is provided 
free of charge to healthcare facilities. Additionally, the ability of 
the CDC to receive NHSN measures data from electronic health records 
(EHR) may be possible in the near future. Currently, more than 20 
States require hospitals to report HAIs using NHSN, and the CDC 
supports more 4,000 hospitals that are using the NHSN.
    We also proposed to require submission of the data elements needed 
to calculate the Catheter-Associated Urinary Tract Infection measure 
using the NHSN's standard data submission requirements. The NHSN 
requires submission of data on HAI events on all patients. Collecting 
data on all patients will provide CMS with the most robust, accurate 
reflection of the quality of care delivered to Medicare beneficiaries 
as compared with non-Medicare patients. Therefore, to measure the 
quality of care that is delivered to Medicare beneficiaries in the IRF 
setting, we proposed to collect quality data related to HAI events on 
all patients regardless of payor.
    CDC/NHSN requirements may include adherence to training 
requirements, use of CDC measure specifications, data element 
definitions, data submission requirements and instructions, data 
reporting timeframes, as well as NHSN participation forms and 
indications to CDC allowing CMS to access data for this measure for the 
IRF quality reporting program purposes. Detailed requirements for NHSN 
participation, measure specifications, and data collection can be found 
at http://www.cdc.gov/nhsn/. We proposed to require IRFs to use the 
specifications and data collection tools for the CAUTI measure as 
required by CDC as of the time that the data is submitted.
    For purposes of calculating the FY 2014 increase factor we proposed 
to collect data on CAUTI events that occur from October 1, 2012 through 
December 31, 2012, which we inadvertently misidentified as the ``final 
fiscal quarter of calendar year 2013.'' We should have identified it as 
the final quarter of calendar year (CY) 2012. We proposed that all 
subsequent IRF quality reporting cycles would be based on a full CY 
cycle (that is January 1 through December 31 of the applicable year). 
For example, the FY 2015 payment determinations will be made based on 
CY 2013 data submitted to CDC.
    We stated that further details regarding data submission and 
reporting requirements for this measure would be posted on the CMS Web 
site http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/ no later 
than January 31, 2012. IRFs were also encouraged to visit the CDC Web 
site http://www.cdc.gov/nhsn/ to review the NHSN enrollment and 
reporting requirements.
    We received 21 comments on the proposed submission requirements for 
the CAUTI measure, which are summarized below.
    Comment: Several commenters expressed concerns about the readiness 
of the CDC's NHSN infrastructure to accept a greater volume of data by 
adding IRF reporters.
    Response: As reported to us by CDC, the NHSN has undergone a major 
architectural redesign over the last year in response to the need to 
scale up to more users, facilities and functionality. It is our 
understanding that the addition of IRF quality reporting on the NHSN 
will not unduly strain the system.
    Comment: Several commenters expressed concerns with provider burden 
and resources needed to enroll, train and implement data reporting 
through the CDC's NHSN. One commenter suggested CMS should move to a 
single standardized and streamlined quality reporting system and added 
that training on multiple quality reporting systems would be confusing 
and time consuming. Another commenter suggested that the IRF-PAI could 
be modified to collect CAUTI data.
    Response: We recognize that there are initial start-up costs and 
time investments to enroll and complete the required training for 
reporting through CDC's NHSN. We have factored these costs into the 
provider burden estimates that we provided in both the FY 2012 IRF PPS 
proposed rule and in this final rule. We believe that safety benefits 
will result from this new quality reporting requirement such as the 
ability to track serious, and at times, life threatening infections 
like CAUTI. As such, the benefits outweigh the costs. In addition, 
these costs are primarily incurred during the initial phase of the data 
reporting, and will be lower in subsequent years. For future rulemaking 
cycles, we will take into consideration the suggestion that CMS should 
move to a single standardized and streamlined quality reporting system 
and potentially consider collecting CAUTI data through an additional 
modification to the IRF-PAI.
    Final Decision: Having carefully considered the comments received 
on the method of data submission for the measure, we finalize our 
proposals to require that IRFs submit data on the measure through the 
Centers for Disease Control (CDC)/National Healthcare Safety Network 
(NHSN); to require submission of the data elements needed to calculate 
the measure using the NHSN's standard data submission requirements; to 
collect quality data related to HAI events on all patients regardless 
of payor; and to require IRFs to use the specifications and data 
collection tools for the measure as required by CDC as of the time that 
the data is submitted. Data collection for the FY 2014 program will 
pertain to CAUTI events that occur from October 1, 2012 through 
December 31, 2012 (the last quarter of CY 2012). All subsequent IRF 
quality reporting cycles will be based on a full calendar year (CY) 
cycle (that is January 1 through December 31 of the applicable year). 
Further details regarding data submission and reporting requirements 
for this measure will be posted on the CMS Web site http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/ no later than January 31, 2012.
2. Method of Data Submission for the Percent of Patients With New or 
Worsened Pressure Ulcer Measure
    We seek to implement the IRF Quality Reporting Program in a manner 
that imposes as little burden as possible. IRFs already are required to 
submit certain data for purposes of determining payment via the current 
Inpatient Rehabilitation Facility-Patient Assessment Instrument (IRF-
PAI). Previously the IRF-PAI included optional ``quality indicators'' 
(QI). To support the standardized collection and calculation of quality 
measures specifically focused on IRF services, we proposed to modify 
the IRF-PAI by replacing the optional pressure ulcer items in the 
previous QI section of the IRF-PAI with mandatory pressure ulcer data 
elements.
    We proposed that IRFs would be required to submit the data needed 
to calculate the measure ``Percent of Patients with New or Worsened 
Pressure Ulcers'' on all Medicare patients. Therefore, to measure the

[[Page 47880]]

quality of care that is delivered to Medicare beneficiaries in the IRF 
setting, we proposed to collect quality data related to new or 
worsening pressure ulcers on all Medicare patients.
    We proposed to use the IRF-PAI to collect pressure ulcer data 
elements that would be similar to those collected through the Minimum 
Data Set 3.0 (MDS 3.0), which is a reporting instrument that is used in 
nursing homes. A draft of the proposed IRF-PAI revisions with the new 
pressure ulcer elements that we are submitting to OMB for approval is 
available on the CMS Web site at http://www.cms.gov/InpatientRehabFacPPS/04_IRFPAI.asp#TopOfPage. The current MDS 3.0 
pressure ulcer items evolved as an outgrowth of CMS' work to develop a 
set of standardized patient assessment items, now referred to as CARE 
(Continuity Assessment Record & Evaluation).
    The CARE assessment items were developed and tested in the post-
acute care payment reform demonstration (PAC-PRD) which included IRFs 
as required by section 5008 of the 2005 Deficit Reduction Act (DRA) 
(Pub. L. 109-171, enacted February 8, 2006) (more information may be 
found at http://www.pacdemo.rti.org). We note that the proposed data 
elements are supported by the NPUAP. We believe that modifying the 
current IRF-PAI pressure ulcer items to be consistent with the 
standardized data elements now used in the MDS 3.0, will drive 
uniformity across settings that will lead to better quality of care in 
IRFs and ultimately, across the continuum of care settings. Additional 
details regarding the use of modified IRF-PAI data elements to 
calculate this measure will be published on the CMS Web site at http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/by no later than January 
31, 2012.
    We received 23 comments on the data collection and reporting of new 
and worsening pressure ulcers for the IRF quality reporting program, 
which are summarized below.
    Comment: One commenter expressed a preference for a claims-based 
pressure ulcer measure, citing inter-rater reliability concerns with 
clinicians assessing pressure ulcers at admission and at discharge. 
Another commenter recommended inclusion of a body diagram to record the 
location of pressure ulcers. Another commenter expressed concern that 
the data collection mechanism allows for a count of multiple pressure 
ulcers and specific stages, but not the sizes of multiple pressure 
ulcers at the same stage.
    Response: Although one of the commenters suggested that we consider 
collecting data on the pressure ulcer measure on the claims form 
instead of the IRF-PAI, we do not currently collect this type of 
patient assessment data on the claim form, nor do we have a mechanism 
for collecting such data through the IRF claims. Furthermore, even if 
the data were to be collected through the IRF claim, it would still 
need to be based on a clinician's assessment of the patient at 
admission and at discharge from the IRF. Since we currently use the 
IRF-PAI to collect other sorts of patient assessment data, we believe 
that this is the most appropriate vehicle for collecting data for the 
pressure ulcer measure.
    We agree that it is good clinical practice to record the location 
of pressure ulcers in the medical record. However, this is not part of 
the measure specifications because we do not believe that reporting the 
location of pressure ulcers to CMS will enhance the usefulness of the 
New or Worsening Pressure Ulcer quality measure for measuring quality 
in IRFs. We believe, after extensive consultation with national subject 
matter experts on wound healing, that recording the overall number of 
new pressure ulcers and presence (or lack thereof) of worsening 
pressure ulcers, provides an adequate indication of the quality of care 
provided in IRFs with regard to skin integrity management and wound 
healing.
    Comment: Several commenters commended CMS on modifications to the 
IRF-PAI to include pressure ulcer elements that are consistent with the 
MDS 3.0. They noted that the elements offer clear ulcer staging 
definitions consistent with NPUAP and the Wound Ostomy and Continence 
Nurses Society (WOCN).
    Response: We thank the commenters for their positive comments with 
respect to the IRF-PAI modifications.
    Comment: Several commenters suggested that any plans to incorporate 
elements from Continuity Assessment Record and Evaluation (CARE), which 
was developed for and used in the Post-Acute Care Payment Reform 
Demonstration, be delayed until the demonstration findings have been 
reported to Congress and the public has had an opportunity to comment 
on CARE.
    Response: We did not propose to use the CARE instrument to collect 
this data. The Pressure Ulcer Measure we are adopting, as noted 
previously, is based on a similar measure generated from data collected 
through the current MDS 3.0 instrument. This measure is NQF-endorsed 
for short-stay nursing home residents. We proposed to amend the IRF PAI 
to replace the prior quality indicator (QI) elements with the data 
elements needed to generate the pressure ulcer measure. The IRF-PAI 
that has been submitted to OMB for approval can be downloaded from the 
IRF PPS Web site at http://www.cms.gov/InpatientRehabFacPPS/04_IRFPAI.asp#TopOfPage.
    We concluded the PAC-PRD, and data collection using CARE, in 
December 2010. We plan to submit our Report to Congress by the close of 
2011. As we are not proposing the use of CARE at this time, we do not 
believe there is a need to defer the start of the new IRF quality 
reporting program pending delivery of the CARE report.
    Final Decision: Having carefully considered the comments, we 
finalize our proposal to require IRFs to submit the data needed to 
calculate the measure ``Percent of Patients with New or Worsened 
Pressure Ulcers'' on all Medicare patients to CMS through the modified 
IRF PAI for all Medicare beneficiaries treated in the IRF setting. 
Additional details regarding the use of modified IRF-PAI data elements 
to calculate this measure are currently available on the CMS Web site 
at http://www.cms.gov/InpatientRehabFacPPS/04_IRFPAI.asp#TopOfPage. We 
will publish the electronic specifications related to reporting the 
pressure ulcer measure on the CMS Web site http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/ no later than January 31, 2012.
3. Potential Method of Data Submission for the 30-Day Comprehensive 
All-Cause Risk-Standardized Readmission Measure
    If we adopt a 30-day comprehensive all-cause risk-standardized 
readmission measure for the IRF quality reporting program, we 
anticipate being able to use claims data otherwise submitted by the IRF 
to construct it. We generally anticipate constructing the measure using 
3 years of claims data so that the measure rate captures a sufficient 
number of discharges.

D. Public Reporting

    Under section 1886(j)(7)(E)of the Act, the Secretary is required to 
establish procedures for making data submitted by IRFs under the IRF 
quality reporting program available to the public. In accordance with 
this provision, we proposed to establish procedures to make the data 
available to the public. As noted in the proposed rule, we do not 
intend to make individual patient-level

[[Page 47881]]

data public. We believe that existing laws governing access to agency 
records will adequately address requests for such data. We will adopt 
procedures that will ensure that an IRF has the opportunity to review 
the data to be made public prior to the data being made public. 
Additionally, as required under section 1886(j)(7)(E) of the Act, we 
will report quality measures that relate to services furnished in IRFs 
on CMS' Web site.
    We received 3 comments on public reporting, which are summarized 
below.
    Comment: One commenter supported CMS' proposal to allow IRFs to 
preview data and measures prior to any information being posted on a 
Web site. One commenter suggested that CMS provide IRFs with a 30-day 
preview period prior to publicly posting the data submitted by IRFs 
under the quality reporting program and that CMS engage in ``user 
testing'' procedures before posting the information.
    Response: We agree with the commenters that it is important to 
allow IRFs to preview data and measures prior to any information being 
publicly displayed. We will adopt procedures that will ensure that an 
IRF has the opportunity to review the data to be made public prior to 
the data being made public. Additionally, as required under section 
1886(j)(7)(E) of the Act, we will report quality measures that relate 
to services furnished in IRFs on a CMS Web site. We will take the 
commenter's suggestions regarding ``user testing'' into consideration 
as we develop procedures to publicly report IRF quality data.
    Comment: One commenter urged CMS to delay public reporting of the 
IRF quality data until the second year of reporting to avoid that 
potential that inaccurate data would be posted based on unintended 
analytical issues.
    Response: We have not at this time proposed a specific date to 
begin publicly reporting IRF quality data. We will take the commenter's 
suggestions into account as we develop our plans for future public 
reporting.

E. Quality Measures for Future Consideration for Determination of 
Increase Factors for Future Fiscal Year Payments

    As indicated previously in this section, we ultimately seek to 
adopt a comprehensive set of quality measures to be available for 
widespread use for informed decision making and quality improvement. 
While we are initially adopting a limited set of measures for the IRF 
quality reporting program, we expect to expand the measure set through 
rulemaking which will allow us, for example, to assess an IRF patient's 
functional status and whether he/she has achieved his or her 
rehabilitation goals and potential.
    We intend to propose a more robust set of measures for the IRF 
quality reporting program in the FY 2013 rulemaking cycle for the 
determination of the FY 2015 payment increase factor. We are 
considering the measures listed in Table 13 which include, but are not 
limited to, measure topics reported by skilled nursing facilities 
(SNFs) for short stay nursing home patients.
    Some quality data on short stay nursing home patients in skilled 
nursing facilities (SNFs) are collected via the MDS 3.0 data collection 
vehicle. We are currently analyzing these quality data, and expect to 
have findings by early 2012. Next steps would include analyzing whether 
any of these measures would be appropriate for application in the IRF 
setting.
    If any of the short stay nursing home measures are appropriate for 
application to the IRF setting we intend to propose some or all of 
these measures in the FY 2013 rulemaking cycle. Any measures that we 
proposed to adopt in through the FY 2013 rulemaking cycle would apply 
to the payment determination for FY 2015. We expect that any measures 
proposed in the FY 2013 rulemaking cycle would be collected via the 
IRF-PAI, and that further changes to this data collection vehicle and 
the supporting information technology (IT) infrastructure would be 
necessary. We expect that it would take providers, vendors, and CMS 
approximately one year to make the necessary changes to their IT 
systems to support the collection and reporting of new or modified IRF-
PAI data elements. We would expect providers, vendors, and CMS to 
complete any needed changes to their IT systems by August 2013. We 
intend to propose that IRFs submit any additional or revised IRF-PAI 
data elements starting October 1, 2013 through December 31, 2013 for 
the FY 2015 payment update, but we are considering the possibility of 
basing future quality measures on data sources or assessment 
instruments other than the IRF-PAI. As stated earlier, we developed and 
tested the CARE assessment instrument for the post-acute demonstration 
under section 5008 of the DRA. We intend to submit a report to Congress 
by the end of 2011 with findings from the 3-year PAC-PRD and its use of 
the CARE patient assessment instrument as a data collection vehicle. 
More details on the PAC-PRD which concluded in late 2010 are available 
at http://www.pacdemo.rti.org. We believe that the data elements that 
were collected using this CARE standardized assessment instrument could 
be used across all post-acute care sites to measure functional status 
and other factors during treatment and at discharge which are key 
indicators of quality in IRFs and in nursing homes treating short stay 
patients requiring rehabilitative services. We believe the instrument 
could be beneficial in supporting the submission of data on quality 
measures by IRFs and other care settings by using a standardized data 
collection instrument
    During the NQF endorsement process for nursing home quality 
measures, conducted through the NQF's 2010 measures maintenance cycle, 
the NQF steering committee pointed to the need for CMS to consider 
pairing pain measures with a measure or measures that reflect patients' 
preferences for how their care, treatment and symptoms are managed by 
healthcare providers. These items, and other items in Table 13, are 
under consideration for future years.

    Table 13--Possible Future Measures and Topics for the IRF Quality
                            Reporting Program
------------------------------------------------------------------------
 
 Overarching Goal: Safety and Healthcare Acquired Conditions: Avoidable
             Adverse Events and Serious Reportable Events *
------------------------------------------------------------------------
 Unplanned acute care hospitalizations.
 Falls with major injury.* **
 Falls with major injury per 1,000 days.
 Incidence of venous thromboembolism (VTE), potentially
 preventable.*
 Poly-pharmacy related injury.
 Medication errors.*
 Stage III and IV pressure ulcers.**
------------------------------------------------------------------------

[[Page 47882]]

 
                 Overarching Goal: Safety and Prevention
------------------------------------------------------------------------
 VTE Prophylaxis.
 Patient Immunization for Influenza.
 Patient Immunization for Pneumonia.
 Staff Immunization.
------------------------------------------------------------------------
    Overarching Goal: Safety and Healthcare Acquired Conditions--HAIs
------------------------------------------------------------------------
 Surgical site infections.
 Multidrug resistant organism infection.
------------------------------------------------------------------------
 Overarching Goal: Better, Person Centered-Care: Care Coordination/Care
                                 Outcome
------------------------------------------------------------------------
 Functional Change: Change in Motor Score.
 Change in Cognitive Function: Change in Cognitive Score.
 Communication.
 Percent of patients whose individually stated goals were met.
 Care Transitions Measure-3 (CTM-3).
 Discharge Outcome/Discharge disposition:
    --Home.
    --Assisted Living.
    --Nursing Home.
    --LTCH.
    --Hospital.
    --Hospice.
 Patient Preferences for care, treatment and management of
 symptoms by healthcare providers.
------------------------------------------------------------------------
   Overarching Goal: Better, Person Centered-Care: Symptom Management
------------------------------------------------------------------------
 Percent of patients on a scheduled pain management regime on
 admission who report a decrease in pain intensity or frequency.
 Percent of patients with pain assessment conducted and
 documented prior to therapy.
 Percent of patients who self-report moderate to severe pain.
 Percent of patients with dyspnea improved within one day of
 assessment.
------------------------------------------------------------------------
   Overarching Goal: Better, Person Centered-Care: Experience of Care
------------------------------------------------------------------------
 Patient Survey, for example, Hospital Consumer Assessment of
 Healthcare Providers & Systems.
 Percent of patients for whom care delivered was consistent with
 patient stated care preferences.
------------------------------------------------------------------------
* Consistent with NQF Serious Reportable Events.
** Consistent with Healthcare Acquired Conditions (HAC) Prevalence
  Measure.

    We received 8 comments on CMS' potential future use of the CARE 
assessment instrument to collect quality reporting data, which are 
summarized below.
    Comment: Several commenters said that they recognized the value of 
standardizing assessment data across settings. However, they expressed 
concerns about CMS' potential future use of CARE as a data collection 
vehicle in IRFs. These commenters questioned CARE's ability to 
accurately document medical severity, functional status and other 
factors related to quality outcomes. In addition, several commenters 
suggested the need for additional testing of CARE items in IRFs should 
CMS elect to use CARE.
    Response: CARE was developed in response to the Deficit Reduction 
Act of 2005 which directed CMS to develop a standardized assessment and 
test it in a demonstration for the purposes of ``costs and outcomes 
across different post-acute care sites.'' CARE was used in the PAC-PRD 
to collect over 7,000 assessments in IRFs (as well as long-term care 
hospitals, nursing homes, home health agencies and acute-care hospitals 
at discharge) across the country. Items were tested for reliability 
using two methods--a traditional inter-rater reliability test where 2 
clinicians of the same discipline scored the same patient, and a test 
of reliability examining differences among disciplines in rating the 
same case. Overall, the vast majority of items had ``good'' to ``very 
good'' agreement. We will deliver our Report to Congress with findings 
by the close of 2011.
    We received 16 comments on possible Future Measures and Topics for 
the IRF Quality Reporting Program, which are summarized below.
    Comment: The majority of the commenters were supportive of the 
listed possible future quality measures. Many applauded consideration 
of measures for functional status, discharge to community, falls with 
major injuries, incidence of venous thromboembolism (VTE), patient 
preferences and symptom management. The MedPAC expressed support for 
the development of a limited number of quality measures in the IRF 
sector that would focus on outcomes measures when possible and patient 
safety and experience where applicable. Moreover, MedPAC expressed 
support for CMS developing and including a hospital readmission measure 
into the IRF quality reporting program, and encouraged CMS to add a 
measure of functional improvement given its centrality to IRF care.
    Response: We thank the commenters for their input. We appreciate 
MedPAC's support of our efforts to develop a quality reporting program 
for IRFs that focuses on outcome measures and patient safety. We will 
take all comments into consideration for future expansion of the IRF 
quality reporting program.
    Final Decision: After carefully considering the comments we 
received on the new IRF quality reporting program, we are finalizing 
the new IRF quality reporting program for the first reporting year, as 
proposed. In addition, we are submitting the revised IRF-PAI,

[[Page 47883]]

which can be downloaded from the IRF PPS Web site at http://www.cms.gov/InpatientRehabFacPPS/04_IRFPAI.asp#TopOfPage, to OMB for 
approval.
    We are also re-designating the existing paragraph Sec.  
412.624(c)(4) as Sec.  412.624(c)(5) and adding a new paragraph Sec.  
412.624(c)(4). The specific changes to the regulations at part 412 are 
shown in the ``Regulation Text'' of this final rule.

XI. Miscellaneous Comments

    Comment: Several commenters requested that CMS use the most recent 
3 years of data to review and update the list of comorbidities used to 
determine the tier payments to ensure that the tier list reflects all 
conditions that contribute significantly to IRF costs of care. Along 
these same lines, one commenter suggested that additional tier 
comorbidity codes might be appropriate for the list if CMS were to 
require IRFs to provide ``present on admission'' information to verify 
that the condition had been present on admission and did not occur 
during the IRF stay.
    Response: We appreciate the commenters' suggestions, and will 
consider these suggestions for future analyses.
    Comment: Several commenters requested that CMS provide more data to 
allow stakeholders to replicate our analyses. Specifically, one 
commenter requested that CMS amend the MedPAR file to include 
information on a patient's CMG classification, and provide stakeholders 
with patient-level IRF-PAI data.
    Response: We agree that the public should have access to whatever 
is necessary to review and comment on our proposed policies and 
evaluate the impacts of these policies. Some commenters have expressed 
a belief that the MedPAR files could inform their review of our 
proposals if it included CMGs. While we are unsure how this information 
would assist commenters, our policy is to supply whatever data is 
requested if such disclosure is legally permitted. We are therefore 
working towards including CMG information on the MedPAR, to the extent 
that such information will not make the MedPAR a patient-identifiable 
data file. The commenters also requested that we provide public access 
to patient-identifiable data, such as the IRF-PAI. We are restricted in 
our ability to release patient-level data under several privacy and 
security laws, such as the Privacy Act and the Health Insurance 
Portability and Accountability Act of 1996 (HIPAA) and the implementing 
regulations. For example, the HIPAA Privacy Rule provides that we may 
only disclose the minimum data necessary to accomplish the purpose of 
the disclosure (45 CFR 164.502(b)). We did not use IRF-PAI data in our 
analysis for the FY 2012 IRF PPS proposed and final rules. As such, 
these data are not relevant to the ability of commenters to review or 
comment on our proposals. We would violate HIPAA's minimum necessary 
requirements if we were to release these data for purposes of reviewing 
and responding to these rules. If identifiable data is used in future 
rulemaking, we will make data available in accordance with applicable 
law. Further, if commenters wish to request identifiable data for 
purposes outside the IRF PPS rulemaking process, we encourage them to 
use CMS' normal data request process. More information on CMS' data 
distribution policies is available on CMS's Web site at http://www.cms.gov/IdentifiableDataFiles/.
    Comment: One commenter suggested that CMS revise the IRF coverage 
requirements that are described in chapter 1, section 110 of the 
Medicare Benefit Policy Manual (Pub. L. 100-02) to allow recreational 
therapy services to count, on a limited basis, towards the intensive 
rehabilitation therapy requirement in IRFs and also to state that 
recreational therapy is a covered service in IRFs when the medical 
necessity is well-documented by the rehabilitation physician in the 
medical record and is ordered by the rehabilitation physician as part 
of the overall plan of care for the patient.
    Response: As we did not propose any changes to the IRF coverage 
requirements in Sec.  412.622(a)(3), (4), and (5) that would affect any 
of the requirements described in chapter 1, section 110 of the Medicare 
Benefit Policy Manual (Pub. L. 100-02), this comment is outside the 
scope of the proposed rule. However, as we have indicated before, we do 
not believe that recreational therapy services should replace the 
provision of the 4 core skilled therapy services (physical therapy, 
occupational therapy, speech-language pathology, and prosthetics/
orthotics). Thus, we believe it should be left to each individual IRF 
to determine whether offering recreational therapy is the best way to 
achieve the desired patient care outcomes. As we have stated 
previously, recreational therapy is a covered service in IRFs when the 
medical necessity is well-documented by the rehabilitation physician in 
the medical record and is ordered by the rehabilitation physician as 
part of the overall plan of care for the patient.

XII. Provisions of the Final Regulations

    In this final rule, we are adopting the provisions as set forth in 
the FY 2012 IRF PPS proposed rule (76 FR 24214), except as noted 
elsewhere in the preamble. Specifically:

A. Payment Provision Changes

     We will update the FY 2012 IRF PPS relative weights and 
average length of stay values using the most current and complete 
Medicare claims and cost report data in a budget neutral manner, as 
discussed in section IV. of this final rule.
     We will hold the FY 2012 IRF facility-level adjustments 
(rural, LIP, and teaching status adjustments) at FY 2011 levels while 
we conduct further research on the underlying reasons for the 
fluctuations in the data, as discussed in section V. of this final 
rule.
     We will implement a temporary cap adjustment policy for 
the teaching status adjustment to reflect interns and residents 
displaced due to closure of IRFs or IRF residency training programs, as 
discussed in section V. of this final rule.
     We will update the FY 2012 IRF PPS payment rates by the 
market basket increase factor, based upon the most current data 
available, with a 0.1 percentage point reduction as required by 
sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act and a 
productivity adjustment required by section 1886(j)(3)(C)(ii)(I) of the 
Act, as described in section VI. of this final rule.
     We will update the wage index and the labor-related share 
of the FY 2012 IRF PPS payment rates in a budget neutral manner, as 
discussed in section VI. of this final rule.
     We will calculate the final IRF Standard Payment 
Conversion Factor for FY 2012, as discussed in section VI. of this 
final rule.
     We will update the outlier threshold amount for FY 2012, 
as discussed in section VII. of this final rule.
     We will update the cost-to-charge ratio (CCR) ceiling and 
urban/rural average CCRs for FY 2012, as discussed in section VII. of 
this final rule.
     We will discuss the impact of the IPPS data matching 
process changes on the IRF PPS calculation of the Supplemental Security 
Income (SSI) ratios used to compute the IRF LIP adjustment factor, as 
discussed in section VIII. of this final rule.
     We will implement the IRF quality reporting program 
provisions of section 1886(j)(7) of the Act, as discussed in section X. 
of this final rule.

[[Page 47884]]

B. Proposed Revisions to Existing Regulation Text

    In addition, we will revise the existing requirements at Sec.  
412.25(b), Sec.  412.25(b)(1), Sec.  412.25(b)(2), and Sec.  
412.25(b)(3) that apply to all units that are excluded from the IPPS, 
as described in section IX. of this final rule. To amend the regulatory 
reference to conform with these changes, we will also revise the 
existing requirements at Sec.  412.25(e)(2)(ii)(A), as described in 
section IX. of this final rule. With the exception of Sec.  
412.25(e)(2)(ii)(A), the revisions affect both IRFs and IPFs.
    We will also relocate and revise the existing requirements at Sec.  
412.23(b), Sec.  412.29, and Sec.  412.30 that describe the 
requirements for facilities to qualify to receive payment under the IRF 
PPS, as described in section IX. of this final rule.
    Finally, we will re-designate the existing paragraph Sec.  
412.624(c)(4) as Sec.  412.624(c)(5) and add a new paragraph Sec.  
412.624(c)(4) to implement the IRF quality reporting program, as 
described in section X of this final rule.

XIII. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the OMB for review and approval. In order to fairly evaluate whether an 
information collection should be approved by OMB, section 3506(c)(2)(A) 
of the Paperwork Reduction Act of 1995 requires that we solicit comment 
on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    This final rule does not impose any new information collection 
requirements as outlined in the regulation text. However, this final 
rule does make reference to associated information collections that are 
not discussed in the regulation text contained in this document. The 
following is a discussion of these information collections, some of 
which have already received OMB approval.
    As stated in section X.B of this final rule, for purposes of 
calculating the FY 2014 IRF PPS increase factor, we require IRFs to 
submit data on 2 quality measures beginning October 1, 2012. These 
quality measures are: (1) Catheter Associated Urinary Tract Infections; 
and (2) Pressure Ulcers that are New or Have Worsened. The 
aforementioned measures will be collected via the following respective 
means.

A. Catheter Associated Urinary Tract Infections (CAUTI)

    Regarding the collection of data on the first quality measure, 
Catheter Associated Urinary Tract Infections, we will require as the 
form and manner of submission for the measure, CAUTI rate per 1,000 
urinary catheter days, to be through the Centers for Disease Control 
(CDC)/National Health Safety Network (NHSN). Data collection by the 
NHSN occurs via a Web-based tool hosted by the CDC. This reporting 
service is provided free of charge to healthcare facilities. In fact, 
some IRFs are already using the NHSN to collect and submit this data. 
With this final rule, we will impose an information collection 
requirement for the CAUTI measure. It should be noted that information 
collection activities associated with the CDC/NHSN are currently 
approved under OMB control number 0920-0666. Detailed requirements for 
NHSN participation, measure specifications, and data collection can be 
found at http://www.cdc.gov/nhsn/. IRFs must use the current 
specifications and data collection tools for Catheter Associated 
Urinary Tract Infections.
    While IRFs were not previously required to report data to NHSN, 
according to the CDC, there are 26 IRFs that already submit data to 
NHSN either voluntarily or per State mandate. To report data to NHSN, 
the CDC requires the facility to enroll into the NHSN and take 
specified training. According to the NHSN Web site, it will take 240 
minutes (4 hours) to register and complete the necessary training 
provided by the CDC. The estimated annual burden associated with this 
requirement is 270,000 minutes/4,500 hours (240 minutes x 1,126 IRFs) 
at an estimated cost of $187,321. This cost is estimated using the 
average hourly wage of a Registered Nurse which is reported by the U.S. 
Bureau of Labor Statistics to be $41.59. Once each facility has been 
properly registered into NHSN and trained, they will need to submit two 
types of forms in order for CDC to calculate the CAUTI rate per 1,000 
urinary catheter days. The first form, the Urinary Tract Infection 
(UTI) form, is submitted by facilities for each patient with a CAUTI. 
We estimate that it will take 15 minutes per form per IRF. This time 
estimate consists of 5 minutes of nursing time needed to collect the 
clinical data and 10 minutes of clerical time necessary to enter the 
data into NHSN. We further anticipate that there will be approximately 
2.25 forms submitted per IRF per month. Based on this estimate, we 
expect for each IRF to expend 33.75 minutes (0.5625 hours) per month or 
405 minutes (6.75 hours) per year reporting to NHSN. The estimated 
annual burden to all IRFs in the U.S. for reporting to NHSN is 7,776 
hours. The estimated cost per IRF is $186.15 per year. Similarly, the 
estimated total yearly cost across all IRFs is $214,445. These costs 
are estimated using an hourly wage for a Registered Nurse of $41.59 and 
a Medical Billing Clerk/Data Entry person of $20.57 as stated by the 
U.S. Bureau of Labor Statistics. The second form, the denominator form, 
is used to count daily the number of patients with an indwelling 
catheter device. These daily counts are summed and only the total for 
each month is submitted to NHSN. While CDC estimates that the 
denominator form takes 5 hours per month to complete, we estimate that 
it will take 2.5 hours per form per IRF per month, as the number of 
patients with an indwelling catheter is the only part of this form that 
IRFs will be required to complete. We anticipate that there will be one 
form submitted per IRF per month. Based on this estimate, we expect for 
each IRF to expend 150 minutes (2.5 hours) per month and 1,800 minutes 
(30 hours) per year reporting to NHSN. The estimated annual burden to 
all IRFs in the U.S. for reporting to NHSN is 34,560 hours. The 
estimated cost per IRF is $1,247.70 per year. Similarly, the estimated 
total yearly cost across all IRFs is $1,437,350. These costs are 
estimated using an hourly wage for a Registered Nurse of $41.59.

B. Pressure Ulcers That Are New or Have Worsened

    As stated in section X.C.2 of this final rule, to support the 
standardized collection and calculation of quality measures 
specifically focused on IRF services, we modified the IRF-PAI by 
replacing and harmonizing the pressure ulcer items with data elements 
similar to those collected through the MDS 3.0 used in nursing homes. 
Additionally, the MDS 3.0 pressure ulcer items have been harmonized 
with the CARE data set, which was developed for and broadly tested in 
the post-acute demonstration as required by section 5008 of the Deficit 
Reduction Act of 2005 (Pub. L. 109-171, enacted on February 8, 2006) 
(DRA). We believe the modified IRF-PAI pressure ulcer items are 
consistent with the standardized

[[Page 47885]]

data elements now used in the MDS 3.0, and supported by the NPUAP. They 
will provide better informed decision making and quality improvement in 
IRFs and ultimately, across the continuum of care settings.
    Since all IRFs are already required to complete and transmit IRF-
PAIs on all Medicare Part A fee-for-service and Medicare Part C 
(Medicare Advantage) patients in order to receive payment from 
Medicare, and the number of IRFs submitting claims to Medicare has 
remained stable over the past several years, we do not estimate that 
there are any IRFs that would need to conduct additional training or 
set-up for completing and transmitting the IRF-PAI. Thus, we do not 
estimate any additional burden on IRFs for these activities. In 
addition, we do not estimate any additional burden for IRFs to complete 
the IRF-PAI with the mandatory quality measures, as the IRF-PAI 
currently contains a voluntary ``Quality Indicators'' section. We are 
replacing the voluntary data items with the proposed pressure ulcer 
question set. When the original burden estimates were completed for the 
IRF-PAI, we estimated that the ``Quality Indicators'' section of the 
IRF-PAI would take about 10 minutes to complete, and we assumed that 
all IRFs would complete the Quality Indicators items, even though 
completion of this section was voluntary. Thus, removing the Quality 
Indicators items from the IRF-PAI decreases the total estimated burden 
of completing each IRF-PAI by about 10 minutes. However, we estimate 
that it will take about 10 minutes to complete the new pressure ulcer 
item that we require IRFs to complete as part of the new IRF quality 
reporting program. Since the time to complete the items that we are 
removing from the IRF-PAI is the same as the time to complete the new 
items we added, we estimate no net change in the amount of time 
associated with completing each IRF-PAI and no net change in burden.
    We will be submitting a revision to the IRF-PAI information 
collection request currently approved under OMB control number 0938-
0842 for OMB review and approval.
    If you comment on these information collection and recordkeeping 
requirements, please do either of the following:
    1. Submit your comments electronically as specified in the 
ADDRESSES section of this proposed rule; or
    2. Submit your comments to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Attention: CMS Desk Officer, 
CMS-1349-F, Fax: (202) 395-6974; or E-mail: OIRA_submission@omb.eop.gov.

XIV. Economic Analyses

A. Regulatory Impact Analysis

1. Introduction
    We have examined the impacts of this final rule as required by 
Executive Order 12866 (September 30, 1993, Regulatory Planning and 
Review), Executive Order 13563 on Improving Regulation and Regulatory 
Review (January 18, 2011), the Regulatory Flexibility Act (September 
19, 1980, Pub. L. 96-354) (RFA), section 1102(b) of the Act, section 
202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), 
Executive Order 13132 on Federalism (August 4, 1999), and the 
Congressional Review Act (5 U.S.C. 804(2)).
    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. This final rule has been designated an ``economically'' 
significant rule, under section 3(f)(1) of Executive Order 12866. 
Accordingly, the rule has been reviewed by the OMB.
2. Statement of Need
    This final rule updates the IRF prospective payment rates for FY 
2012 as required under section 1886(j)(3)(C) of the Act. It responds to 
Section 1886(j)(5) of the Act, which requires the Secretary to publish 
in the Federal Register on or before the August 1 that precedes the 
start of each fiscal year, the classification and weighting factors for 
the IRF PPS's case-mix groups and a description of the methodology and 
data used in computing the prospective payment rates for that fiscal 
year.
    This rule also implements some policy changes within the statutory 
discretion afforded to the Secretary under section 1886(j) of the Act. 
We believe that the policy changes will better align IRF PPS policies 
with those of other Medicare payment systems and will clarify the IRF 
payment regulations. Further, many of the policy changes are designed 
to promote greater flexibility in the IRF PPS policies.
    This final rule also implements section 3401(d) of the Affordable 
Care Act, which amended section 1886(j)(3)(C) of the Act and added 
section 1886(j)(3)(D) of the Act. Section 1886(j)(3)(C) of the Act 
requires the Secretary to apply a multi-factor productivity adjustment 
to the market basket increase factor, and to apply other adjustments as 
defined by the Act. The productivity adjustment applies to FYs from 
2012 forward. The other adjustments apply to FYs 2010 through 2019.
    Finally, this final rule discusses the IRF quality measures that we 
are adopting for the first year of implementation of a new IRF quality 
reporting program, as required by section 3004(b) of the Affordable 
Care Act.
3. Overall Impacts
    We estimate that the total impact of these changes for estimated FY 
2012 payments compared to estimated FY 2011 payments would be an 
increase of approximately $150 million (this reflects a $120 million 
increase from the update to the payment rates and a $30 million 
increase due to the update to the outlier threshold amount to increase 
estimated outlier payments from approximately 2.6 percent in FY 2011 to 
3 percent in FY 2012).
4. Detailed Economic Analysis
i. Basis and Methodology of Estimates
    This final rule sets forth updates of the IRF PPS rates contained 
in the FY 2011 notice and updates to the CMG relative weights and 
average length of stay values, the wage index, and the outlier 
threshold for high-cost cases. This final rule also implements a 0.1 
percentage point reduction to the FY 2012 rebased RPL market basket 
increase factor (updated from a 2002 base year to a 2008 base year) in 
accordance with sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of 
the Act and a 1.0 percent reduction to the FY 2012 rebased RPL market 
basket increase factor for the productivity adjustment as required by 
section 1886(j)(3)(C)(ii)(I) of the Act.
    We estimate that the FY 2012 impact would be a net increase of $150 
million in payments to IRF providers (this reflects a $120 million 
estimated increase from the update to the payment rates and a $30 
million estimated increase due to the update to the outlier threshold 
amount to increase the estimated outlier payments from approximately 
2.6 percent in FY 2011 to 3.0 percent in FY 2012). The impact analysis 
in Table 14 of this final rule represents the projected effects of the 
policy changes in the IRF PPS for FY

[[Page 47886]]

2012 compared with estimated IRF PPS payments in FY 2011 without the 
policy changes. We estimate the effects by estimating payments while 
holding all other payment variables constant. We use the best data 
available, but we do not attempt to predict behavioral responses to 
these changes, and we do not make adjustments for future changes in 
variables, such as the number of discharges or case-mix.
    We note that certain events may combine to limit the scope or 
accuracy of our impact analysis, because an analysis is future-oriented 
and, thus, susceptible to forecasting errors because of other changes 
in the forecasted impact time period. Some examples could be 
legislative changes made by the Congress to the Medicare program that 
would impact program funding, or changes specifically related to IRFs. 
Although some of these changes may not necessarily be specific to the 
IRF PPS, the nature of the Medicare program is that the changes may 
interact, and the complexity of the interaction of these changes could 
make it difficult to predict accurately the full scope of the impact 
upon IRFs.
    In updating the rates for FY 2012, we are implementing a number of 
standard annual revisions and clarifications mentioned elsewhere in 
this final rule (for example, the update to the wage index and market 
basket increase factor used to adjust the Federal rates). We estimate 
that these revisions will increase payments to IRFs by approximately 
$120 million (all due to the update to the market basket increase 
factor, since the update to the wage index is done in a budget neutral 
manner-as required by statute-and therefore neither increases nor 
decreases aggregate payments to IRFs).
    The aggregate change in estimated payments associated with this 
final rule is estimated to be an increase in payments to IRFs of $150 
million for FY 2012. The market basket increase of $120 million and the 
$30 million increase due to the update to the outlier threshold amount 
to increase estimated outlier payments from approximately 2.6 percent 
in FY 2011 to 3.0 percent in FY 2012 result in a net change in 
estimated payments from FY 2011 to FY 2012 of $150 million.
    The effects of the changes that impact IRF PPS payment rates are 
shown in Table 14. The following changes that affect the IRF PPS 
payment rates are discussed separately below:
     The effects of the update to the outlier threshold amount, 
from approximately 2.6 to 3.0 percent of total estimated payments for 
FY 2012, consistent with section 1886(j)(4) of the Act.
     The effects of the 2.9 percent annual market basket update 
for FY 2012 (using the rebased RPL market basket) to IRF PPS payment 
rates, as required by sections 1886(j)(3)(A)(i) and 1886(j)(3)(C) of 
the Act, including a 0.1 percentage point reduction for FY 2012 in 
accordance with sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of 
the Act and a 1.0 percent reduction for the productivity adjustment as 
required by section 1886(j)(3)(C)(ii)(I) of the Act.
     The effects of applying the budget-neutral labor-related 
share and wage index adjustment, as required under section 1886(j)(6) 
of the Act.
     The effects of the budget-neutral changes to the CMG 
relative weights and average length of stay values, under the authority 
of section 1886(j)(2)(C)(i) of the Act.
     The effect of the data matching process to compute the DSH 
patient percentage used in the IPPS DSH adjustment that is also used by 
IRF PPS to compute the low-income percentage adjustment factor.
     The effect of the IRF quality reporting program, beginning 
in FY 2013.
     The total change in estimated payments based on the FY 
2012 policies relative to estimated FY 2011 payments without the 
policies.
ii. Description of Table 14
    Table 14 categorizes IRFs by geographic location, including urban 
or rural location, and location in one of CMS's 9 census divisions (as 
defined on the cost report) of the country. In addition, the table 
divides IRFs into those that are separate rehabilitation hospitals 
(otherwise called freestanding hospitals in this section), those that 
are rehabilitation units of a hospital (otherwise called hospital units 
in this section), rural or urban facilities, ownership (otherwise 
called for-profit, non-profit, and government), by teaching status, and 
by disproportionate share patient percentage (DSH PP). The top row of 
the table shows the overall impact on the 1,152 IRFs included in the 
analysis.
    The next 12 rows of Table 14 contain IRFs categorized according to 
their geographic location, designation as either a freestanding 
hospital or a unit of a hospital, and by type of ownership; all urban, 
which is further divided into urban units of a hospital, urban 
freestanding hospitals, and by type of ownership; and all rural, which 
is further divided into rural units of a hospital, rural freestanding 
hospitals, and by type of ownership. There are 956 IRFs located in 
urban areas included in our analysis. Among these, there are 752 IRF 
units of hospitals located in urban areas and 205 freestanding IRF 
hospitals located in urban areas. There are 195 IRFs located in rural 
areas included in our analysis. Among these, there are 175 IRF units of 
hospitals located in rural areas and 20 freestanding IRF hospitals 
located in rural areas. There are 380 for-profit IRFs. Among these, 
there are 317 IRFs in urban areas and 63 IRFs in rural areas. There are 
718 non-profit IRFs. Among these, there are 596 urban IRFs and 122 
rural IRFs. There are 54 government-owned IRFs. Among these, there are 
44 urban IRFs and 10 rural IRFs.
    The remaining three parts of Table 14 show IRFs grouped by their 
geographic location within a region, by teaching status, and by DSH PP. 
First, IRFs located in urban areas are categorized to their location 
within one of the 9 CMS geographic regions. Second, IRFs located in 
rural areas are categorized to their location within one of the 9 CMS 
geographic regions. In some cases, especially for rural IRFs located in 
the New England, Mountain, and Pacific regions, the number of IRFs 
represented is small. Third, IRFs are grouped by teaching status, 
including non-teaching IRFs, IRFs with an intern and resident to 
Average Daily Census (ADC) ratio less than 10 percent, IRFs with an 
intern and resident to ADC ratio greater than or equal to 10 percent 
and less than or equal to 19 percent, and IRFs with an intern and 
resident to ADC ratio greater than 19 percent. Finally, IRFs are 
grouped by DSH PP, including IRFs with zero DSH PP, IRFs with a DSH PP 
less than 5 percent, IRFs with a DSH PP between 5 percent and 10 
percent, IRFs with a DSH PP between 10 percent and 20 percent, and IRFs 
with a DSH PP greater than 20 percent.
    The estimated impacts of each change to the facility categories 
listed above are shown in the columns of Table 14. The description of 
each column is as follows:
    Column (1) shows the facility classification categories described 
above.
    Column (2) shows the number of IRFs in each category in our FY 2010 
analysis file.
    Column (3) shows the number of cases in each category in our FY 
2010 analysis file.
    Column (4) shows the estimated effect of the adjustment to the 
outlier threshold amount so that estimated outlier payments increase 
from approximately 2.6 percent in FY 2011 to

[[Page 47887]]

3.0 percent of total estimated payments for FY 2012.
    Column (5) shows the estimated effect of the rebased market basket 
update to the IRF PPS payment rates.
    Column (6) shows the estimated effect of the update to the IRF 
labor-related share and wage index, in a budget neutral manner.
    Column (7) shows the estimated effect of the update to the CMG 
relative weights and average length of stay values, in a budget neutral 
manner.
    Column (8) compares our estimates of the payments per discharge, 
incorporating all of the proposed changes reflected in this final rule 
for FY 2012, to our estimates of payments per discharge in FY 2011 
(without these changes).
    The average estimated increase for all IRFs is approximately 2.2 
percent. This estimated increase includes the effects of the 1.8 
percent market basket update, which is derived from a 2.9 percent 
rebased market basket update reduced by 0.1 percentage point for FY 
2012, in accordance with sections 1886(j)(3)(C)(ii)(II) and 
1886(j)(3)(D)(ii) of the Act, and reduced by a 1.0 percentage point 
productivity adjustment as required by section 1886(j)(3)(C)(ii)(I) of 
the Act. It also includes the 0.4 percent overall estimated increase 
(the difference between 2.6 percent in FY 2011 and 3.0 percent in FY 
2012) in estimated IRF outlier payments from the update to the outlier 
threshold amount. Because we are making the remainder of the changes 
outlined in this final rule in a budget-neutral manner, they will not 
affect total estimated IRF payments in the aggregate. However, as 
described in more detail in each section, they will affect the 
estimated distribution of payments among providers.

                                     Table 14--IRF Impact Table for FY 2012
----------------------------------------------------------------------------------------------------------------
      Facility classification        Number of  Number of   Outlier    FY 2012    FY 2012      CMG       Total
------------------------------------    IRFs      cases   -----------  Adjusted  CBSA wage -----------  percent
                                    ----------------------              market   index and               change
                                                                        basket     labor-             ----------
                                                                       increase    share
                (1)                     (2)        (3)        (4)     factor\1\ -----------    (7)
                                                                     -----------                          (8)
                                                                         (5)        (6)
----------------------------------------------------------------------------------------------------------------
Total..............................      1,152    397,256       0.4%       1.8%       0.0%       0.0%        2.2
Urban unit.........................        752    200,510        0.6        1.8       -0.1        0.0        2.3
Rural unit.........................        175     27,993        0.5        1.8        0.7        0.1        3.2
Urban hospital.....................        205    162,121        0.2        1.8        0.0        0.0        1.9
Rural hospital.....................         20      6,632        0.2        1.8        1.6       -0.1        3.5
Urban For-Profit...................        317    151,768        0.2        1.8        0.1        0.0        2.1
Rural For-Profit...................         63     12,437        0.4        1.8        1.1        0.1        3.4
Urban Non-Profit...................        596    199,249        0.6        1.8       -0.3        0.0        2.1
Rural Non-Profit...................        122     20,437        0.5        1.8        0.8        0.0        3.1
Urban Government...................         44     11,614        0.7        1.8        0.2        0.0        2.8
Rural Government...................         10        751        0.9        1.8        1.3        0.1        4.1
Urban..............................        957    362,631        0.4        1.8       -0.1        0.0        2.1
Rural..............................        195     34,625        0.5        1.8        0.9        0.1        3.2
Urban by region \2\
    Urban New England..............         32     16,385        0.4        1.8       -1.2        0.1        1.1
    Urban Middle Atlantic..........        142     66,330        0.3        1.8       -0.7        0.0        1.4
    Urban South Atlantic...........        132     63,773        0.4        1.8        0.0        0.0        2.2
    Urban East North Central.......        188     57,251        0.6        1.8        0.0        0.0        2.4
    Urban East South Central.......         49     26,367        0.2        1.8        0.4       -0.1        2.3
    Urban West North Central.......         73     18,112        0.6        1.8        0.0        0.0        2.4
    Urban West South Central.......        169     66,296        0.4        1.8        0.5        0.0        2.7
    Urban Mountain.................         70     23,827        0.5        1.8        0.2       -0.1        2.3
    Urban Pacific..................        102     24,290        0.7        1.8       -0.3        0.0        2.2
Rural by region \2\                  .........  .........  .........  .........  .........  .........  .........
    Rural New England..............          6      1,354        1.0        1.8        0.7        0.1        3.6
    Rural Middle Atlantic..........         16      3,232        0.3        1.8        1.8        0.0        3.9
    Rural South Atlantic...........         25      5,988        0.3        1.8        0.8        0.0        2.9
    Rural East North Central.......         33      5,775        0.4        1.8        0.1        0.1        2.4
    Rural East South Central.......         23      4,016        0.2        1.8        1.4        0.0        3.4
    Rural West North Central.......         31      3,944        0.8        1.8       -0.2        0.1        2.5
    Rural West South Central.......         50      9,259        0.6        1.8        1.6        0.1        4.0
    Rural Mountain.................          7        670        0.6        1.8        0.3        0.1        2.8
    Rural Pacific..................          4        387        1.5        1.8       -0.4       -0.1        2.8
Teaching status
    Non-teaching...................      1,036    345,421        0.4        1.8        0.1        0.0        2.3
    Resident to ADC less than 10%..         69     36,843        0.6        1.8       -0.4        0.0        2.0
    Resident to ADC 10%-19%........         33     12,481        0.6        1.8       -0.3        0.1        2.2
    Resident to ADC greater than            14      2,511        0.7        1.8       -0.7        0.0        1.9
     19%...........................
Disproportionate share patient
 percentage (DSH PP)
    DSH PP = 0%....................         39     10,532        0.5        1.8        0.4        0.0        2.7
    DSH PP http://www.census.gov/geo/www/us_regdiv.pdf.)

iii. Impact of the Update to the Outlier Threshold Amount
    In the FY 2011 IRF PPS notice (75 FR 42836), we used FY 2009 
patient-level claims data (the best, most complete data available at 
that time) to set the outlier threshold amount for FY 2011 so that 
estimated outlier payments would equal 3 percent of total estimated 
payments for FY 2011. For this final rule, we update our analysis using 
more current FY 2010 data. Using the updated FY 2010 data, we now 
estimate that IRF outlier payments, as a percentage of total estimated 
payments for FY 2011, decreased from 3 percent using the FY 2009 data 
to approximately 2.6 percent using the updated FY 2010 data. As a 
result, we adjust the outlier threshold amount for FY 2012 to $10,660, 
reflecting total estimated outlier payments equal to 3 percent of total 
estimated payments in FY 2012.
    The impact of the update to the outlier threshold amount (as shown 
in column 4 of Table 14) is to increase estimated overall payments to 
IRFs by 0.4 percent. We do not estimate that any group of IRFs would 
experience a decrease in payments from this update. We estimate the 
largest increase in payments to be a 1.5 percent increase in estimated 
payments to rural IRFs in the Pacific region.
iv. Impact of the Market Basket Update to the IRF PPS Payment Rates
    The adjusted market basket update to the IRF PPS payment rates is 
presented in column 5 of Table 14. In the aggregate the update will 
result in a net 1.8 percent increase in overall estimated payments to 
IRFs. This net increase reflects the estimated rebased RPL market 
basket increase factor for FY 2012 of 2.9 percent, reduced by 0.1 
percentage point in accordance with sections 1886(j)(3)(C)(ii)(II) and 
1886(j)(3)(D)(ii) of the Act, and reduced by a 1.0 percent productivity 
adjustment as required by section 1886(j)(3)(C)(ii)(I) of the Act.
v. Impact of the CBSA Wage Index and Labor-Related Share
    In column 6 of Table 14, we present the effects of the budget 
neutral update of the wage index and labor-related share. The changes 
to the wage index and the labor-related share are discussed together 
because the wage index is applied to the labor-related share portion of 
payments, so the changes in the two have a combined effect on payments 
to providers. As discussed in section VI.A.4 of this final rule, the 
labor-related share decreased from 75.271 percent in FY 2011 to 70.199 
percent in FY 2012.
    In the aggregate, since these updates to the wage index and the 
labor-related share are applied in a budget-neutral manner as required 
under section 1886(j)(6) of the Act, we do not estimate that these 
updates will affect overall estimated payments to IRFs. However, we 
estimate that these changes will have small distributional effects. For 
example, we estimate a 0.9 percent increase in payments to rural IRFs, 
with the largest increase in payments of 1.8 percent for rural IRFs in 
the Mid-Atlantic region. We estimate the largest decrease in payments 
from the update to the CBSA wage index and labor-related share to be a 
1.2 percent decrease for urban IRFs in the New England region.
vi. Impact of the Update to the CMG Relative Weights and Average Length 
of Stay Values
    In column 7 of Table 14, we present the effects of the budget 
neutral update of the CMG relative weights and average length of stay 
values. In the aggregate we do not estimate that these updates will 
affect overall estimated payments to IRFs. However, we estimate that 
these updates will have small distributional effects. The largest 
decrease in payments as a result of these updates is a 0.1 percent 
decrease to rural freestanding IRFs, urban IRFs in the East South 
Central and Mountain regions, and rural IRFs in the Pacific region.
vii. Impact of the IPPS Data Matching Process Changes on the IRF PPS 
Calculation of the Low-Income Percentage Adjustment Factor
    In section VIII of this final rule, we note the recent revision of 
the data matching process that is used to calculate the DSH patient 
percentage used in the acute IPPS DSH adjustment. As we have stated 
previously, it is our policy in calculating the LIP adjustment factor 
to use the same DSH patient percentage used in the acute IPPS DSH 
adjustment. This would include the data matching process. We are not 
able to provide a detailed analysis of the impact of the revised data 
matching process. That is, it is not possible to determine whether IRF 
LIP adjustment payments will generally increase or decrease, because 
IRFs' SSI fractions will vary depending on various factors, including 
the use of a more updated MedPAR claims data file, use of a more 
updated SSI eligibility data file, and the other features of the 
revised data matching process. See the FY 2011 IPPS final rule (75 FR 
50663 through 50664) for more information on the revised data matching 
process.
ix. Impact of the IRF Quality Reporting Program Beginning in FY 2013
    As discussed in section X.B of this final rule, we will collect 
data on 2 quality measures from October 1, 2012 through December 31, 
2012 (FY 2013). These quality measures are: (1) Catheter-Associated 
Urinary Tract Infections; and (2) Pressure Ulcers that are New or Have 
Worsened. As discussed in section XIII. of this final rule, we estimate 
that IRFs will incur costs associated with the collection of these 
data, which we detail below.
a. Catheter Associated Urinary Tract Infections
    As stated in section X.C.1. of this final rule, we collect data on 
the first quality measure, Catheter Associated Urinary Tract 
Infections, through CDC/NHSN. We do not currently require IRFs to 
report data to NHSN. However, some IRFs submit data to NHSN either 
voluntarily or per State mandate. According to the CDC, 26 IRFs already 
report data to NHSN. We estimate that 1,126 IRFs (1,152 minus the 26 
IRFs that are already reporting data to NHSN) will incur costs for 
registering and completing the necessary training provided by the CDC 
in FY 2012 in preparation for submitting the data beginning on October 
1, 2012 (FY 2013). We estimate that registering and completing the 
necessary training of the required personnel at each IRF will take 4 
hours at a cost of $41.59 per hour, at an estimated cost per IRF of 
$166.36 and a total estimated cost across all IRFs of $187,321.
    Once IRFs begin submitting data to the NHSN on Catheter Associated 
Urinary Tract Infections by October 1, 2012 (FY 2013), they will need 
to submit two types of forms in order for CDC to calculate the CAUTI 
rate per 1,000 urinary catheter days. We estimate that the first form, 
the UTI form, will take 15 minutes per reporting episode per IRF and 
that there will be approximately 2.25 NHSN submissions per IRF per 
month. Based on this estimate, we expect for each IRF to expend 33.75 
minutes (0.5625 hours) per month or 405 minutes (6.75 hours) per year 
reporting to NHSN. The estimated annual burden to all IRFs in the U.S. 
for reporting to NHSN is 7,776 hours. The estimated yearly cost per IRF 
is $186.15 and the estimated total yearly

[[Page 47889]]

cost across all IRFs is $214,445. While CDC estimates that the second 
form, the denominator form used to count daily the number of patients 
with an indwelling catheter device, will take 5 hours per month to 
complete, we estimate that it will take 2.5 hours per form per IRF per 
month as the number of patients with an indwelling catheter is the only 
part of this form that IRFs will be required to complete. We anticipate 
that there will be one form submitted per IRF per month and each IRF 
will expend 150 minutes (2.5 hours) per month and 1,800 minutes (30 
hours) per year reporting to NHSN. The estimated annual burden to all 
IRFs in the U.S. for reporting to NHSN is 34,560 hours. The estimated 
cost per IRF is $1,247.70 per year and the estimated total yearly cost 
across all IRFs is $1,437,350. These costs are estimated using an 
hourly wage for a Registered Nurse of $41.59 and a Medical Billing 
Clerk/Data Entry person of $20.57.
b. Pressure Ulcers That Are New or Have Worsened
    As stated in section X.C.2 of this final rule, we modified the IRF-
PAI by removing the items previously in the ``Quality Indicators'' 
section and replacing them with pressure ulcer items similar to 
elements from the MDS 3.0 nursing home instrument. Since all IRFs are 
already required to complete and transmit IRF-PAIs on all Medicare Part 
A fee-for-service and Medicare Part C (Medicare Advantage) to receive 
payment from Medicare, and since the number of IRFs submitting claims 
to Medicare has remained stable over the past several years, we do not 
estimate that there are any IRFs that will need to conduct additional 
training or set-up for completing and transmitting the IRF-PAI. Thus, 
we do not estimate any additional cost to IRFs in FY 2012 for these 
activities. While IRFs are already transmitting the IRF-PAI form to 
CMS, we do not estimate any additional transmission costs associated 
with the proposed IRF quality reporting program. Further, we do not 
estimate any additional burden for IRFs to complete an IRF-PAI with 
mandatory quality measures as the IRF-PAI previously contained a 
voluntary ``Quality Indicators'' section, which we replaced with the 
pressure ulcer question set. When the original burden estimates were 
completed for the IRF-PAI, we estimated that the ``Quality Indicators'' 
section of the IRF-PAI would take about 10 minutes to complete, and we 
assumed that all IRFs would complete the Quality Indicators items, even 
though completion of this section was voluntary. Thus, removing the 
Quality Indicators items from the IRF-PAI decreases the total estimated 
burden of completing each IRF-PAI by about 10 minutes. However, we 
estimate that it will take about 10 minutes to complete the new 
pressure ulcer item that we are requiring IRFs to complete as part of 
the new IRF quality reporting program. Since the time to complete the 
items that we are removing from the IRF-PAI is the same as the time to 
complete the new items we are adding, we estimate no net change in the 
amount of time or the costs associated with completing each IRF-PAI.
5. Alternatives Considered
    Although we have determined that this final rule will not have a 
significant economic impact on a substantial number of small entities, 
we have voluntarily prepared a discussion on the alternatives 
considered to the IRF PPS.
    Section 1886(j)(3)(C) of the Act requires the Secretary to update 
the IRF PPS payment rates by an increase factor that reflects changes 
over time in the prices of an appropriate mix of goods and services 
included in the covered IRF services. Thus, we did not consider 
alternatives to updating payments using the estimated RPL market basket 
increase factor for FY 2012. In this final rule, we rebase the RPL 
market basket for FY 2012, as we typically do every 5 to 7 years, from 
a 2002 base year to a 2008 base year. We considered not rebasing the 
RPL market basket for FY 2012; however, periodically rebasing the RPL 
market basket ensures that it continues to reflect the most accurate 
account of the cost of relevant goods and services. In accordance with 
the recently amended section 1886(j)(3)(C) of the Act, we are updating 
IRF Federal prospective payments in this final rule by 1.8 percent 
(which equals the 2.9 percent estimated rebased RPL market basket 
increase factor for FY 2012 reduced by 0.1 percentage point, as 
required by sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the 
Act, and reduced by a 1.0 percent productivity adjustment as required 
by section 1886(j)(3)(C)(ii)(I) of the Act).
    We considered maintaining the existing CMG relative weights and 
average length of stay values for FY 2012. However, in light of 
recently available data and our desire to ensure that the CMG relative 
weights and average length of stay values are as reflective as possible 
of recent changes in IRF utilization and case mix, we believe that it 
is appropriate to update the CMG relative weights and average length of 
stay values at this time to ensure that IRF PPS payments continue to 
reflect as accurately as possible the current costs of care in IRFs.
    We considered adjusting the facility-level adjustments (the rural, 
LIP, and teaching status adjustment) for FY 2012 using updated data and 
a revised methodology that would remove a weighting factor from the 
regression analysis that we believe is no longer appropriate. However, 
we found that the proposed changes to the adjustment factors would 
cause unusually large reductions in payment for some facilities that 
are not clearly justified. Thus, we are freezing the IRF facility-level 
adjustment factors at FY 2011 levels for FY 2012 while we continue to 
study the underlying anomalies in the data that may be causing some of 
the instability in the facility-level adjustments and analyze the most 
appropriate methodology to use to update the facility-level adjustment 
factors.
    We considered maintaining the existing outlier threshold amount for 
FY 2012. However, the update to the outlier threshold amount will have 
a positive impact on IRF providers and, therefore, on small entities 
(as shown in Table 14, column 4). If we were to maintain the FY 2011 
outlier threshold amount, fewer outlier cases would qualify for the 
additional outlier payments in FY 2012. Analysis of updated FY 2010 
data indicates that estimated outlier payments would not equal 3 
percent of estimated total payments for FY 2012 unless we update the 
outlier threshold amount. Thus, we believe that this update is 
appropriate for FY 2012.
6. Accounting Statement
    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table 15, we have 
prepared an accounting statement showing the classification of the 
transfers associated with the provisions of this final rule. This table 
provides our best estimate of the increase in Medicare payments under 
the IRF PPS as a result of the changes presented in this final rule 
based on the data for 1,152 IRFs in our database.

 Table 15--Accounting Statement: Classification of Estimated Transfers,
    From the 2011 IRF PPS Fiscal Year to the 2012 IRF PPS Fiscal Year
------------------------------------------------------------------------
                 Category                             Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers............  $150 million.

[[Page 47890]]

 
From Whom to Whom?                          Federal Government to IRF
                                             Medicare Providers.
------------------------------------------------------------------------

7. Conclusion
    Overall, the estimated payments per discharge for IRFs in FY 2012 
are projected to increase by 2.2 percent, compared with those in FY 
2011, as reflected in column 8 of Table 14. IRF payments are estimated 
to increase 2.1 percent in urban areas and 3.2 percent in rural areas, 
per discharge, compared with FY 2011. Payments to rehabilitation units 
in hospitals in urban areas are estimated to increase 2.3 percent per 
discharge. Payments to freestanding rehabilitation hospitals in urban 
areas are estimated to increase 1.9 percent per discharge. Payments to 
rehabilitation units in hospitals in rural areas are estimated to 
increase 3.2 percent per discharge, while payments to freestanding 
rehabilitation hospitals in rural areas are estimated to increase 3.5 
percent per discharge.
    Overall, the largest payment increase is estimated at 4.1 percent 
for rural government-owned IRFs and rural IRFs in the West South 
Central region. We are not estimating any payment decreases for FY 
2012.

B. Regulatory Flexibility Act Analysis

    The RFA requires agencies to analyze options for regulatory relief 
of small entities, if a rule has a significant impact on a substantial 
number of small entities. For purposes of the RFA, small entities 
include small businesses, nonprofit organizations, and small 
governmental jurisdictions. Most IRFs and most other providers and 
suppliers are small entities, either by nonprofit status or by having 
revenues of $34.5 million in any 1 year. (For details, see the Small 
Business Administration's Web site at http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=2465b064ba6965cc1fbd2eae60854b11&rgn=div8&view=text&node=13:1.0.1.1.16.1.266.9&idno=13) (refer to subsector 622). Because we 
lack data on individual hospital receipts, we cannot determine the 
number of small proprietary IRFs or the proportion of IRFs' revenue 
that is derived from Medicare payments. Therefore, we assume that all 
IRFs (an estimated 1,152 IRFs that are in our analysis file, of which 
approximately 60 percent are nonprofit facilities) are considered small 
entities and that Medicare payment constitutes the majority of their 
revenues. The HHS generally uses a revenue or cost impact of 3 to 5 
percent as a significance threshold under the RFA. There is no negative 
estimated impact as a result of this final rule that is within the 
significance threshold of 3 to 5 percent. As shown in Table 14, we 
estimate that the net revenue impact of this final rule on all IRFs is 
to increase estimated payments by about 2.2 percent, with an estimated 
increase in payments of 3 percent or higher for some categories of IRFs 
(such as both freestanding rehabilitation hospitals located in rural 
areas and rehabilitation units in hospitals located in rural areas, 
rural government-owned IRFS and rural IRFs in the New England, Mid-
Atlantic, East South Central, and West South Central) and no estimated 
decreases in payment. Therefore, we estimate that all IRFs will 
experience a net positive increase in payments. As a result, the 
Secretary has determined that this final rule will not have a 
significant impact on a substantial number of small entities. We 
present, in the Alternatives Considered section XIV.A.5 of this final 
rule, an analysis of the alternatives we considered for this final IRF 
PPS rule. Medicare fiscal intermediaries and carriers are not 
considered to be small entities. Individuals and States are not 
included in the definition of a small entity.
    In addition, section 1102(b) of the Act requires us to prepare a 
RIA if a rule may have a significant impact on the operations of a 
substantial number of small rural hospitals. This analysis must conform 
to the provisions of section 603 of the RFA. For purposes of section 
1102(b) of the Act, we define a small rural hospital as a hospital that 
is located outside of a MSA and has fewer than 100 beds. Based on the 
data of the 175 rural units and 20 rural hospitals in our database of 
1,152 IRFs, we estimate that small rural IRF hospitals will receive 
between 2.4 percent and 4.1 percent higher net payments in FY 2012 due 
to the provisions in this final rule, with no rural IRF hospitals 
estimated to receive negative net payments. Thus, the Secretary has 
determined that the rates and policies set forth in this final rule 
will not have a significant impact on the operations of a substantial 
number of small rural hospitals.

C. Unfunded Mandates Reform Act Analysis

    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any one year of 
$100 million in 1995 dollars, updated annually for inflation. In 2011, 
that threshold level is approximately $136 million. This final rule 
will not impose spending costs on State, local, or Tribal governments, 
in the aggregate, or by the private sector, of $136 million.

XV. Federalism Analysis

    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. This final rule will have no substantial direct effect on 
State and local governments, preempt State law, or otherwise have 
Federalism implications.

List of Subjects in 42 CFR Part 412

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

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services amends 42 CFR chapter IV as follows:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

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

    Authority:  Sections 1102, 1862, and 1871 of the Social Security 
Act (42 U.S.C. 1302, 1395y, and 1395hh).

Subpart B--Hospital Services Subject to and Excluded From the 
Prospective Payment Systems for Inpatient Operating Costs and 
Inpatient Capital-Related Costs

0
2. Section 412.23 is amended by revising paragraph (b) to read as 
follows:

Sec.  412.23  Excluded hospitals: Classifications.

* * * * *
    (b) Rehabilitation hospitals. A rehabilitation hospital or unit 
must meet the requirements specified in Sec.  412.29 of this subpart to 
be excluded from the prospective payment systems specified in Sec.  
412.1(a)(1) of this subpart and to be paid under the prospective 
payment system specified in Sec.  412.1(a)(3) of this subpart and in 
subpart P of this part.
* * * * *

[[Page 47891]]

0
3. Section 412.25 is amended by revising paragraphs (b) and 
(e)(2)(ii)(A) to read as follows:

Sec.  412.25  Excluded hospital units: Common requirements.

* * * * *
    (b) Changes in the size of excluded units. Except in the special 
cases noted at the end of this paragraph, changes in the number of beds 
or square footage considered to be part of an excluded unit under this 
section are allowed one time during a cost reporting period if the 
hospital notifies its Medicare contractor and the CMS RO in writing of 
the planned change at least 30 days before the date of the change. The 
hospital must maintain the information needed to accurately determine 
costs that are attributable to the excluded unit. A change in bed size 
or a change in square footage may occur at any time during a cost 
reporting period and must remain in effect for the rest of that cost 
reporting period. Changes in bed size or square footage may be made at 
any time if these changes are made necessary by relocation of a unit to 
permit construction or renovation necessary for compliance with changes 
in Federal, State, or local law affecting the physical facility or 
because of catastrophic events such as fires, floods, earthquakes, or 
tornadoes.
* * * * *
    (e) * * *
    (2) * * *
    (ii) * * *
    (A) For a rehabilitation unit, the requirements under Sec.  412.29 
of this subpart; or
* * * * *

0
4. Section 412.29 is revised to read as follows:

Sec.  412.29  Classification criteria for payment under the inpatient 
rehabilitation facility prospective payment system.

    To be excluded from the prospective payment systems described in 
Sec.  412.1(a)(1) and to be paid under the prospective payment system 
specified in Sec.  412.1(a)(3), an inpatient rehabilitation hospital or 
an inpatient rehabilitation unit of a hospital (otherwise referred to 
as an IRF) must meet the following requirements:
    (a) Have (or be part of a hospital that has) a provider agreement 
under part 489 of this chapter to participate as a hospital.
    (b) Except in the case of a ``new'' IRF or ``new'' IRF beds, as 
defined in paragraph (c) of this section, an IRF must show that, during 
its most recent, consecutive, and appropriate 12-month time period (as 
defined by CMS or the Medicare contractor), it served an inpatient 
population that meets the following criteria:
    (1) For cost reporting periods beginning on or after July 1, 2004, 
and before July 1, 2005, the IRF served an inpatient population of whom 
at least 50 percent, and for cost reporting periods beginning on or 
after July 1, 2005, the IRF served an inpatient population of whom at 
least 60 percent required intensive rehabilitation services for 
treatment of one or more of the conditions specified at paragraph 
(b)(2) of this section. A patient with a comorbidity, as defined at 
Sec.  412.602 of this part, may be included in the inpatient population 
that counts toward the required applicable percentage if--
    (i) The patient is admitted for inpatient rehabilitation for a 
condition that is not one of the conditions specified in paragraph 
(b)(2) of this section;
    (ii) The patient has a comorbidity that falls in one of the 
conditions specified in paragraph (b)(2) of this section; and
    (iii) The comorbidity has caused significant decline in functional 
ability in the individual that, even in the absence of the admitting 
condition, the individual would require the intensive rehabilitation 
treatment that is unique to inpatient rehabilitation facilities paid 
under subpart P of this part and that cannot be appropriately performed 
in another care setting covered under this title.
    (2) List of conditions.
    (i) Stroke.
    (ii) Spinal cord injury.
    (iii) Congenital deformity.
    (iv) Amputation.
    (v) Major multiple trauma.
    (vi) Fracture of femur (hip fracture).
    (vii) Brain injury.
    (viii) Neurological disorders, including multiple sclerosis, motor 
neuron diseases, polyneuropathy, muscular dystrophy, and Parkinson's 
disease.
    (ix) Burns.
    (x) Active, polyarticular rheumatoid arthritis, psoriatic 
arthritis, and seronegative arthropathies resulting in significant 
functional impairment of ambulation and other activities of daily 
living that have not improved after an appropriate, aggressive, and 
sustained course of outpatient therapy services or services in other 
less intensive rehabilitation settings immediately preceding the 
inpatient rehabilitation admission or that result from a systemic 
disease activation immediately before admission, but have the potential 
to improve with more intensive rehabilitation.
    (xi) Systemic vasculidities with joint inflammation, resulting in 
significant functional impairment of ambulation and other activities of 
daily living that have not improved after an appropriate, aggressive, 
and sustained course of outpatient therapy services or services in 
other less intensive rehabilitation settings immediately preceding the 
inpatient rehabilitation admission or that result from a systemic 
disease activation immediately before admission, but have the potential 
to improve with more intensive rehabilitation.
    (xii) Severe or advanced osteoarthritis (osteoarthrosis or 
degenerative joint disease) involving two or more major weight bearing 
joints (elbow, shoulders, hips, or knees, but not counting a joint with 
a prosthesis) with joint deformity and substantial loss of range of 
motion, atrophy of muscles surrounding the joint, significant 
functional impairment of ambulation and other activities of daily 
living that have not improved after the patient has participated in an 
appropriate, aggressive, and sustained course of outpatient therapy 
services or services in other less intensive rehabilitation settings 
immediately preceding the inpatient rehabilitation admission but have 
the potential to improve with more intensive rehabilitation. (A joint 
replaced by a prosthesis no longer is considered to have 
osteoarthritis, or other arthritis, even though this condition was the 
reason for the joint replacement.)
    (xiii) Knee or hip joint replacement, or both, during an acute 
hospitalization immediately preceding the inpatient rehabilitation stay 
and also meet one or more of the following specific criteria:
    (A) The patient underwent bilateral knee or bilateral hip joint 
replacement surgery during the acute hospital admission immediately 
preceding the IRF admission.
    (B) The patient is extremely obese with a Body Mass Index of at 
least 50 at the time of admission to the IRF.
    (C) The patient is age 85 or older at the time of admission to the 
IRF.
    (c) In the case of new IRFs (as defined in paragraph (c)(1) of this 
section) or new IRF beds (as defined in paragraph (c)(2)of this 
section), the IRF must provide a written certification that the 
inpatient population it intends to serve meets the requirements of 
paragraph (b) of this section. This written certification will apply 
until the end of the IRF's first full 12-month cost reporting period 
or, in the case of new IRF beds, until the end of the cost reporting 
period during which the new beds are added to the IRF.
    (1) New IRFs. An IRF hospital or IRF unit is considered new if it 
has not been paid under the IRF PPS in subpart P of

[[Page 47892]]

this part for at least 5 calendar years. A new IRF will be considered 
new from the point that it first participates in Medicare as an IRF 
until the end of its first full 12-month cost reporting period.
    (2) New IRF beds. Any IRF beds that are added to an existing IRF 
must meet all applicable State Certificate of Need and State licensure 
laws. New IRF beds may be added one time at any point during a cost 
reporting period and will be considered new for the rest of that cost 
reporting period. A full 12-month cost reporting period must elapse 
between the delicensing or decertification of IRF beds in an IRF 
hospital or IRF unit and the addition of new IRF beds to that IRF 
hospital or IRF unit. Before an IRF can add new beds, it must receive 
written approval from the appropriate CMS RO, so that the CMS RO can 
verify that a full 12-month cost reporting period has elapsed since the 
IRF has had beds delicensed or decertified. New IRF beds are included 
in the compliance review calculations under paragraph (b) of this 
section from the time that they are added to the IRF.
    (3) Change of ownership or leasing. An IRF hospital or IRF unit 
that undergoes a change of ownership or leasing, as defined in Sec.  
489.18 of this chapter, retains its excluded status and will continue 
to be paid under the prospective payment system specified in Sec.  
412.1(a)(3) before and after the change of ownership or leasing if the 
new owner(s) of the IRF accept assignment of the previous owners' 
Medicare provider agreement and the IRF continues to meet all of the 
requirements for payment under the IRF prospective payment system. If 
the new owner(s) do not accept assignment of the previous owners' 
Medicare provider agreement, the IRF is considered to be voluntarily 
terminated and the new owner(s) may re-apply to participate in the 
Medicare program. If the IRF does not continue to meet all of the 
requirements for payment under the IRF prospective payment system, then 
the IRF loses its excluded status and is paid according to the 
prospective payment systems described in Sec.  412.1(a)(1).
    (4) Mergers. If an IRF hospital (or a hospital with an IRF unit) 
merges with another hospital and the owner(s) of the merged hospital 
accept assignment of the IRF hospital's provider agreement (or the 
provider agreement of the hospital with the IRF unit), then the IRF 
hospital or IRF unit retains its excluded status and will continue to 
be paid under the prospective payment system specified in Sec.  
412.1(a)(3) before and after the merger, as long as the IRF hospital or 
IRF unit continues to meet all of the requirements for payment under 
the IRF prospective payment system. If the owner(s) of the merged 
hospital do not accept assignment of the IRF hospital's provider 
agreement (or the provider agreement of the hospital with the IRF 
unit), then the IRF hospital or IRF unit is considered voluntarily 
terminated and the owner(s) of the merged hospital may reapply to the 
Medicare program to operate a new IRF.
    (d) Have in effect a preadmission screening procedure under which 
each prospective patient's condition and medical history are reviewed 
to determine whether the patient is likely to benefit significantly 
from an intensive inpatient hospital program. This procedure must 
ensure that the preadmission screening is reviewed and approved by a 
rehabilitation physician prior to the patient's admission to the IRF.
    (e) Have in effect a procedure to ensure that patients receive 
close medical supervision, as evidenced by at least 3 face-to-face 
visits per week by a licensed physician with specialized training and 
experience in inpatient rehabilitation to assess the patient both 
medically and functionally, as well as to modify the course of 
treatment as needed to maximize the patient's capacity to benefit from 
the rehabilitation process.
    (f) Furnish, through the use of qualified personnel, rehabilitation 
nursing, physical therapy, and occupational therapy, plus, as needed, 
speech-language pathology, social services, psychological services 
(including neuropsychological services), and orthotic and prosthetic 
services.
    (g) Have a director of rehabilitation who--
    (1) Provides services to the IRF hospital and its inpatients on a 
full-time basis or, in the case of a rehabilitation unit, at least 20 
hours per week;
    (2) Is a doctor of medicine or osteopathy;
    (3) Is licensed under State law to practice medicine or surgery; 
and
    (4) Has had, after completing a one-year hospital internship, at 
least 2 years of training or experience in the medical-management of 
inpatients requiring rehabilitation services.
    (h) Have a plan of treatment for each inpatient that is 
established, reviewed, and revised as needed by a physician in 
consultation with other professional personnel who provide services to 
the patient.
    (i) Use a coordinated interdisciplinary team approach in the 
rehabilitation of each inpatient, as documented by the periodic 
clinical entries made in the patient's medical record to note the 
patient's status in relationship to goal attainment and discharge 
plans, and that team conferences are held at least once per week to 
determine the appropriateness of treatment.
    (j) Retroactive adjustments. If a new IRF (or new beds that are 
added to an existing IRF) are excluded from the prospective payment 
systems specified in Sec.  412.1(a)(1) and paid under the prospective 
payment system specified in Sec.  412.1(a)(3) for a cost reporting 
period under paragraph (c) of this section, but the inpatient 
population actually treated during that period does not meet the 
requirements of paragraph (b) of this section, we adjust payments to 
the IRF retroactively in accordance with the provisions in Sec.  
412.130.

Sec.  412.30  [Removed and Reserved]

0
5. Section 412.30 is removed and reserved.

Subpart P--Prospective Payment for Inpatient Rehabilitation 
Hospitals and Rehabilitation Units

0
6. Section 412.624 is amended by
0
A. Redesignating paragraph (c)(4) as paragraph (c)(5).
0
B. Adding a new paragraph (c)(4).
    The addition reads as follows:

Sec.  412.624  Methodology for calculating the Federal prospective 
payment rates.

* * * * *
    (c) * * *
    (4) Applicable increase factor for FY 2014 and for subsequent FY. 
Subject to the provisions of paragraphs (c)(4)(i) and (c)(4)(ii) of 
this section, the applicable increase factor for FY 2014 and for 
subsequent years for updating the standard payment conversion factor is 
the increase factor described in paragraph (a)(3) of this section, 
including adjustments described in paragraph (d) of this section as 
appropriate.
    (i) In the case of an IRF that is paid under the prospective 
payment system specified in Sec.  412.1(a)(3) of this part that does 
not submit quality data to CMS, in the form and manner specified by 
CMS, the applicable increase factor specified in paragraph (a)(3) of 
this section is reduced by 2 percentage points.
    (ii) Any reduction of the increase factor will apply only to the 
fiscal year involved and will not be taken into account in computing 
the applicable increase factor for a subsequent fiscal year.
* * * * *

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

[[Page 47893]]

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

    The following addendum will not appear in the Code of Federal 
Regulations.
BILLING CODE 4120-01-P

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[FR Doc. 2011-19516 Filed 7-29-11; 4:15 pm]
BILLING CODE 4120-01-C
```