[Federal Register Volume 63, Number 91 (Tuesday, May 12, 1998)]
[Rules and Regulations]
[Pages 26318-26360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12231]



[[Page 26317]]

_______________________________________________________________________

Part III





Department of Health and Human Services





_______________________________________________________________________



Health Care Financing Administration



_______________________________________________________________________



42 CFR Parts 410 et al.

Medicare Program: Changes to the Hospital Inpatient Prospective Payment 
Systems and Fiscal Year 1998 Rates; Final Rule

Federal Register / Vol. 63, No. 91 / Tuesday, May 12, 1998 / Rules 
and Regulations

[[Page 26318]]



DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 410, 412, 413, 415, and 485

[HCFA-1878-F, formerly BPD-878]
RIN 0938-AH55


Medicare Program; Changes to the Hospital Inpatient Prospective 
Payment Systems and Fiscal Year 1998 Rates

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This final rule responds to public comments received on those 
portions of a final rule with comment period published in the Federal 
Register on August 29, 1997, that revised the Medicare hospital 
inpatient prospective payment systems for operating costs and capital-
related costs to implement necessary changes resulting from the 
Balanced Budget Act (BBA) of 1997, Public Law 105-33. This rule also 
addresses public comments on other BBA changes relating to cost limits 
for hospitals and hospital units excluded from the prospective payment 
systems as well as direct graduate medical education payments that were 
included in the August 29, 1997 document. Generally, these BBA changes 
were applicable to hospital discharges occurring on or after October 1, 
1997.

EFFECTIVE DATE: This final rule is effective on June 11, 1998.

FOR FURTHER INFORMATION CONTACT:

Nancy Edwards, (410) 786-4531, Operating Prospective Payment and Wage 
Index Issues
Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded 
Hospitals Critical Access Hospitals, and Graduate Medical Education 
Issues

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SUPPLEMENTARY INFORMATION:

I. Background

A. Summary

    Under section 1886(d) of the Social Security Act (the Act), payment 
for the operating costs of acute care hospital inpatient stays under 
Medicare Part A (Hospital Insurance) is based on prospectively-set 
rates. Under this system, which was established effective with hospital 
cost reporting periods beginning on or after October 1, 1983, Medicare 
payment for hospital inpatient operating costs is made at a 
predetermined, specific rate for each hospital discharge. All 
discharges are classified according to a list of diagnosis-related 
groups (DRGs). The regulations governing the hospital inpatient 
prospective payment system are located in 42 CFR Part 412.
    As required by section 1886(g) of the Act, effective with cost 
reporting periods beginning on or after October 1, 1991, we also use a 
prospective payment methodology for hospital inpatient capital-related 
costs. Under the capital-related cost methodology, a predetermined 
payment amount per discharge is made for Medicare inpatient capital-
related costs.
    The prospectively set rates and methodologies are updated annually 
as required by law or as new legislation is enacted.

B. Summary of the Provisions of the August 29, 1997 Final Rule with 
Comment Period Resulting from the Balanced Budget Act of 1997

    On August 29, 1997, we published a final rule with comment period 
in the Federal Register (62 FR 45966) setting forth statutorily 
required changes to the Medicare hospital inpatient prospective payment 
systems for both operating costs and capital-related costs, which were 
effective for discharges occurring on or after October 1, 1997. This 
final rule with comment period followed a proposed rule published in 
the Federal Register on June 2, 1997 (62 FR 29902) that set forth 
proposed updates and changes. Following issuance of the June 2, 1997 
proposed rule, the Balanced Budget Act (BBA) of 1997, Public Law 105-
33, was enacted on August 5, 1997. This new law made major changes to 
the hospital prospective payment systems, effective October 1, 1997. 
Therefore, a major part of the August 29, 1997 final rule with comment 
period incorporated changes made by the BBA. Because the BBA was 
enacted after we had issued the June 2 proposed rule and because most 
of the BBA changes were effective October 1, 1997, we issued the August 
29, 1997 document as a final rule with comment period.
    The BBA made major changes that affected Medicare payments for 
inpatient hospital services under the prospective payment systems, and 
the cost limits applicable to excluded hospitals and hospital units as 
well as payment for the direct costs of graduate medical education. The 
provisions of the BBA that we implemented in the August 29, 1997 final 
rule with comment period related to the following:
    <bullet> The hospital operating payment update factor. (Sections 
4401(a) and (b))
    <bullet> The hospital capital rate reduction. (Section 4402)
    <bullet> Reductions in payments to disproportionate share 
hospitals. (Section 4403)
    <bullet> Elimination of payment of indirect medical education (IME) 
and disproportionate share adjustment on outlier payments. (Section 
4405)
    <bullet> Base payment rate to Puerto Rico hospitals. (Section 4406)
    <bullet> Special reclassification of Stanly County, North Carolina 
for purposes of the prospective payment system. (Section 4408)
    <bullet> New guidelines for geographic reclassification of certain 
hospitals for Federal fiscal year 1998 and subsequent fiscal years. 
(Sections 4409 and 4410(c))
    <bullet> Floor on area wage index. (Sections 4410(a) and (b))
    <bullet> Revision of the IME formula, limitations on full-time 
equivalent residents, and payment to teaching hospitals for IME costs 
associated with Medicare managed care discharges. (Sections 4621(a), 
4621(b), and 4622)
    <bullet> Classification of rural referral centers (RRC) for FY 1998 
and

[[Page 26319]]

subsequent fiscal years. (Section 4202(b))
    <bullet> Special treatment of Medicare-dependent, small rural 
hospitals (MDHs). (Section 4204)
    <bullet> Reinstatement of the add-on payment for blood clotting 
factor for inpatient beneficiaries with hemophilia. (Section 4452)
    <bullet> Counting residents for direct graduate medical education. 
(Section 4623)
    <bullet> Payments to managed care plans for graduate medical 
education. (Section 4624)
    <bullet> Payment to nonhospital providers for the direct costs of 
medical education incurred in the operation of an approved medical 
residency training program. (Section 4625)
    <bullet> Payment for combined medical residency training programs. 
(Section 4627)
    <bullet> Payment update for excluded hospitals and hospital units. 
(Section 4411)
    <bullet> Reductions in capital payment amounts for certain excluded 
hospitals and hospital units. (Section 4412)
    <bullet> Rebasing target amounts for excluded hospitals. (Section 
4413)
    <bullet> Cap on target amounts for excluded hospitals and hospital 
units (psychiatric hospitals and units, rehabilitation hospitals and 
units, and long-term care hospitals) for FYs 1998 through 2002. 
(Section 4414)
    <bullet> Bonus and relief payments to excluded hospitals and 
hospital units. (Section 4415)
    <bullet> Change in payment and target amount for new providers. 
(Sections 4416 and 4419)
    <bullet> Treatment of certain long-term care hospitals. (Sections 
4417(a) and 4417(b))
    <bullet> Exclusion of certain cancer hospitals from the prospective 
payment system. (Section 4418)
    <bullet> Establishment of a new ``Medicare Rural Hospital 
Flexibility Program'' to replace the existing Essential Access 
Community Hospital/Rural Primary Care Hospital (EACH/RPCH) program that 
operates in seven States. (Section 4201)
    <bullet> Beginning with the FY 1999 update, a change in the 
publication dates for the DRG prospective payment rate methodology and 
the recommended hospital prospective payment updates as a proposed rule 
by April 1 and as a final rule by August 1 of each year. (Section 
4644(a)(1) and (b)(1))
    As a conforming change, the deadline for applications for 
geographic reclassification for years beginning with FY 2000 was moved 
from October 1 to September 1. Because the FY 1999 applications were 
due on October 1, 1997, we shortened the deadlines for decisionmaking 
by the Medicare Geographic Classification Review Board (MGCRB), so that 
a final decision for all applications is made by June 15, 1998. 
(Section 4644(c))

II. Summary of the BBA Provisions and Discussion of Public Comments

A. General

    We received a total of 180 pieces of correspondence containing 
public comments on the BBA changes addressed in the August 29, 1997 
final rule with comment period. Below we discuss the BBA provisions, 
the changes we made to implement these provisions, the public comments 
received on each provision, and our response to the public comments.

B. Hospital Operating Payment Update Factor

1. General Provision
    The BBA made several revisions to the applicable percentage change 
(the update factor) to the Federal rates for prospective payment 
hospitals. Section 4401(a)(1) of the BBA amended section 
1886(b)(3)(B)(i) of the Act to revise the update factors for the 
Federal rates for inpatient operating costs for FYs 1998 through 2002. 
The update factor for FY 1998 was set at 0 percent for hospitals in all 
areas. For FY 1999, the update for hospitals in all areas is the market 
basket rate of increase minus 1.9 percentage points. For FY 2000, the 
update for all areas is the market basket rate of increase minus 1.8 
percentage points. For FY 2001 and FY 2002, the update for all areas is 
the market basket rate of increase minus 1.1 percentage points. For FY 
2003 and subsequent years, the update for all areas is the market 
basket rate of increase.
    In the August 29 final rule with comment period, we made necessary 
changes to Sec. 412.63 of our regulations.
    Comment: One commenter asserted that while the 0 percent update of 
the prospective payment rates for FY 1998 is consistent with the 
requirements of section 4401(a)(2) of the BBA, it is inappropriate 
given circumstances in the real world.
    Response: As the commenter noted, HCFA is required by statute to 
implement the 0 percent update to the prospective payment rates for FY 
1998. We believe that the 0 percent update is appropriate for the 
reasons discussed in both our update recommendation in the June 2 
proposed rule (62 FR 30035) and our responses to comments on that 
recommendation in the August 29 final rule with comment period (62 FR 
46139).
2. Special Update for Certain Nonteaching, Nondisproportionate Share 
Hospitals that do not Qualify as MDHs
    Section 4401(b) of the BBA provided a temporary special payment for 
FYs 1998 and 1999 for certain hospitals that do not receive any 
additional payment through the IME or DSH adjustment and do not meet 
the criteria to be classified as an MDH. As set forth in section 
4401(b)(2), in order to qualify for the special payment, a hospital 
must be located in a State in which the aggregate operating prospective 
payment for hospitals that meet the special payment criteria (that is, 
non-IME, non-DSH, non-MDH hospitals) is less than the aggregate 
allowable operating costs of inpatient hospital services (referred to 
hereafter as a negative operating prospective payment margin) for those 
hospitals for their cost reporting periods that began during FY 1995. 
In addition, a hospital must have a negative operating prospective 
payment margin during the cost reporting period at issue (beginning in 
FY 1998 or 1999).
    Under the provisions of section 4401(b)(1), for these hospitals, 
the percentage increase otherwise applicable to the standardized amount 
for FY 1998 was increased by 0.5 percentage points and, for FY 1999, 
the applicable percentage increase will be increased by 0.3 percentage 
points. Based on current statutory provisions, this means that these 
hospitals will receive an update of 0.5 percent for FY 1998 (the update 
for all other hospitals is 0) and, for FY 1999, an update of the market 
basket increase minus 1.6 percentage points (1.9 for all other 
hospitals). Under section 4401(b)(1), in applying these updates, the 
increase provided in FY 1998 will not apply in computing the update for 
FY 1999 and neither update will affect the updates provided for 
discharges in fiscal years after FY 1999.
    In accordance with section 4401(b)(2) of the BBA, in determining 
whether a hospital qualifies for the special payment for a given cost 
reporting period, we looked first at statewide aggregate data for non-
IME, non-DSH, non-MDH hospitals for cost reporting periods beginning 
during FY 1995, and second at hospital-specific characteristics for the 
cost reporting period at issue to determine whether the hospital has a 
negative operating prospective payment margin for that period, and 
whether the hospital received IME or DSH payments or qualified as an 
MDH for that period. Using the latest cost reporting data, we 
identified 17 States that met the criteria

[[Page 26320]]

set forth in section 4401(b)(2): Alaska, Connecticut, Delaware, Hawaii, 
Illinois, Indiana, Iowa, Louisiana, Maine, Missouri, New Hampshire, New 
Jersey, Ohio, Puerto Rica, Rhode Island, Vermont, and Wisconsin. The 
fiscal intermediaries will make interim payment to hospitals in these 
17 designated States, beginning with discharges occurring on or after 
October 1, 1997, based on the higher standardized amount during the 
fiscal year. However, as noted above, the final decision as to a 
hospital's qualification for the additional payment is determined based 
on whether the hospital has a negative operating prospective payment 
margin during its FY 1998 or FY 1999 cost reporting period. Therefore, 
the final determination will be made at cost report settlement.
    In the August 29 final rule with comment period, we added a new 
Sec. 412.107 to the regulations and revised Sec. 412.90 to implement 
this provision.
    Comment: Two hospital associations commented that any hospital 
identified by its fiscal intermediary as likely to qualify for an 
update of 0.5 percentage points under the temporary special payment 
provision of section 4401(b) of the BBA should be given the option of 
declining the higher interim payments. The commenters were concerned 
that some hospitals that receive the additional money on an interim 
basis might have difficulty paying back the funds should the 
intermediary determine at cost report settlement that the hospital does 
not qualify for the update.
    Response: If a hospital that has been identified as eligible for 
the higher interim payment believes that ultimately it may not qualify 
for the higher update and wishes to decline the higher interim 
payments, it should notify its intermediary.

C. Hospital Capital Rate Reduction

    Section 4402 of the BBA amended section 1886(g)(1)(A) of the Act to 
require that, for discharges occurring on or after October 1, 1997, the 
Secretary must apply the budget neutrality adjustment factor used to 
determine the Federal capital payment rate in effect on September 30, 
1995 (as described in Sec. 412.352) to the unadjusted standard Federal 
capital payment rate (as described in Sec. 412.308(c)) effective 
September 30, 1997, and the unadjusted hospital-specific rate (as 
described in Sec. 412.328(e)(1)) effective September 30, 1997. For 
discharges occurring on or after October 1, 1997, and before September 
30, 2002, the Secretary must reduce the same rates an additional 2.1 
percent.
    The budget neutrality adjustment factor effective September 30, 
1995 was 0.8432 (59 FR 45416), which is equivalent to a 15.68 percent 
((1.0-0.8432) * 100) reduction in the unadjusted standard Federal 
capital payment rate and the unadjusted hospital-specific rate in 
effect on September 30, 1997. The additional 2.1 percent reduction to 
the rates reduces the rates in effect on September 30, 1997 by a total 
of 17.78 percent. The unadjusted standard Federal rate must be 
distinguished from the annual Federal rate actually used in making 
payment under the capital PPS system. The unadjusted standard Federal 
rate is the underlying or base rate used to determine the Federal rate 
for each Federal fiscal year by applying the formula described in 
Sec. 412.308(c). The annual Federal rate is the result of that 
determination process in Sec. 412.308(c). In accordance with the broad 
authority conferred in section 1886(g) of the Act, to implement a 
capital prospective payment system, we extended the reduction to the 
capital rates to the Puerto Rico capital rates and incorporated it in 
Sec. 412.374(a).
    Under the statute, the additional 2.1 percent reduction applies to 
discharges occurring ``before September 30, 2002''. This provision 
would have required us to calculate special rates that would be in 
effect for only one day. Because we believed that the Congress intended 
to apply the reduction to discharges occurring through September 30, 
2002, we indicated in the August 29 final rule with comment period that 
we plan to seek a technical correction to change the date that the 2.1 
percent reduction expires from September 29, 2002, to September 30, 
2002. Since we assumed this technical error would be corrected, we used 
the September 30, 2002 expiration date in our regulations.
    When we restore the 2.1 percent reduction to the Federal rate after 
September 30, 2002, we plan to restore the rate to the level that it 
would have been without the reduction. We determined the adjustment 
factor for FY 1998 by deducting both cuts (0.1568 and 0.021) from 1 
(1-0.1568-0.021 =0.8222). We then applied 0.8222 to the unadjusted 
standard Federal rate. The adjustment factor to restore the 2.1 percent 
cut would be the adjustment without the 2.1 percent cut (0.8432) 
divided by the adjustment with the 2.1 percent cut (0.8222). (0.8432/
0.8222=1.02554). To restore the 2.1 percent reduction, we will apply 
1.02554 to the unadjusted standard Federal capital payment rate in 
setting rates for discharges after September 30, 2002.
    Section 412.328(e) of the regulations provides that the hospital-
specific rate for each fiscal year is determined by adjusting the 
previous fiscal year's hospital specific rate by the hospital specific 
rate update factor and the exceptions payment adjustment factor. After 
these two adjustments are applied, a net adjustment to the rate is 
determined. The previous year's hospital specific rate is analogous to 
the standard Federal rate, which is updated each year to become the 
annual Federal rate.
    When the 2.1 percent reduction is restored, most hospitals will 
have completed the transition to a fully prospective payment system for 
capital related costs. However, new hospitals might be eligible for 
hold harmless payments beyond the transition, so we may need to 
continue to compute a hospital specific rate. If we need to restore the 
2.1 percent reduction to the hospital specific rates, we will do so in 
a manner similar to that described above with respect to the unadjusted 
standard Federal capital payment rate.
    In the August 29 final rule with comment period, we revised two 
sections of the capital prospective payment system regulations to 
implement these statutory requirements. Specifically, we revised 
Secs. 412.308(c) and 412.328(e) to provide for the required 15.68 and 
2.1 percent reduction to the rates. The 2.1 percent reduction will be 
restored after September 30, 2002.
    Comment: One commenter noted that as a result of the high capital 
rate paid in FY 1997, many hold-harmless hospitals switched from being 
paid based on a blend of their old and new capital to being paid based 
on 100 percent of the Federal rate, because the Federal rate was higher 
than their old and new capital payment would have been. The commenter 
also stated that when Congress reduced the capital rate as part of the 
provisions of the BBA, many hospitals' payments would have been higher 
had they been allowed to return to their previous old capital and new 
capital payment methodology. The commenter suggested deleting the 
requirement at Sec. 412.344(b) that once a hospital is paid based on 
100 percent of the Federal rate, it cannot return to payments based on 
a blend of its old and new capital costs. The commenter also noted that 
when the Federal capital rate was reduced under the provisions of OBRA 
1993, fiscal intermediaries were given specific authority to 
redetermine each hospital's payment methodology.

[[Page 26321]]

    Response: In section 13501(a)(3) of the Omnibus Budget 
Reconciliation Act of 1993 (Public Law 103-66), Congress reduced the 
Federal capital rate and not the hospital-specific rate. Hospital 
payment methodology redeterminations were expressly provided for in 
that section of the statute. However, in 1997, when Congress reduced 
both the hospital-specific rate and the Federal capital rate as part of 
the BBA, hospital payment methodology redeterminations were not 
provided for by the legislation and we do not believe that it would be 
appropriate to provide for redeterminations by regulation. In addition, 
we do not believe it would be appropriate to allow hospitals to return 
to payment based on their ratio of old and new capital once they have 
been paid based on 100 percent of the Federal rate. We are in the 
seventh year of the 10 year transition to a fully prospective capital 
payment system. By October 1, 2002, all hospitals will be paid based on 
100 percent of the Federal rate. It would not be appropriate to allow 
hospitals to return to cost-based payment this point in the transition.

D. Disproportionate Share Hospital (DSH) Payments

    Section 4403(a) of the BBA reduced the payment for hospitals that 
treat a disproportionately large number of low-income patients. The 
payment a hospital would otherwise receive under the disproportionate 
share formula is reduced by 1 percent for FY 1998, 2 percent for FY 
1999, 3 percent for FY 2000, 4 percent for FY 2001, 5 percent for FY 
2002, and 0 percent for FY 2003 and each subsequent fiscal year. In the 
August 29 final rule with comment period, we added a new paragraph (e) 
to Sec. 412.106 to implement this provision.
    Comment: One commenter asked that we clarify the applicability of 
the provisions of section 4403(a) of the BBA, which relate to 
disproportionate share operating payments, to the prospective payment 
system for capital related costs. Specifically, the commenter requested 
that we verify that the phased-in 5 percent reduction of operating DSH 
payments does not apply to capital DSH payments. The commenter also 
asked us to codify our decision as to the applicability of this 
provision in the appropriate section of the capital regulations 
governing DSH.
    Response: The commenter is correct. Section 4403 amended section 
1886(d)(5)(F) of the Act to reduce the amount otherwise payable for 
operating DSH. The capital DSH adjustment set forth at Sec. 412.320 
references the operating DSH definition of low income patients at 
Sec. 412.106(b) and uses the definition of the disproportionate patient 
percentage at Sec. 412.106(c)(2), but section 4403 does not affect 
capital DSH payments. In response to the commenter's request that we 
codify in the regulations the applicability of the BBA operating 
provisions to capital payments, we do not believe that it is necessary 
to do so. The capital regulations that are affected will be 
automatically included by their reference to the appropriate section of 
the operating regulations. The capital regulations that are not 
affected (regarding the reduction to DSH payments need not be revised.

E. Outlier Payments

    Section 4405 of the BBA amended sections 1886(d)(5)(B)(i)(I) and 
(d)(5)(F)(ii)(I) of the Act to provide that, in determining the payment 
for hospitals that receive indirect medical education or 
disproportionate share payments, the IME and DSH adjustment factors are 
applied only to the base DRG payment, not the sum of the base DRG 
payment and any cost outlier payments, effective with discharges 
occurring on or after October 1, 1997. The same section of the BBA also 
amended section 1886(d)(5)(A)(ii) of the Act to require that the fixed 
loss cost outlier threshold is based on the sum of DRG payments and IME 
and DSH payments for purposes of comparing costs to payments. 
Therefore, in the August 29 final rule with comment period, we revised 
our regulations at Sec. 412.84(g) to remove the provision that costs be 
reduced by the IME and DSH adjustment factors for purposes of comparing 
costs to payments to determine if costs exceed the fixed loss cost 
outlier threshold, as well as to delete Sec. 412.80(c). Conforming 
changes were made to Sec. 412.105(a) (IME adjustment) and 
Sec. 412.106(a)(2) (DSH adjustment). We also made a corresponding 
change to the capital cost outlier methodology. We received two 
comments on this provision, both of which concurred with HCFA's 
interpretation of section 4405 of the BBA.

F. Payment Rate for Puerto Rico Hospitals

1. Operating Payment Rate
    Section 4406 of the BBA amended section 1886(d)(9)(A) of the Act to 
revise the Puerto Rico and national shares of the Puerto Rico payment 
rate. Beginning with discharges occurring on or after October 1, 1997, 
the Puerto Rico payment rate will be a blend of 50 percent of the 
Puerto Rico standardized amount and 50 percent of a national 
standardized amount (compared to a blend of 75 and 25 percent, 
respectively, prior to enactment of the BBA). In the August 29 final 
rule with comment period, we revised Sec. 412.204 of the regulations to 
conform with this amendment.
2. Capital Payment Rate
    Under the broad authority of section 1886(g) of the Act, in the 
August 29 final rule with comment period, we revised the calculation of 
capital payments to Puerto Rico to parallel the change that was made in 
the calculation of operating payments to Puerto Rico. Effective October 
1, 1997, we will base capital payments to hospitals in Puerto Rico on a 
blend of 50 percent of the national rate and 50 percent of the Puerto 
Rico-specific rate. This change will increase payments to Puerto Rico 
hospitals since the national rate is higher than the Puerto Rico rate.
    We did not receive any public comments on either of these 
provisions.

G. Special County Designation

    In the August 29 final rule with comment period, the Secretary 
exercised the authority granted to her by section 4408 of the BBA to 
include Stanly County in the Charlotte-Gastonia-Rock Hill, North 
Carolina-South Carolina MSA for purposes of the prospective payment 
system. This change was reflected in the final wage index included in 
that document.
    We did not receive any public comments on this provision.

H. Changes to the Medicare Geographic Classification Review Board 
(MGCRB) Guidelines and Timeframes

    Various provisions of the BBA addressed the guidelines the MGCRB 
uses to reclassify hospitals to other geographic areas as well as the 
timetable under which hospitals must submit applications for 
reclassification and when the MGCRB and the Secretary must make 
decisions on those applications.
1. Revised Application and MGCRB Timeframes
    Prior to the enactment of the BBA, a hospital had to submit an 
application to the MGCRB for geographic reclassification for a fiscal 
year by the first day of the preceding fiscal year (that is, October 1, 
1997 for reclassification effective in FY 1999). The MGCRB had 180 days 
to make a decision on that application (no later than March 31 of the 
fiscal year), the hospital has 15 days to request a review of that 
decision by the Administrator of HCFA (by April 15), and the

[[Page 26322]]

Administrator had up to 90 days to issue a final decision (July 15). 
The July 15 deadline allowed the final geographic reclassification 
decisions to be incorporated in the wage index and payment rates that 
were published in the final rule (on or about September 1).
    Sections 4644(a)(1) and (b)(1) of the BBA amended section 
1886(d)(6) and (e) of the Act to provide that the prospective payment 
system final rule setting the payment rates for years beginning with FY 
1999 must be published by August 1. Because this change in publication 
date would conflict with the timetable for geographic reclassification 
decisions, section 4644(c) of the BBA amended section 
1886(d)(10)(C)(ii) of the Act to require a hospital, beginning with 
applications filed for reclassification for FY 2000, to submit its 
application for reclassification no later than the first day of the 
month preceding the beginning of the Federal fiscal year (that is, by 
September 1). Under this timetable, the amount of time the MGCRB and 
the Administrator have to make decisions will not change from the 
existing schedule.
    In addition, because applications filed for reclassification 
effective in FY 1999 were not due until October 1, 1997, section 
4644(c)(2) required us to shorten the deadlines under section 
1886(d)(10)(C) of the Act so that all final decisions on MGCRB 
applications will be completed by June 15, 1998.
    In the August 29 final rule with comment period, we revised 
Secs. 412.256 and 412.274 to implement the change in the application 
deadline.
2. Alternative Wage Index Reclassification Guidelines for Individual 
Hospitals
    Effective for FY 1998 reclassification, sections 4409 and 4410 of 
the BBA required the Secretary to establish alternative wage index 
guidelines for geographic reclassification for certain 
disproportionately large hospitals. In the case of a hospital that is 
owned by a municipality and that was reclassified as an urban hospital 
for FY 1996, in calculating the hospital's average hourly wage for the 
purposes of geographic reclassification for FY 1998 only, section 
4410(c) of the BBA required the exclusion of general service wages and 
hours of personnel associated with a skilled nursing facility that is 
owned by the hospital of the same municipality and that is physically 
separated from the hospital to the extent that such wages and hours of 
such personnel are not shared with the hospital and are separately 
documented. Because the application and decisionmaking processes for FY 
1998 reclassification were already completed, we had to provide special 
guidelines for hospitals to apply for reclassification under these 
provisions for FY 1998.
    A hospital seeking reclassification for FY 1998 under either 
section 4409 or 4410(c) had to submit its application to the MGCRB (7 
copies) by September 15, 1997. If the MGCRB rendered a favorable 
decision on a hospital's application, the hospital was reclassified for 
purposes of the wage index for FY 1998 as if that decision had been 
made under the usual guidelines and timetable.
    We also extended the existing appeal rights for decisions on 
requests for reclassification to decisions made under sections 4409 and 
4410. Therefore, for such appeals, in the August 29 final rule with 
comment period, we incorporated the existing appeals and review process 
(including the timetables for a hospital to request review and for the 
Administrator to complete review) even though that process was not 
finalized until after the beginning of the fiscal year. We revised the 
regulations at Sec. 412.230(e) to implement section 4409. However, 
because the provision of section 4410(c) applied for only one year, we 
did not revise the codified regulations text to reflect that provision.
3. Reclassification for Rural Referral Centers and the Disproportionate 
Share Adjustment
    Currently, under section 1886(d)(10)(D) of the Act, rural referral 
centers (RRCs) are allowed to apply to the MGCRB to be reclassified for 
purposes of the wage index adjustment. To be reclassified, RRCs must 
meet the following criteria:
    <bullet> The hospital's average hourly wage must be at least 108 
percent of the Statewide rural hourly wage.
    <bullet> The hospital's average hourly wage must be at least 84 
percent of the average hourly wage of the target urban area to which 
the RRC is applying.
    Section 4202 of the BBA prohibits the MGCRB from rejecting a 
hospital's request for reclassification on the basis of any comparison 
between the hospital's own average hourly wage and the average hourly 
wage of hospitals in the area in which the hospital is located if the 
hospital was ever classified as an RRC. However, RRCs will continue to 
be required to have an average hourly wage that is at least 84 percent 
of the average hourly wage of the target urban area to which the RRC is 
applying. In addition, while RRCs do not have to meet the proximity 
requirements for reclassification, they continue to be required to seek 
reclassification to the nearest urban area. In the August 29 final rule 
with comment period, we revised Sec. 412.230(a)(3) to implement this 
provision.
    Section 4203 of the BBA provided that, for a limited time, a rural 
hospital may apply and qualify for reclassification to another area for 
purposes of disproportionate share adjustment payments whether or not 
the standardized amount is the same for both areas. For 30 months after 
the date of enactment of the BBA, the MGCRB will consider the 
application under section 1886(d)(10)(C)(i) of the Act from a hospital 
requesting a change in the hospital's geographic classification for 
purposes of determining, for a fiscal year, eligibility for and 
additional payment amounts under section 1886(d)(5)(F) of the Act. The 
MGCRB will apply the guidelines for standardized amount 
reclassification (Sec. 412.230(d)) until the Secretary establishes 
separate guidelines. Therefore, hospitals seeking such reclassification 
for FY 1999 must have submitted a reclassification application to the 
MGCRB by October 1, 1997. Decisions based on these applications will be 
effective for FY 1999 (beginning on October 1, 1998). Section 4203 of 
the BBA is effective for the 30-month period beginning on the date of 
enactment. Accordingly, hospitals may seek reclassification for 
purposes of DSH for FY 1999, FY 2000, and FY 2001. In the August 29 
final rule with comment period, we revised Sec. 412.230(a)(5)(ii) of 
the regulations to implement this provision.
    Comment: One commenter questioned the effective date of sections 
4202 and 4203 of the BBA, which exempt RRCs from the 108 percent 
criterion in applying for wage index reclassification and allow a 
hospital to reclassify to another area for purposes of the 
disproportionate share adjustment even if the standardized amount of 
both areas is the same, respectively. The commenter asserted that the 
conference report accompanying the statute clearly states that the 
effective date of these provisions is ``enactment'' of the BBA, that 
is, August 5, 1997. Therefore, the commenter believes that hospitals 
should have been allowed to apply to the MGCRB and reclassify under 
these provisions for FY 1998 reclassifications, which were effective 
beginning October 1, 1997. The August 29 final rule with comment period 
limited the effect of these provisions to reclassifications beginning 
in FY 1999.
    Response: We agree that the provisions of sections 4202 and 4203 of 
the BBA are effective August 5, 1997. However, the statutory language 
contains no

[[Page 26323]]

directive to apply these provisions to hospital reclassifications 
effective for FY 1998 (compare sections 4409 and 4410(c) of the BBA, 
both of which specifically stated that their provisions were effective 
for FY 1998 reclassifications). Section 4202 amends section 
1886(d)(10)(D) of the Act to provide that the MGCRB ``may not reject 
the application'' of a hospital on the basis of a comparison specified 
in the statute. Accordingly, if the MGCRB considers an application on 
or after August 5, 1997, it will not reject the application on the 
basis specified in the statute. Section 4202 does not require the MGCRB 
to re-evaluate applications that the MGCRB rejected before August 5, 
1997.
    Similarly, section 4203 provides that, for the 30-month period 
beginning on August 5, 1997, the MGCRB ``shall consider'' a hospital's 
application for reclassification for purposes of DSH payments. 
Accordingly, if a hospital submits an application to be reclassified 
for purposes of DSH on or after August 5, 1997, the MGCRB will consider 
the application. Generally, the deadline for FY 1998 reclassifications 
was October 1, 1996. Section 4203, unlike other provisions of the BBA, 
does not require the MGCRB to grant reclassifications for FY 1998 
notwithstanding this deadline.
    Thus, hospitals may apply for reclassification under the provisions 
of sections 4202 and 4203 after August 5, 1997. The first such 
applications would be those for FY 1999 reclassification beginning on 
October 1, 1998, which were due by October 1, 1997. We note that, 
although the provisions of section 4202 are permanent, section 4203 is 
effective for 30 months and applies only to those reclassifications 
effective for FY 1999, 2000, and 2001.

I. Floor on Area Wage Index

    As provided by section 4410(a) of the BBA, for discharges on or 
after October 1, 1997, the area wage index applicable to any hospital 
that is not located in a rural area may not be less than the area wage 
index applicable to hospitals located in rural areas in the State in 
which the hospital is located. For FY 1998, this change affected 128 
hospitals in 32 MSAs. Furthermore, this wage index floor is to be 
implemented in such a manner as to assure that aggregate prospective 
payment system payments are not greater or less than those which would 
have been made in the year if this section did not apply.
    We did not receive any public comments on this provision.

J. Indirect Medical Education (IME) Adjustment

1. Operating IME Adjustment
    In the August 29 final rule with comment period, we revised our 
regulations to incorporate the provisions of section 4621 of the BBA, 
which amended section 1886(d)(5)(B) of the Act in several ways. First, 
it gradually reduces the current level of the IME adjustment 
(approximately a 7.7 percent increase for every 10 percent increase in 
the resident-to-bed ratio) over the next several years according to the 
following schedule: 7.0 percent for discharges during FY 1998; 6.5 
percent during FY 1999; 6.0 percent during FY 2000; and 5.5 percent 
during FY 2001 and thereafter.
    Second, section 4621 established certain limits both on the full-
time equivalent (FTE) number of residents counted by each hospital and 
on the resident-to-bed ratio. Effective for discharges on or after 
October 1, 1997, section 4621(b)(1) added a new section 
1886(d)(5)(B)(v) to the Act to require that a hospital's total number 
of resident FTEs in the fields of allopathic and osteopathic medicine 
may not exceed the total number of such resident FTEs counted by the 
hospital during its most recent cost reporting period ending on or 
before December 31, 1996. Furthermore, section 1886(d)(5)(B)(vi)(I) 
provides that the ratio of residents-to-beds may not exceed the ratio 
calculated during the prior cost reporting period (after accounting for 
the cap on the number of resident FTEs).
    Third, for cost reporting periods beginning on or after October 1, 
1997, and subject to the new limit on counting residents described 
above (as well as the expansion of allowable settings to off-site 
services, as described below), section 1886(d)(5)(B)(vi)(II) provides 
that ``the total number of full-time equivalent residents for payment 
purposes shall equal the average of the actual full-time equivalent 
resident count for the cost reporting period and the preceding two cost 
reporting periods.'' For the first cost reporting period beginning on 
or after October 1, 1997, this provision ``shall be applied using the 
average for such period and the preceding cost reporting period.'' For 
purposes of this provision, section 1886(d)(5)(B)(vii) requires the 
Secretary to make appropriate modifications in the event of a cost 
reporting period other than 12 months.
    With respect to medical residency training programs established on 
or after January 1, 1995, section 1886(d)(5)(B)(viii) provides that the 
Secretary must develop rules to apply these limits to such new 
programs, giving special consideration to ``facilities that meet the 
needs of underserved areas,'' and to facilitate the application of 
aggregate limits in the case of affiliated groups (as defined by the 
Secretary). Finally, ``(t)he Secretary may require any entity that 
operates a medical residency training program . . . to submit to the 
Secretary such additional information as the Secretary considers 
necessary to carry out such (limits).'' We revised the regulations at 
Sec. 413.86(g)(6) to comply with these directions for both the indirect 
and direct GME FTE counts.
    Finally, section 4621(b)(2) amended section 1886(d)(5)(B)(iv) of 
the Act to allow all the time spent by a resident in patient care 
activities under an approved medical residency training program at an 
entity in a nonhospital setting to be counted towards the determination 
of full-time equivalency if the hospital incurs all, or substantially 
all, of the costs for the training program in the setting. Therefore, 
in the August 29 final rule with comment period, we revised 
Sec. 412.105(g)(1)(ii)(C), which allowed hospitals to include the time 
residents spent in patient care activities in nonhospital settings, for 
purposes of IME. The eligibility criteria for this provision is similar 
to a provision regarding direct graduate medical education payments at 
section 1886(h)(4)(E) of the Act, and implemented at 
Sec. 413.86(f)(iii). For IME purposes, we intend to rely upon the same 
criteria as are applied for the direct GME to identify eligible 
situations under this new provision.
    In the August 29 final rule with comment period, we revised 
Sec. 412.105 to reflect these changes, and issued instructions to 
fiscal intermediaries to implement these changes prior to October 1, 
1997. In response to our discussion of the changes enacted by the BBA, 
we received numerous comments seeking clarification on many of these 
issues.
    Comment: Several commenters noted a discrepancy in the preamble of 
the August 29 document concerning the effective date of the cap on 
allopathic and osteopathic FTEs: In the preamble summary of the BBA 
changes at 62 FR 45968, the effective date of the provision is stated 
as ``cost reporting periods beginning on or after October 1, 1997.'' In 
the full discussion of the provision in the preamble at 62 FR 46003, 
the provision is made effective for ``discharges on or after October 1, 
1997.''
    Response: The effective date for applying the cap on allopathic and 
osteopathic FTEs, as set forth in section

[[Page 26324]]

1886(d)(5)(B)(v) of the Act, is for ``discharges on or after October 1, 
1997.'' This effective date citation in the preamble summary at 62 FR 
45968 was a typographic error.
    Comment: Commenters noted that the requirements set forth in 
section 1886(h)(4)(H) of the Act concerning special rules for applying 
the FTE limits for direct graduate medical education for new programs 
and affiliated groups also apply to IME payments. The commenters 
requested that they be added to the regulations at Sec. 412.105.
    Response: The commenters are correct. Under section 
1886(d)(5)(B)(viii) of the Act, as added by section 4621(b)(1) of the 
BBA, rules similar to the rules set forth at section 1886(h)(4)(H) of 
the Act apply for purposes of implementing: the cap on resident FTEs; 
the cap on the resident-to-bed ratio; and the 3-year rolling average 
resident count. We are revising Sec. 412.105(f)(1)(vi) and (vii) 
accordingly.
    The count of residents in accordance with the rules for special 
circumstances (new programs and affiliated groups) under section 
1886(d)(5)(B)(viii) of the Act is described in sections II.N.3 and 4 of 
this final rule. We note that this section of the Act applies only to 
the limits set forth in sections 1886(d)(5)(B)(v) and (vi) of the Act.
    Comment: Several commenters objected to our interpretation of the 
language of section 1886(d)(5)(B)(vi) of the Act, which describes the 
cap on the resident-to-bed ratio. In the August 29 final rule with 
comment period, we stated that this is a cap on the total resident FTE 
count including dental and podiatry residents. The commenters believe 
the Congress intended that dental and podiatry residents should be 
exempt from this cap in addition to their exemption from the cap 
established for resident FTEs. In support of their interpretation, the 
commenters noted the reference to the FTE cap in establishing the cap 
on the ratio (section 1886(d)(5)(B)(vi) of the Act). One commenter 
stated that including dental and podiatry residents in the FTE 
calculation before applying the ratio cap leads to a nonsensical result 
since the Congress established a cap on allopathic and osteopathic 
residents but explicitly did not include dental and podiatry residents 
under this cap.
    Another commenter supported applying the cap to total FTEs, 
including dentists and podiatrists. This commenter noted that the ratio 
could increase after a one-year lag to reflect additional dental or 
podiatry residents.
    Response: Section 1886(d)(5)(B)(vi) of the Act, as amended by the 
BBA, establishes a cap on the value of ``r,'' which is defined in 
section 1886(d)(5)(B)(ii) of the Act as ``the ratio of the hospital's 
full-time equivalent interns and residents to beds.'' The IME formula 
defined in this section of the Act explicitly includes the value `r' in 
the IME calculation. Therefore, `r' has a very precise and significant 
value.
    Section 1886(d)(5)(B)(v) of the Act (as amended) states that ``the 
total number of full-time equivalent interns and residents in the 
fields of allopathic and osteopathic medicine'' may not exceed the 
number of such residents in either a hospital or nonhospital setting 
with respect to the hospital's most recent cost reporting period ending 
on or before December 31, 1996. This section sets a cap on a subset 
(allopathic and osteopathic medical residents) of the total number of 
residents. The numerator of the ratio is the total number of residents 
including the effect of the cap; the Congress did not provide that `r' 
would be computed using only a subset of residents. In fact, one could 
argue that under such an interpretation, there would be no explicit 
methodology in the Act for including dental and podiatry residents in 
the IME calculation. The reference in section 1886(d)(5)(B)(vi)(I) of 
the Act to ``the limit under clause (v)'' means that the numerator 
includes the effect of the cap on allopathic and osteopathic residents, 
not that the numerator is limited to those residents. Thus, the 
statutory language requires that we apply the cap on the ratio after 
including all residents, dental and podiatry as well as allopathic and 
osteopathic, in the calculation of the numerator.
    Comment: Other commenters believe that it is inappropriate not to 
allow exceptions to the ratio cap when hospitals are voluntarily 
closing inpatient beds. In addition, commenters requested that the cap 
be adjusted to include the residents' time spent in nonprovider 
settings.
    Response: Section 4621 of the BBA addresses the application of the 
cap, specific situations where special rules are appropriate, and the 
allowance of residents' time spent in nonprovider settings. In 
addition, we note that the ratio could increase after a one-year delay 
for legitimate changes in either the numerator or the denominator. That 
is, the ratio is capped based on its value during the prior cost 
reporting period. An increase in the ratio thereby establishes a higher 
cap for the following cost reporting period.
    Comment: One commenter requested clarification of the term ``the 
prior cost reporting period'' as used in the preamble of the final rule 
with comment period when describing the application of the cap on the 
ratio of residents-to-beds (62 FR 46003).
    Response: The phrase ``prior cost reporting period'' refers to the 
immediately preceding period. A hospital's cost reporting period 
beginning July 1, 1998 would have its ratio capped at the value of its 
ratio for its cost reporting period ending June 30, 1998. In 
determining a hospital's resident-to-bed ratio for a cost reporting 
period that begins before October 1, 1997 (the effective date of the 
cap on allopathic and osteopathic FTEs) and ends after that date, the 
ratio for that period will reflect a prorated resident FTE count. That 
is, the numerator is determined through averaging the uncapped and 
capped FTE amounts based on the number of months in the cost reporting 
period before and after October 1, 1997. This FTE count will also be 
used to determine the rolling average amount for subsequent years.
    Comment: Commenters requested an explanation of how the ratio cap 
would be determined under the special rules implemented pursuant to 
section 1886(d)(5)(B)(viii) of the Act (that is, the new program and 
affiliated group provisions).
    Response: The ratio is first determined by calculating the resident 
FTE count taking into account all of the relevant limitations and 
applicable rolling averages, and the denominator in the ratio is the 
hospital's available bed count during the current cost reporting 
period. If this results in a ratio in excess of the previous cost 
reporting period's ratio, the hospital's IME adjustment is based on the 
ratio from the previous cost reporting period.
    Special rules apply for the special circumstances at section 
1886(d)(5)(B)(viii) of the Act. In the event that the application of 
section 1886(d)(5)(B)(viii) results in a higher resident-to-bed ratio 
for a hospital compared to its most recently completed cost reporting 
period, the special rule will be applicable only for the portion of the 
higher ratio due to the increase in residents. In such instances, the 
ratio during the prior cost reporting period is similarly applicable, 
but it is adjusted for the additional residents allowed by the special 
circumstances rule. In practice, this is accomplished by adding the 
additional residents to the resident FTE count used in the prior cost 
reporting period's resident-to-bed ratio. It should be noted that this 
adjustment is the result of a special rule for applying the cap on `r' 
for new programs and affiliated groups as set forth in section 
1886(d)(5)(B)(viii) of the Act. Therefore, no adjustment to the ratio 
is made for an increase in dental

[[Page 26325]]

or podiatry residents during the cost reporting period in which an 
increase occurs.
    In the case of recognized affiliation arrangements, each hospital 
will be paid on the basis of its individual resident-to-bed ratio. 
Under such an arrangement, the ratio is the number of residents counted 
by the hospital in accordance with the special FTE counting rules for 
these arrangements, over the hospital's bed count during the current 
cost reporting period. As described above, the ratio may increase 
during a particular cost reporting period due to an increase in the 
number of residents allowed under the special affiliation arrangement. 
Any such exemption from the ratio cap will be limited to the increase 
in residents and will not reflect changes in hospital bed size.
    Comment: Commenters were concerned about the language establishing 
the resident FTE cap (section 1886(d)(5)(B)(v) of the Act) that the 
number of allopathic and osteopathic residents may not exceed ``the 
number of such full-time equivalent interns and residents in the 
hospital'' during the most recent cost reporting period ending on or 
before December 31, 1996. The commenters believed that this 
disadvantages the programs that have already been training residents in 
nonprovider settings. Commenters suggested that we support the effort 
to delete the phrase ``in the hospital'' from this section.
    Response: As is indicated by the comments, residents in nonhospital 
settings during the most recent cost reporting period ending on or 
before December 31, 1996, are excluded by the Act from the 
determination of the allopathic and osteopathic cap. Furthermore, 
although we recognize that many of these arrangements that were in 
existence during 1996 reflected the demand for more primary care 
physicians, we would note that the purpose of allowing hospitals to 
count this time in the future is to create an incentive for even more 
primary care training. In that regard, hospitals that had previously 
established residency training in nonhospital settings did so in 
response to the existing incentives at that time.
    Comment: Several commenters suggested that the reduction in the IME 
adjustment factor (from approximately a 7.7 percent increase for every 
10 percent increase in the ratio of residents to beds to 7.0 percent 
for discharges during FY 1998, and gradually reducing further for 3 
years beyond that) places a disproportionate share of the cost-cutting 
burden on teaching hospitals, especially academic medical centers.
    Response: The reduction to the IME adjustment factor is set forth 
in the statute. However, given the gradual reduction in the factor and 
the recent very high Medicare operating margins for teaching hospitals 
(especially major teaching hospitals), we disagree that the reductions 
to the IME adjustment unfairly burden these hospitals. We note that 
HCFA and the Prospective Payment Assessment Commission (ProPAC) have 
both supported a reduction in the IME adjustment for several years 
based on our analysis of the indirect effect of graduate medical 
education programs on total hospital costs.
2. Capital IME Adjustment
    Comment: One commenter asked us to clarify whether the following 
conclusions are correct in applying the IME provisions of the BBA to 
the capital prospective payment system:
    (1) The cap on the number of residents training in the fields of 
allopathic and osteopathic medicine for purposes of computing the 
operating IME adjustment does pertain to the capital IME adjustment;
    (2) The rolling average resident count for purposes of computing 
the operating IME adjustment does pertain to the capital IME 
adjustment; and
    (3) The cap on the ratio of interns and residents to beds for 
purposes of computing the operating IME adjustment does not pertain to 
the ratio of interns and residents to the average daily census for 
purposes of computing the capital IME adjustment.
    As with the DSH provisions, the commenter also asked us to codify 
our policy on the applicability of these operating provisions in the 
appropriate sections of the capital regulations governing the IME 
adjustment.
    Response: Cap on Number of Residents in Allopathic and Osteopathic 
Medicine--The regulations at Sec. 412.322 describe the capital IME 
adjustment. Section 412.322(a)(1) provides that the hospital's number 
of full-time equivalent (FTE) residents is determined in accordance 
with Sec. 412.105(f) of the operating regulation. Since the BBA 
provisions affected Sec. 412.105(f)(iv) by capping the number of 
allopathic and osteopathic interns and residents at the number of 
interns and residents reported on a hospital's cost report for the 
period ending December 31, 1996, the capital IME intern and resident 
count for allopathic and osteopathic residents is also capped 
automatically.
    Rolling Average Resident Count--The BBA provision implementing a 
rolling average resident count (section 4623) is also included in 
Sec. 412.105(f) of the operating IME regulations. Since the capital IME 
regulations reference the operating IME regulation at Sec. 412.105(f), 
the capital IME FTE count is affected by the rolling average resident 
count as well.
    Cap on Ratio of Interns to Beds--The cap on the number of interns 
and residents to beds (section 4621) does not have an impact on the 
capital IME payments because we use the ratio of hospital FTEs to 
average daily census to determine the capital IME adjustment factor.
    In response to the commenter's request that we codify in the 
regulations the applicability of these BBA operating IME provisions to 
capital payments, we do not believe that it is necessary to do so. The 
capital regulations that are affected (regarding the cap on the number 
of residents in allopathic and osteopathic medicine, and the rolling 
average resident count) will be automatically included by their 
reference to the appropriate section of the operating regulations. The 
capital regulations that are not affected (regarding the cap on the 
ratio of interns to beds) need not be revised.
    It has come to our attention that there has also been some question 
raised about the applicability of sections 4001 and 4622 of the BBA--
Payment to Hospitals of Indirect Medical Education Costs for 
Medicare+Choice Enrollees to capital IME payments. Section 4001 of the 
BBA instructs the Secretary to exclude from the Medicare+Choice 
capitation rate payment adjustments for the indirect costs of medical 
education under section 1886(d)(5)(B) of the Act. Section 4622 of the 
BBA provides for payments to teaching hospitals for discharges 
associated with Medicare managed care beneficiaries for portions of 
cost reporting periods beginning on or after January 1, 1998.
    Section 4001 of the BBA refers only to the indirect costs of 
medical education as defined in section 1886(d)(5)(B) of the Act. This 
section refers to operating IME payments and not capital IME payments, 
which were established by regulation. Thus, section 4001 affects only 
operating IME payments.

K. Rural Referral Centers

    Based on section 1886(d)(5)(C)(i) of the Act and the Conference 
Committee Report accompanying Public Law 98-21 (the original 
legislation implementing the prospective payment system), we 
established qualifying criteria for referral center status to identify 
those rural hospitals that, because of bed size,

[[Page 26326]]

a large number of complicated cases, a high number of discharges, or a 
large number of referrals from other hospitals or from physicians 
outside the hospital's service area, were likely to have operating 
costs more similar to urban hospitals than to the average smaller 
community hospitals. The regulations implementing the referral center 
provision are codified at Sec. 412.96.
    In 1984, after a year's experience with the referral center 
criteria, we determined that once approved for the referral center 
adjustment, a hospital would retain its status for a 3-year period. At 
the end of the 3-year period, we would review the hospital's 
performance to determine whether it should be requalified for an 
additional 3-year period. The requirement for triennial review was 
added to the regulations in 1984 (Sec. 412.96(f)) to be effective for 
cost reporting periods beginning on or after October 1, 1987 (the end 
of the first 3 years of the referral center adjustment). However, since 
then, three statutory moratoria on the performance of the triennial 
reviews were enacted by Congress. When the third of these moratoria 
expired at the end of cost reporting periods that began during FY 1994, 
we implemented the triennial review requirements and some hospitals 
lost their referral center status. (See the September 1, 1993 final 
rule (58 FR 46310) for a detailed explanation of the moratoria and the 
implementation of the triennial reviews.)
    Hospitals could lose rural referral center status in other ways. 
With the creation of the MGCRB and a hospital's ability, beginning in 
FY 1992, to request that it be reclassified from one geographic 
location to another, we stated that if a referral center was 
reclassified to an urban area for purposes of the standardized amount, 
it would, in most instances, be voluntarily terminating its referral 
center status. (See the June 4, 1991 final rule with comment period (56 
FR 25482).) This was true because, in most instances, a hospital's 
ability to qualify as a ``rural referral center'' was contingent upon 
(among other criteria) its status as a rural hospital.
    In addition, rural referral centers located in areas that were 
redesignated as urban by the Office of Management and Budget (OMB) lost 
their referral center status. These hospitals had qualified for 
referral center status under criteria applicable only to hospitals 
located in rural areas. OMB's designation of the areas to urban status 
meant that such hospitals were urban for all purposes and thus could no 
longer qualify as rural referral centers.
    Section 4202(b)(1) of the BBA states that, ``Any hospital 
classified as a rural referral center by the Secretary . . . for fiscal 
year 1991 shall be classified as such a rural referral center for 
fiscal year 1998 and each subsequent fiscal year.'' Thus, many of the 
hospitals that lost their referral center status for the reasons listed 
above must be reinstated. For the purpose of implementing this 
provision, we consider that a hospital that was classified as a 
referral center for any day during FY 1991 (October 1, 1990 through 
September 30, 1991) meets the reinstatement criterion.
    In the August 29 final rule with comment period, we reinstated 
rural referral center status for all hospitals that lost the status due 
to triennial review or MGCRB reclassification regardless of whether it 
was classified as an RRC during FY 1991. We did not reinstate rural 
referral center status to hospitals in areas redesignated as urban by 
OMB because they are no longer rural hospitals. We also did not 
reinstate the status of the six hospitals that voluntarily requested 
termination of their RRC status. However, we would allow any of these 
six hospitals to requalify if they so desire.
    In addition, we terminated the requirement for triennial reviews of 
referral center status. Thus, Secs. 412.96(f) and (g) (1) and (2) were 
deleted in the August 29 final rule with comment period. If we later 
discover some hospital or class of hospitals that we believe should not 
be allowed to retain referral center status because they fail to meet 
some basic requirement we believe is essential to receiving this 
special designation, we will consider reinstating some type of annual 
or periodic qualifying criteria.
    Finally, we eliminated our policy that terminated RRC status for 
any hospital that is reclassified as urban by the MGCRB.
    Comment: One commenter expressed agreement with our decision to 
reinstate hospitals that lost their RRC status as a result of failure 
to meet triennial review requirements or due to MGCRB reclassification 
to an urban area for purposes of the standardized amount. The commenter 
further commended HCFA for terminating triennial reviews and 
eliminating the policy that a hospital loses its RRC status if it is 
reclassified as urban by the MGCRB. However, the commenter disagreed 
with our decision to not restore the RRC status of hospitals that are 
in areas redesignated as urban by OMB. The commenter believes that this 
policy unfairly disadvantages those hospitals when applying for 
reclassification for the wage index. That is, they will be unable to 
reclassify under the special provisions of section 1886(d)(10)(D)(iii) 
of the Act as amended by section 4202(a) of the BBA if they meet all 
requirements except the 108 percent rule.
    Response: The language of section 4202(b)(1) states that any 
hospital classified as a rural referral center for FY 1991, `` * * * 
shall be classified as such a rural referral center for fiscal year 
1998 and each subsequent year.'' (Emphasis added.) Hospitals located in 
areas redesignated as urban by OMB are no longer physically located in 
a rural area. Designation by OMB of an area to urban status means that 
any hospital located in that area becomes urban for all purposes and 
thus could no longer qualify as rural referral centers. In reinstating 
referral center status, section 4202(b) of the BBA did not revise the 
qualifying criteria for these hospitals. Thus, we believe that our 
decision to not reinstate hospitals located in urban areas as rural 
referral centers is appropriate.
    We note, however, that these hospitals are not precluded from 
taking advantage of the provisions of section 1886(d)(10)(D)(iii) of 
the Act, which state that the MGCRB is prohibited from rejecting a 
hospital's application for reclassification on the basis of any 
comparison between its hourly wage and the average hourly wage of the 
hospitals in the area in which the hospital is located if the hospital 
``has ever been classified by the Secretary as a rural referral 
center.'' (Emphasis added.) This means that the hospital need not 
currently be classified as an RRC in order to take advantage of this 
provision.

L. Medicare-Dependent Small, Rural Hospitals

    Section 4204 of the BBA amended section 1886(d)(5)(G) of the Act to 
reinstate the classification of Medicare-dependent, small rural 
hospitals (MDHs) for cost reporting periods beginning on or after 
October 1, 1997 and before October 1, 2001. This category of hospitals 
was originally created by section 6003(f) of the Omnibus Budget 
Reconciliation Act of 1989 (Public Law 101-239), enacted on December 
19, 1989, which added a new section 1886(d)(5)(G) of the Act. The 
statute provides that the special payment for MDHs was to be available 
for cost reporting periods beginning on or after April 1, 1990 and 
ending on or before March 31, 1993. Hospitals classified as MDHs were 
paid using the same methodology applicable to sole community hospitals.

[[Page 26327]]

    Section 13501(e)(1) of the Omnibus Budget Reconciliation Act of 
1993 (Public Law 103-66), enacted on August 10, 1993, extended the MDH 
provision through discharges occurring before October 1, 1994. Under 
this revised provision, after the hospital's first three 12-month cost 
reporting periods beginning on or after April 1, 1990, the additional 
payment to an MDH whose applicable hospital-specific rate exceeded the 
Federal rate was limited to 50 percent of the amount by which that 
hospital-specific rate exceeded the Federal rate.
    In reinstating the MDH special payment for discharges occurring on 
or after October 1, 1997 and before October 1, 2001, section 4204 of 
the BBA did not revise either the qualifying criteria for these 
hospitals nor the most recent payment methodology. Therefore, the 
criteria a hospital must meet in order to be classified as an MDH are 
the same as before. Since classification as an MDH is not optional, we 
reinstated all qualifying hospitals as of October 1, 1997.
    In the August 29 final rule with comment period, we revised 
Secs. 412.90 and 412.108 to reflect the reinstatement of the MDH 
special payment.
    Section 4204(a)(3) of the BBA permits those hospitals that qualify 
as an MDH and that applied and were approved for reclassification to a 
large urban area for purposes of receiving the large urban rates 
through the MGCRB to decline that reclassification for FY 1998. 
Normally, hospitals approved for reclassification have only 45 days 
from the date of the proposed rule to withdraw their request for 
reclassification. However, the statute provides that, in this 
situation, hospitals may withdraw their request for FY 1998 
reclassification to a large urban area for purposes of the standardized 
amount. Any hospital that does not requalify for MDH reinstatement for 
FY 1998 because of a reclassification to an urban area by the MGCRB for 
FY 1998 will be notified and given the opportunity to decline that 
reclassification.
    Comment: Three commenters support the reinstatement of the special 
payment for MDHs. However, the commenters recommended that HCFA 
establish a process for identifying those hospitals that did not 
qualify previously but now meet the criteria for classification as an 
MDH.
    Response: Since section 4204 of the BBA did not revise the criteria 
for classification as an MDH, it is unlikely that there will be new 
hospitals that qualify except for those hospitals that met all of the 
original criteria except bed size.
    We have instructed our fiscal intermediaries to review their 
records to determine if there are any hospitals that did not meet the 
criteria in 1994 and that do now; for example, a hospital that had more 
than 100 beds in 1994 and now has 100 or fewer beds. In addition, as 
discussed in the August 29, 1997 final rule (62 FR 46000), at the time 
of a hospital's year-end cost report settlement, the fiscal 
intermediary will determine if the hospital met the criteria to qualify 
as an MDH.
    Although the fiscal intermediaries are making every effort to 
identify and notify all affected hospitals, any hospital that believes 
it meets the criteria for MDH status but has not received notification 
should contact its fiscal intermediary.

M. Reinstatement of the Add-On Payment for Blood Clotting Factor for 
Hemophilia Inpatients

    Section 4452 of the BBA amended section 6011(d) of Public Law 101-
239 to reinstate the add-on payment for the costs of administering 
blood clotting factor to Medicare beneficiaries who have hemophilia 
(which was previously in effect from June 19, 1990 through September 
30, 1994) and who are hospital inpatients for discharges occurring on 
or after October 1, 1997. The payment is based on a predetermined price 
per unit of clotting factor multiplied by the number of units provided.
    In our August 29, 1997 final rule with comment period, we stated 
that we would calculate the add-on payment for FY 1998 using the same 
methodology we have used in the past (62 FR 46002). Thus, we 
established a price per unit of clotting factor based on the current 
price listing available from the 1997 Drug Topics Red Book, the 
publication of pharmaceutical average wholesale prices (AWP). We set 
separate add-on amounts for the following clotting factors, as 
described by HCFA's Common Procedure Coding System (HCPCS). The add-on 
payment amount for each HCPCS code is based on the median AWP of the 
several products available in that category of factor, discounted by 15 
percent.
    Based on this methodology, we established the following prices per 
unit of factor for discharges occurring on or after October 1, 1997:

J7190 Factor VIII (antihemophilic factor-human).................   $0.76
J7192 Factor VIII (antihemophilic factor-recombinant)...........    1.00
J7194 Factor IX (complex).......................................    0.32
J7196 Other hemophilia clotting factors (e.g., anti-inhibitors).    1.10
                                                                        

    In the August 29 final rule with comment period, we solicited 
comments on the appropriateness of the add-on payment amount and 
suggestions for the best methodology to calculate this amount.
    Comment: We received five comments on this issue. The commenters 
indicated that the payment add-ons for blood clotting factors were 
appropriate with the exception of the payment amount under HCPCS code 
J7194, Factor IX (complex). The commenters asserted that ``purified'' 
Factor IX products (that is, products that contained Factor IX only) 
constituted a distinctly different and much more costly group of 
products than Factor IX (complex); thus, it was inappropriate to group 
all ``Factor IX'' products together under one HCPCS code. They 
recommended that HCFA either allow the purified Factor IX products to 
be billed under HCPCS code J7196 (Other hemophilia clotting factors) or 
establish a separate HCPCS code (or codes) for the purified Factor IX 
products.
    Response: We agree that there is a need for further distinctions 
among the Factor IX products. Therefore, as suggested by the 
commenters, we are establishing the following two new HCPCS billing 
codes for purified Factor IX products:

Q0160 Factor IX (antihemophilic factor, purified,                       
 nonrecombinant)................................................   $0.93
Q0161 Factor IX (antihemophilic factor, purified, recombinant)..    1.00
                                                                        

(Note that ``Q-codes'' are national temporary HCPCS codes that HCFA 
establishes unilaterally. We will request approval for permanent 
HCPCS codes at the next session of the national HCPCS panel.)
    We will issue instructions to Medicare hospitals and fiscal 
intermediaries stating that payment should be made under these codes 
for all applicable discharges occurring on or after the effective date 
of this rule (that is, June 11, 1998). As discussed in the August 29 
document, payment will be made for blood clotting factor only if there 
is an ICD-9-CM diagnosis code for hemophilia included on the bill.

N. Counting Residents for Direct Graduate Medical Education

1. Limit on the Count of Residents
    Section 4623 of the BBA added section 1886(h)(4)(F) of the Act to 
establish a limit on the number of allopathic and osteopathic residents 
that a hospital can include in its full time equivalent (FTE) count for 
direct GME payment. Residents in dentistry and podiatry are exempt from 
the cap. For cost reporting periods beginning on or after October 1, 
1997, a hospital's

[[Page 26328]]

unweighted direct medical education FTE count may not exceed the 
hospital's unweighted FTE count for its most recent cost reporting 
period ending on or before December 31, 1996.
    Section 1886(h)(4)(H)(iii) of the Act gives the Secretary authority 
to collect whatever data are necessary to implement this provision. 
Hospitals have been required to report resident-specific information to 
their fiscal intermediaries under longstanding requirements of 
Sec. 413.86, and we believe it is possible to implement section 
1886(h)(4)(F) without mandating significant additional reporting. We 
expect to amend the Medicare cost report in light of all of the 
provisions of the BBA addressing indirect and direct GME payments. We 
believe that the data, for the most recent cost reporting periods 
ending on or before December 31, 1996, necessary to implement the 
indirect and direct GME provisions is already available to fiscal 
intermediaries through the intern and resident information system.
    We believe the hospital's unweighted FTE limit for its most recent 
cost reporting period ending on or before December 31, 1996 should be 
based on a 12 month cost reporting period. If the hospital's most 
recent cost reporting period ending on or before December 31, 1996 is a 
short period report, the fiscal intermediaries shall make adjustments 
so that the hospital's unweighted FTE limit corresponds to the 
equivalent of a 12-month cost reporting period. In the August 29 final 
rule with comment period, we revised Sec. 413.86(g)(4) accordingly.
    Comment: We received comments that many hospitals received approval 
from the Accreditation Council on Graduate Medical Education (ACGME) to 
expand existing medical residency training programs prior to enactment 
of the BBA. The additional residents associated with these program 
expansions may not have been included in the hospital's most recent 
cost reporting period ending on or before December 31, 1996. Some 
commenters felt that it was not the intent of the Congress to ``unduly 
burden residency programs and hospitals by putting into effect 
regulations which retroactively punish programs attempting to expand.'' 
These commenters stated that even if it was Congressional intent to 
halt program expansion, programs serving rural and rural underserved 
areas should be exempt. Some commenters urged that the cap be adjusted 
to allow for situations where documented expansion plans were approved 
by national credentialing bodies or state regulatory agencies prior to 
August 5, 1997, or where hospitals made commitments to residents for 
the 1997/1998 academic year. Other commenters stated that HCFA should 
allow all residents training before August 5, 1997, to be included in 
hospital FTE caps. One commenter suggested that HCFA consider the 
number of approved slots rather than the actual number of residents on 
December 31, 1996, for purposes of calculating the FTE cap. This 
commenter did not believe that Congress intended to punish well-
established programs that happened to have an open slot on a particular 
date, nor to force programs with significant activity in the training 
of rural physicians to reduce their number of residency slots. Some 
commenters recognized that the statute requires the Secretary to 
establish hospital specific FTE caps from the hospitals' most recent 
cost reporting period ending on or before December 31, 1996, even in 
situations where hospitals made commitments to training additional 
residents after their cost reporting period ending during 1996 and 
before the enactment of the BBA. The commenters urged HCFA to recommend 
a statutory change to the 1996 cost report year provision to ameliorate 
the retrospective nature of this provision.
    Response: Under sections 1886(d)(5)(B)(v) and 1886(h)(4)(F), as 
amended by the BBA, the number of a hospital's residents in allopathic 
medicine and osteopathic medicine may not exceed the number of such 
residents for the hospital's most recent cost reporting period ending 
on or before December 31, 1996. The limit applies to discharges 
occurring on or after October 1, 1997, for indirect medical education 
and to cost reporting periods beginning on or after October 1, 1997, 
for direct GME. Thus, for an individual hospital, the amount of 
Medicare payment for direct and indirect GME is limited by the number 
of residents in a base year specified by the statute.
    Many of the comments we received indicated that hospitals made 
commitments to expand existing residency programs between their most 
recent cost reporting periods ending on or before December 31, 1996, 
and their first cost reporting period in which the caps apply. As a 
result, the hospital may have more residents in its current cost 
reporting period than its FTE cap. If we adjusted the caps for these 
hospitals we would effectively give them a base year contrary to the 
one specified by the statute.
    Similarly, establishing FTE caps based on the number of residents 
training on August 5, 1997 or in the 1997-1998 program year would be 
inconsistent with the statutory base year. In response to the comment 
that we establish FTE caps based on approved slots rather than the 
actual number of residents in training, the statute specifically 
establishes that the cap equals the number of allopathic and 
osteopathic FTE residents (before the application of the initial 
residency period weighting factors) in the hospital's most recent cost 
reporting period ending on or before December 31, 1996. The Conference 
Report for the BBA states that ``the conference agreement provides for 
a `cap' or limit on the number of residents that may be reimbursed by 
the Secretary, on a national and a facility level.''
    Section 1886(h)(5)(H) states that the Secretary shall give special 
consideration to facilities that meet the needs of underserved areas 
but only in the context of prescribing rules for medical residency 
training programs created on or after January 1, 1995. Thus, we 
disagree with these commenters that hospitals that meet the needs of 
rural underserved areas should be exempt from the FTE caps.
    Comment: We received several comments on the need for flexibility 
in the FTE caps. These comments stated that an institution-specific cap 
does not allow training to move from one hospital to another even if 
those sites become undesirable. One commenter suggested that a 
hospital's FTE resident count should be allowed to increase if the 
residents are moved from another teaching hospital because that 
hospital no longer provides a desirable training site. Another 
commenter stated that program sponsors are responsible for ensuring 
that residency program sites meet accreditation requirements, and that 
a program sponsor is required to move residency slots if an affiliated 
hospital cannot or does not want to continue to support residency 
program changes. These commenters noted that if the sponsor of a 
residency program moves residents from one hospital to another, the 
receiving hospital will not be paid for those residents above its cap 
even though there is no net growth in the number of residents. These 
commenters requested that the regulations be modified to allow a 
hospital's FTE cap to increase if the residents are moved from one 
teaching hospital to another by the program sponsor if there is no net 
growth in residency slots. One comment proposed setting the cap at the 
number of residents included in an institution's sponsored programs as 
an alternative to the unweighted cap based on the time a resident works 
at a facility. Rotating residents would be counted outside the

[[Page 26329]]

cap since the increase in FTEs at one institution due to rotations is 
balanced by a decrease in the FTEs at the originating institution. One 
commenter stated that since hospitals now ``own'' residency slots, 
program sponsors are put at a disadvantage in negotiating with 
affiliated hospitals for reimbursement of resident salaries and faculty 
supervision costs, and an affiliated hospital may choose to ``sell its 
residency slots to the highest bidder.''
    Response: The statute does not prohibit program sponsors from 
restructuring a residency training program or resident rotation 
schedules. Sections 1886(d)(5)(B)(v) and 1886(h)(4)(F) only provide for 
hospital-specific FTE caps for purposes of determining Medicare payment 
for indirect and direct GME. We believe the concerns of these 
commenters may be addressed by our rules for affiliated groups, which 
permit hospitals to elect to apply the caps on an aggregate basis. As 
discussed later, if two or more hospitals are members of the same 
affiliated group, they can, by mutual agreement, adjust each respective 
hospital's FTE cap under an aggregate FTE cap. Absent this mutual 
agreement, we do not believe it is appropriate for the Secretary to 
establish rules that allow adjustments to hospital-specific FTE caps 
based on unilateral decisions by the residency training program 
director.
    With regard to the comment that the hospital's FTE caps should be 
based on the hospital's sponsored programs, sections 1886(d)(5)(B)(v) 
and 1886(h)(4)(F) specifically limit the hospital's FTEs for 
determining Medicare payment to the number included in the hospital's 
most recent cost reporting period ending on or before December 31, 
1996. We would further note that medical residency training programs 
may also be sponsored by medical schools. If we were to adopt this 
commenter's suggestion that the FTE cap be equal to the number of 
residents in a hospital's sponsored programs, residents in programs 
sponsored by medical schools would not be included in any hospital's 
FTE cap.
    We recognize the concern of the commenter who stated that the FTE 
caps may result in changes in financial relationships between program 
sponsors and affiliated training sites to the disadvantage of program 
sponsors. If, indeed, program sponsors are at a disadvantage in 
negotiating financial arrangements, it is a result of the BBA statutory 
requirement that Medicare payment for direct and indirect GME be 
limited by hospital specific FTE caps and not a result of any 
regulations promulgated by the Secretary.
    Comment: One commenter stated that because of osteopathic 
medicine's commitment to primary care and work in underserved 
communities, HCFA should create an exemption to the residency cap for 
osteopathic residency programs. Other commenters stated concerns about 
the adequacy of postgraduate medical education training positions for 
osteopathic medicine residents. One commenter stated that the 
osteopathic medical profession is currently 3,000-3,500 positions in 
deficit, based on the postdoctoral needs of all students who are 
currently and will register in colleges of osteopathic medicine over 
the next 3 years. The commenter argues that, since the allopathic 
positions total approximately 143 percent of U.S. allopathic medical 
graduates, a similar restriction on U.S. osteopathic positions does not 
seem warranted. This commenter stated that a mechanism should be 
permitted to allow the osteopathic profession the flexibility to 
enhance osteopathic training positions by approximately 3,000-4,000 
positions. Another commenter noted that osteopathic physicians serve 
disproportionately in rural areas and appear to fulfill physician 
workforce objectives, which represents an additional justification for 
maintaining osteopathic residency slots. One commenter noted that it is 
important that a GME FTE cap not adversely affect training osteopathic 
surgical subspecialty physicians. According to this commenter, 
osteopathic medical graduates do not have access to allopathic surgical 
subspecialty programs.
    Response: Section 1886(h)(4)(F) provides for a cap on the total 
number of FTE residents in a hospital's ``approved medical residency 
training programs in the fields of allopathic and osteopathic 
medicine.'' The statutory limit on the number of residents paid for by 
Medicare specifically encompasses residents in osteopathic medicine.
    Comment: Several commenters asked about application of the cap for 
hospitals that merged after December 31, 1996 but before the BBA, where 
only one hospital maintains its provider number and participation 
agreement. Another commenter stated that the law and regulations do not 
address application of the resident cap for hospital mergers and 
acquisitions. These commenters do not believe that it was the intent of 
the BBA to eliminate funding for residents when hospitals merge. 
Another commenter stated that applying the limits based on cost reports 
ending on or before December 31, 1996, does not allow for the long-term 
plans of providers attempting to reduce medical education costs and 
consolidate programs. The commenters recommended that HCFA interpret 
the BBA provisions to allow hospitals that merged after the base year 
to include the count of both hospitals. Some commenters suggested that 
another approach would be to redefine an affiliated group to include 
hospitals that merged after the December 31, 1996, cost reporting 
period. Another commenter stated that where there is a merger involving 
two hospitals, the merged cap should reflect a 12-month cost reporting 
period. This commenter suggested we amend the regulations specifically 
to ensure that the FTE cap is based on the equivalent of a 12-month 
cost report in the context of a merger.
    Response: We agree with the commenters that when there is a merger, 
the cap for the hospital should reflect the base year FTE counts for 
the hospitals that merged. This is consistent with the principle of 
limiting payments based on the base year specified in the statute. 
Also, in implementing the COBRA 1985 provision establishing a hospital-
specific per resident amount in the situation of a merger, we have 
calculated the revised per resident amount for the merged hospital 
using an FTE weighted average of each of the respective hospital's per 
resident amount which is part of the merger. We believe that it would 
be appropriate to address the FTE caps using the same principle. For 
purposes of this final rule, where two or more or more hospitals merge 
after each hospital's cost reporting period ending during FY 1996, the 
merged hospital's FTE cap will be an aggregation of the FTE cap for 
each hospital participating in the merger. We are modifying 
Sec. 413.86(g)(6) to reflect this change.
    With regard to the comment that we modify the regulations to ensure 
that the FTE caps are applied on the basis of a 12-month cost reporting 
period specifically in the context of mergers and acquisitions, the 
existing regulations state that the fiscal intermediary may make 
appropriate modifications to apply the FTE cap based on the equivalent 
of a 12-month cost reporting period. We do not believe that additional 
regulatory revisions are warranted.
    Comment: Several commenters argued that we should adjust the caps 
when a hospital began training additional residents after its cost 
reporting period ending during 1996 because another hospital closed or 
discontinued its

[[Page 26330]]

teaching programs during the July 1996-June 1997 residency year. One 
commenter stated that there should be a mechanism for allowing FTE 
positions from merged or closed osteopathic residency programs to be 
used by other programs. One commenter suggested that we allow an 
adjustment to the FTE cap if the hospital met the following criteria: 
(1) During the July 1996-June 1997 residency year the hospital assumed 
additional medical residents from a hospital that was closing or 
discontinuing its training programs; (2) The hospital added the 
residents with the intent of allowing them to complete their education 
program; and (3) The hospital that closed does not seek reimbursement 
for the residents. If a hospital meets these three criteria, this 
commenter stated that it should have an unweighted FTE count which 
equals its unweighted FTE count for its most recent cost reporting 
period ending on or before December 31, 1996, adjusted for the 
additional residents added from residency programs at the closed 
hospital.
    Response: Similar to the situation of a merger, we agree that, when 
a hospital takes on residents because another hospital closes or 
discontinues its program, a temporary adjustment to the cap is 
appropriate and consistent with the base year system. In these 
situations, residents may have partially completed a medical residency 
training program and would be unable to complete their training without 
a residency position at another hospital. We believe that it is 
appropriate to allow temporary adjustments to the FTE caps for a 
hospital that provides residency positions to medical residents who 
have partially completed a residency training program at a hospital 
which closed.
    For purposes of this final rule, we will allow for temporary 
adjustments to a hospital's FTE cap to reflect residents affected by a 
hospital closure. That is, we will allow an adjustment to a hospital's 
FTE cap if the hospital meets the following criteria: (1) During the 
July 1996-June 1997 residency year the hospital assumed additional 
medical residents from a hospital that was closing; (2) The hospital 
added the residents with the intent of allowing them to complete their 
education program; and (3) The hospital that closed does not seek 
reimbursement for the residents. As stated above, this adjustment will 
be temporary to allow Medicare payment for those residents from the 
closed hospital. After this period, the hospital's cap will be based 
solely on the statutory base year. Hospitals seeking an adjustment for 
this situation must document to their intermediary that an adjustment 
is warranted for this purpose and the length of time that the 
adjustment is needed.
    Comment: One commenter stated that an appeals process must be 
established for providers to present cases when they believe their 
particular medical education programs have been unfairly penalized.
    Response: Since the direct and indirect medical education FTE 
counts are used in determining hospital payments on the basis of a cost 
reporting period and the hospital has appeal rights on the settlement 
of the cost report under 42 CFR Part 405, we do not believe that a new 
appeals process needs to be established.
2. Counting Residents Based on a 3-Year Average
    Section 1886(h)(4)(G)(iii) of the Act, as added by section 4623 of 
the BBA, provides that for the hospital's first cost reporting period 
beginning on or after October 1, 1997, the hospital's weighted FTE 
count for payment purposes equals the average of the weighted FTE count 
for that cost reporting period and the preceding cost reporting period. 
For cost reporting periods beginning on or after October 1, 1998, 
section 1886(h)(4)(G) of the Act requires that hospitals' direct 
medical education weighted FTE count for payment purposes equal the 
average of the actual weighted FTE count for the payment year cost 
reporting period and the preceding 2 cost reporting periods. This 
provision provides incentives for hospitals to reduce the number of 
residents in training by phasing in the associated reduction in payment 
over a 3-year period. In the August 29 final rule with comment period, 
we revised Sec. 413.86(g)(5) accordingly.
    For cost reporting periods beginning on or after October 1, 1997, 
we indicated in the August 29 final rule with comment period how we 
would determine direct GME payments.
    To address situations in which a hospital increases the number of 
FTE residents over the cap, notwithstanding the limit established under 
section 1886(h)(4)(F), in the August 29 final rule with comment period 
we established the following policy for determining the hospital's 
weighted direct GME FTE count for cost reporting periods beginning on 
or after October 1, 1997.
    <bullet> Determine the ratio of the hospital's weighted FTE count 
for residents in allopathic and osteopathic medicine to the hospital's 
unweighted number of FTE residents without application of the cap for 
the cost reporting period at issue.
    <bullet> Multiply the ratio determined above by the hospital's FTE 
cap. Add the weighted count of residents in dentistry and podiatry to 
determine the weighted FTEs for the cost reporting period. This 
methodology should be used for purposes of determining payment for cost 
reporting periods beginning on or after October 1, 1997. The hospital's 
unweighted count of interns and residents for a cost reporting period 
beginning before October 1, 1997 will not be subject to the FTE limit.
    If a hospital's unweighted count of residents in specialties other 
than dentistry and podiatry does not exceed the limit, the weighted FTE 
count equals the actual weighted FTE count for the cost reporting 
period. The weighted FTE count in either instance will be used to 
determine a hospital's payment under the 3-year rolling average payment 
rules. We believe this proportional reduction in the hospital's 
unweighted FTE count is an equitable mechanism for implementing the 
statutory provision.
    Section 1886(h)(4)(G)(ii) of the Act provides that the Secretary 
makes appropriate modifications to ensure that the average FTE resident 
counts are based on the equivalent of full 12 month cost reporting 
periods. In the August 29 final rule with comment period, we revised 
Sec. 413.86(g)(5) to allow the fiscal intermediaries to make the 
appropriate adjustments to ensure that 3-year and 2-year average FTE 
counts are based on the equivalent of 12-month periods.
    Comment: Some commenters stated that application of the 3-year 
rolling average rule penalizes hospitals that participate in an 
affiliated group and increase residents under an aggregate FTE cap. We 
received comments stating that the 3-year rolling average may penalize 
hospitals that legitimately qualify for an increase in their FTE count 
because they established a medical residency training program on or 
after January 1, 1995. The commenters argue that, in these cases, 
hospitals should be able to choose to have IME or direct GME payments 
based on the current year count of FTE residents or the 3-year rolling 
average. One commenter stated that the rolling average methodology 
arbitrarily penalizes areas of the country undergoing substantial 
growth.
    Response: Section 1886(h)(4)(H)(i) states that ``the Secretary 
shall, consistent with the principles of subparagraphs (F) and (G), 
prescribe rules for the application'' of the FTE caps and the 3-year 
rolling average in the case of medical residency programs established 
after January 1, 1995. We agree with these commenters that FTE

[[Page 26331]]

residents participating in new medical residency training programs 
should be included in the direct and indirect GME FTE counts after 
application of the 3-year averaging methodology. Accordingly, we are 
revising Sec. 413.86(g)(5) to determine a hospital's 3-year average FTE 
count prior to adding residents participating in new medical residency 
training programs consistent with section 1886(h)(4)(H)(i). However, 
section 1886(h)(4)(H)(ii) states that ``the Secretary may prescribe 
rules which allow institutions which are members of the same affiliated 
group (as defined by the Secretary) to elect to apply the limitation of 
subparagraph (F) on an aggregate basis.'' Since the statute provides 
that the Secretary's rules regarding affiliated groups should only 
apply to the FTE cap, we believe the 3-year rolling average should be 
applied for affiliated groups. That is, we will apply the 3-year 
rolling average for hospitals that are part of an affiliated group, 
subject to application of the aggregate cap.
    Comment: We received some comments asking HCFA to clarify that 
dental and podiatric residents are not included in the rolling average 
resident count. Several other commenters suggested that we modify the 
regulations so that dental and podiatric residents are not included in 
the 3-year averaging of FTE counts. The commenters asserted that the 
intent of the provision was that the count of dental and podiatric 
positions be made separately.
    Response: Although the FTE caps established under sections 
1886(d)(5)(B)(v) and (h)(4)(F) are limited to residents in allopathic 
and osteopathic medicine, there is no similar limitation in section 
1886(d)(5)(B)(vi) and (h)(4)(G) when determining indirect and direct 
GME payments based on a 3-year average. These provisions state that the 
Secretary shall determine payment based on an ``average of the actual 
full-time equivalent resident count for the cost reporting period and 
the preceding two cost reporting periods.'' There is no statutory 
distinction between dental, podiatric and other residents in 
determining payment based on the 3-year averaging rules.
    Comment: One commenter stated that capping FTEs for individual cost 
reporting periods in calculating the 3-year average is not the 
intention of the statute. This commenter stated that capping the FTEs 
in the individual years depreciates the FTE count for that year, 
misrepresenting the total number of FTEs during that year. This 
commenter recommended that in calculating the 3-year rolling average, 
the gross number of FTEs should be used in the calculation.
    Response: Section 1886(h)(4)(G), as added by the BBA, provides that 
the computation of the rolling average is ``subject to the limit 
described in subparagraph (F)''. The 3-year rolling average must 
reflect application of the FTE cap.
3. Special Rules for Applying the Direct GME FTE Limit and Rolling 
Average
    Under section 1886(h)(4)(H)(i) of the Act, as added by the BBA, the 
Secretary is required, consistent with the principles of establishing a 
limitation on the number of residents paid for by Medicare and the 3-
year rolling average, to establish rules with respect to the counting 
of residents in medical residency training programs established on or 
after January 1, 1995. Such rules must give special consideration to 
facilities that meet the needs of underserved rural areas. Language in 
the Conference Report for the BBA indicates concern that there be 
proper flexibility to respond to changing needs given the sizeable 
number of hospitals that elect to initiate new (or terminate existing) 
training programs.
    Pursuant to the statute, in the August 29 final rule with comment 
period, we established the following rules for applying the FTE limit 
and determining the FTE count for hospitals that established new 
medical residency training programs on or after January 1, 1995. For 
purposes of this provision, a ``program'' would be considered newly 
established if it is accredited for the first time, including 
provisional accreditation, on or after January 1, 1995, by the 
appropriate accrediting body. The Secretary has broad authority to 
prescribe rules for counting residents in new programs, but the 
Conference Report for the BBA indicates concern that the aggregate 
number of FTE residents should not increase over current levels. 
Accordingly, we indicated that we would continue to monitor growth in 
the aggregate number of residency positions and may consider changes to 
the policies described below if there continues to be growth in the 
number of residency positions.
    Comment: One commenter believed that the Congress intended to 
create exceptions for circumstances where commitments to begin new 
training programs had been made prior to enactment of the cap, 
including situations where programs had begun prior to enactment but 
were not filled in 1996 and situations where a new facility opens after 
enactment, and had no residents in the base year.
    Response: The regulations published on August 29, 1997 provide for 
adjustments to hospital FTE caps for hospitals that previously did not 
participate in GME training and hospitals that established new medical 
residency training programs on or after January 1, 1995 and on or 
before the August 5, 1997 enactment of the BBA.
    Comment: Some commenters questioned the definition of ``new medical 
residency training program'' established for purposes of section 
1886(h)(4)(H) of the Act. The regulation defines a new program as one 
that receives initial accreditation on or after July 1, 1995. Several 
commenters stated that the definition of new program should recognize 
programs that have not yet received accreditation but are approved GME 
programs eligible for payment. The commenter suggested that the current 
definition of ``new medical residency training program'' would not 
recognize programs leading to an American Board of Medical Specialties 
certification since they are not accredited by an accreditation body, 
even though such programs qualify as approved GME programs and are 
eligible for payment. Some commenters suggested that the new program 
definition be based on the date the residents begin training rather 
than the date of an accreditation letter. These commenters noted that 
the majority of programs starting July 1, 1995, received their 
accreditation letters prior to January 1, 1995, and would not qualify 
as new programs. Other commenters believed that a new medical residency 
program should be determined based on the date a program received 
approval from the accrediting body. One commenter stated that programs 
which receive ``provisional accreditation'' should be included in the 
regulatory definition of a new program. One commenter stated that the 
new program definition should include programs for which hospitals 
submitted a formal application before August 5, 1997. The commenter 
noted that it takes from 8-12 months before accreditation action is 
taken. Another comment requested clarification that the documentation 
required under this section (42 CFR 413.86(g)(6)(iv)) related solely to 
justifying the existence of a new program.
    Response: We inadvertently used the date ``July 1, 1995'' when we 
added Sec. 413.86(g)(7) in the final rule with comment published August 
29, 1997. We are correcting the date to January 1, 1995 in this final 
rule.
    As the comments reflect, establishing a newly accredited medical 
residency training program can be a costly and

[[Page 26332]]

time consuming process. We recognize that hospitals that either 
received accreditation for a new medical residency training program or 
began training residents in the new program may have expended 
substantial resources during the accreditation process. We also 
recognize that hospitals usually do not begin training residents 
immediately upon receiving an accreditation letter. For these reasons, 
we believe it is appropriate to consider a medical residency training 
program to be newly established if the program received initial 
accreditation or began training residents on or after January 1, 1995. 
We are modifying the regulation accordingly.
    A hospital seeking to qualify as a new program must provide 
documentation to the intermediary indicating the date a program 
received accreditation and/or the date the residents begin training for 
the hospital to receive an adjustment to its FTE cap. We are not 
allowing programs to be considered newly established based on the date 
the sponsor began seeking accreditation since the date of an 
accreditation application is not indicative of a substantial commitment 
of resources that warrant an adjustment to FTE caps.
    Comment: Some commenters requested that the example in the August 
29 final rule with comment period at 62 FR 46006, on programs that 
received direct GME before January 1, 1995, clearly state that 
dentistry and podiatry positions are not subject to the cap and that 
hospitals may add new programs in dentistry and podiatry without being 
subject to the Secretary's rules for establishment of new programs. The 
commenter would also like the statement on page 46006 that HCFA ``will 
continue to monitor growth in the aggregate number of residency 
positions and may consider changes to the policies described below if 
there continues to be growth in the number of residency positions' 
modified to indicate that it applies only to allopathic and osteopathic 
residency positions.
    Response: The regulations and preamble published on August 29, 
1997, clearly stated that hospitals may include dental and podiatric 
residents in their FTE counts for purposes of direct and indirect 
medical education payment without limit, regardless of whether it is an 
expansion of an existing program or the establishment of a new program. 
We do not believe modification of the regulation is necessary.
    Comment: Several commenters requested clarification about 
adjustments to the FTE cap for new osteopathic rotating internships. 
Another commenter suggested that the osteopathic rotating internship 
should be exempt from the cap as are residents in dentistry and 
podiatry. One commenter noted that the rules call for counting the 
number of first year residents in the third year of the residency 
program. The commenter proposed that a consistent rule for internships 
would adjust the FTE cap for a new internship program based on the 
number of internship positions filled in the third year. One commenter 
expressed concern that our rules should recognize that specialty 
training in osteopathic medical specialties occurs subsequent to the 
osteopathic rotating internship in the second postgraduate year and 
that we should separately make adjustments to the FTE caps for new 
osteopathic internships and new osteopathic specialty training 
programs.
    Response: The osteopathic rotating internship is the first 
postgraduate year of training for osteopathic medical graduates and 
precedes all subsequent specialty training. Since osteopathic rotation 
internship programs are individually accredited, we are applying the 
same rules for new osteopathic rotating internships that we apply for 
all other new medical residency training programs. That is, if a 
hospital qualifies for an adjustment to its FTE cap for a new 
osteopathic rotating internship, the adjustment will be equal to the 
product of the minimum accredited length for the osteopathic rotating 
internship (that is, one year) and the number of FTEs participating in 
the internship in its third year of existence. Since osteopathic 
rotating internships are one year in length, the minimum accredited 
length is equal to one year.
    We will allow adjustments to FTE caps for new osteopathic specialty 
programs based on the product of the minimum length for the accredited 
program and the highest number of residents in any program year 
subsequent to the osteopathic rotating internship (that is, program 
year 2, program year 3 or program year 4) in the third year of the 
program's existence. We are applying the same rule for new allopathic 
training programs (that is, the adjustment for the new medical 
residency program is based on the highest number of residents in any 
program year in the third year of the program's existence). The 
adjustment to the hospital's FTE cap may not exceed the number of 
accredited resident slots for the new medical residency training 
program. In response to the comment that the osteopathic rotating 
internship be exempt from FTE caps, as stated earlier, the FTE caps 
under sections 1886(d)(5)(B)(v) and (h)(4)(F) specifically encompass 
residents participating in allopathic and osteopathic training 
programs.
    a. Hospitals with no residents prior to January 1, 1995. Section 
1886(h)(4)(H) of the Act allows the Secretary to prescribe special 
rules for the application of the FTE caps and 3-year averaging for 
medical residency training programs established on or after January 1, 
1995. In the August 29, 1997 final rule with comment period (62 FR 
46005), we provided a special rule for application of the FTE resident 
cap for hospitals which did not participate in GME training prior to 
January 1, 1995. Under this special rule, we allowed hospitals to 
establish their FTE cap based on the product of the number of first 
year residents participating in accredited GME training programs in the 
third year that the hospital received payment for GME and the minimum 
accredited length for the type of program.
    Comment: Some commenters stated that hospitals that did not receive 
GME payments prior to January 1, 1995, and subsequently become teaching 
hospitals by affiliating with an existing training program, should be 
eligible for GME payments if they incur substantially all of the costs 
of the resident training and the overall number of residents does not 
increase. In this situation, the location of settings in which 
residents receive training changes but there is no net increase in the 
number of residents. One commenter stated that the limit on resident 
growth in new hospitals to those from ``newly accredited programs'' 
severely limits flexibility of moving residents and requires a 
duplicative administrative burden to start new programs when sharing 
residents would work just as well. Another commenter asked whether new 
hospitals may include residents transferred from other hospitals if all 
parties concur. To ensure that this does not increase the number of 
resident slots, hospitals transferring residents would have their caps 
correspondingly reduced. Several commenters asked how the cap would 
apply to hospitals that decide to become teaching institutions and will 
have residency programs that will be a mix of new programs and programs 
currently running in another hospital.
    Response: Under Sec. 413.86(g)(4), hospitals that are part of the 
same affiliated group may elect to apply the FTE cap under section 
1886(h)(4)(F) on an aggregate basis. If a hospital that did not receive 
direct or indirect GME payment prior to January 1, 1995, qualifies to 
be part of the same affiliated group with another hospital that

[[Page 26333]]

participates in residency training, these hospitals can, by mutual 
agreement, provide for adjustments to each respective hospital's FTE 
cap under an aggregate cap for the affiliated hospitals.
    With regard to application of the cap for hospitals that become 
teaching institutions on or after January 1, 1995, and on or before 
August 5, 1997, our policy is that a hospital can receive an adjustment 
to its FTE cap for a new medical residency training program and can 
affiliate with hospitals that have existing medical residency training 
programs. Hospitals in urban areas that participate in medical 
residency training programs for the first time, after the August 5, 
1997 enactment date of the BBA may receive an adjustment only for new 
medical residency training programs; they cannot affiliate with 
hospitals that have existing medical residency training programs. We 
are establishing this policy because of our concern that hospitals with 
existing medical residency training programs may affiliate with 
hospitals that establish new medical residency programs solely for the 
purpose of moving the new residency program to its own hospital and 
receiving an upward adjustment to its FTE cap under an affiliation 
agreement.
    We will allow hospitals in rural areas that qualify for an 
adjustment to its FTE cap for new medical residency training programs 
to affiliate with hospitals in urban areas. However, we will only allow 
a rural hospital that qualifies for an adjustment to its FTE cap for a 
new medical residency training program to be a member of the same 
affiliated group with an urban hospital if the rural hospital provides 
training for the FTE equivalent of at least one third of the residents 
participating in the joint programs of the affiliated hospitals. We are 
allowing these affiliations between rural and urban hospitals to 
recognize that rural hospitals may not have sufficient patient care 
utilization to be able to establish a training program within the rural 
area to meet accreditation standards. However, we remain concerned that 
there needs to be a sizeable component of training in the rural area 
for the policy to provide appropriate consideration for hospitals 
meeting the needs of underserved rural areas. We believe that providing 
for at least one third of the training in rural area will allow 
programs which focus on, but are not exclusively limited to training in 
those areas.
    Comment: One commenter argued that there is an inconsistency 
between the rules for teaching hospitals that had residents prior to 
January 1, 1995, and nonteaching hospitals that became teaching 
hospitals between January 1, 1995, and August 5, 1997. Hospitals in the 
former category may have their limits adjusted upward for all new 
programs established prior to August 5, 1997, while hospitals in the 
latter category are allowed an adjustment only for residents in the 
first program created even though additional programs may have been 
created prior to August 5, 1997. This commenter recommended that all 
hospitals be entitled to cap adjustment for programs created before 
August 5, 1997.
    Response: We agree and will establish the FTE cap for a hospital 
which did not participate in residency training prior to January 1, 
1995, based on the product of the minimum length for the type of 
program and highest number of residents in any program year for all 
residency programs created in the 3rd year after residents first begin 
training (Sec. 413.86(g)(60)(i) and (ii)). This policy addresses 
adjustments for all new medical residency programs established prior to 
August 5, 1997.
    Comment: One commenter suggested (1) allowing a new hospital 5 
years to build its residency programs, and not differentiating between 
new and established programs, (2) using the 3-year methodology outlined 
in the rule but not differentiating between new and established 
programs, or (3) allowing the cap to move with the residents when 
programs are transferred from one hospital to another. Another 
commenter suggested that permitting hospitals to transfer residency 
programs to other hospitals by mutual agreement is necessary to provide 
cooperating hospitals, or hospitals within networks, the necessary 
flexibility to determine requirements for a quality training program 
and how they will meet them.
    Response: One of these commenters is suggesting three alternatives 
for establishing the FTE cap for a new hospital that establishes a 
medical residency training program. Under the first two options, the 
commenter is suggesting that we should not distinguish between whether 
the hospital's resident count is adjusted for new medical residency 
training programs or previously established programs where some or all 
of the residents are transferred to the new hospital. As stated 
earlier, hospitals that did not participate in a medical residency 
training program prior to August 5, 1997, and establish a new medical 
residency training program for the first time after the enactment date 
of BBA will have their FTE caps established in the third year in which 
they participate in residency training.
    We are not allowing hospitals that first participate in medical 
residency training programs to affiliate with hospitals that already 
have an established FTE cap because of our concern that hospitals with 
existing medical residency training programs would affiliate with 
hospitals that do not currently train residents solely for purposes of 
establishing a higher FTE cap, which is inconsistent with sections 
1886(d)(5)(B)(v) and (h)(4)(F) of the Act. As a result of this concern, 
we are reluctant to adopt the first two approaches suggested by this 
commenter for adjusting the FTE cap for a hospital which participates 
in medical residency training for the first time after August 5, 1997. 
This commenter has also suggested allowing the FTE cap to move between 
hospitals when programs are transferred. Hospitals that qualify to be 
members of the same affiliated group can mutually agree to adjustments 
in their respective FTE caps.
    Comment: One commenter stated that the requirement that all new 
programs begin at the same time in new hospitals is contradictory to 
the Accreditation Council on Graduate Medical Education requirement 
that certain new programs be started in hospitals that already have 
other programs. Under HCFA's regulations, a new hospital must start all 
new programs at once in order to receive an adjustment to the FTE cap 
based on the number of residents participating in all of the hospital's 
accredited programs in the third year that the hospital participates in 
training. The commenter suggested that HCFA provide an adequate time 
period for new hospitals to build complementary residency programs that 
do not conflict with Accreditation Council on Graduate Medical 
Education requirements. One commenter stated that basing the resident 
cap for new residency programs on the first program(s) will inhibit 
growth of other primary care programs or the introduction of new 
primary care programs. One commenter stated that nothing in the statute 
suggests that recognition of new programs should be limited to the 
first program. This commenter stated that if an internal medicine 
program is accredited in April 1996 with its first residents in July 
and a specialty program is developed in 1997 with residents beginning 
in 1998, the cap should be adjusted to account for the additional 
residents in the second program. One commenter recommended that the cap 
for new programs be adjusted based on all programs established in the 
hospital's first year rather than the first programs simultaneously 
established. One

[[Page 26334]]

commenter suggested that the cap adjustment for new programs in 
hospitals should be available without a cut-off date. Another commenter 
recommended allowing hospitals a period of time, no less than 5 years, 
to establish their GME training programs. One commenter stated that the 
resident count should be determined in the third year of the program 
based on the number of residents in either the first, second, or third 
residency year, whichever is the highest. In addition, the regulations 
should allow the limits to be adjusted upward for each of the first two 
years of the program to permit payments for residents present during 
that period.
    Response: We agree that hospitals that establish new medical 
residency programs will need time to establish complementary residency 
programs. Additionally, we are concerned that hospitals may be 
disadvantaged by basing the adjustment on the number of first year 
residents in the third year of the program's existence. Therefore, we 
are revising Sec. 413.86(g)(6)(i) to state that the hospital's cap 
adjustment is based on the product of the minimum accredited length for 
the specialty program and the highest number of residents training in 
any program year during the 3rd year of the program's existence. For 
purposes of determining the FTE cap for hospitals which first 
participate in GME training on or after January 1, 1995, we will 
establish the hospital's FTE cap 3 years after the first medical 
residency program is established. The hospital's cap will reflect an 
adjustment based on the product of the minimum accredited length for 
the program and the highest number of residents in any program year for 
each new medical residency program in existence at the time the cap is 
established. The hospital's FTE cap may not exceed the number of 
accredited resident slots available to the hospital.
    b. Hospitals with residents rrior to January 1, 1995 not located in 
rural areas. In the August 29, 1997 final rule with comment period, we 
also provided a special rule for the application of the FTE cap for 
hospitals that participated in GME training before January 1, 1995 and 
established medical residency training programs on or after January 1, 
1995. Under this special rule, we allowed hospitals with new medical 
residency training programs established on or after January 1, 1995 and 
on or before August 5, 1997 to adjust their FTE caps. The hospital's 
FTE caps are adjusted for the incremental increase in residents 
participating in the new medical residency training program which are 
not reflected in the hospital's cost reporting period ending during 
calendar year 1996.
    Comment: We received comments stating that an adjustment should be 
made to the FTE cap for programs established prior to January 1, 1995, 
that had not reached their third year or minimum accredited length for 
the type of program during the cost reporting period ending on or 
before December 31, 1996.
    Response: Section 1886(h)(4)(H) states that the Secretary shall 
prescribe rules for application of the FTE cap and 3-year rolling 
average ``in the case of medical residency training programs 
established on or after January 1, 1995.'' Our policy of limiting 
adjustments to FTE caps for medical residency training programs 
established on or after January 1, 1995 is consistent with this 
statutory requirement.
    Comment: We received comments stating that HCFA should allow 
adjustments to the FTE cap for new residency programs established on or 
after August 5, 1997 in hospitals with existing residency programs. 
Many commenters believed that the August 5, 1997 date was unfair to 
primary care programs since several new family practice programs were 
accredited in September 1997 and there are a number of additional 
programs that will be established in the next 1 to 2 years. According 
to these commenters, if a public policy goal is to increase the number 
of primary care physicians, HCFA should allow for adjustments for 
programs created before September, 1999. One comment stated that urban 
hospitals will be deterred from opening new, desirable residency 
programs such as ambulatory care training programs if they cannot 
receive an adjustment for programs established after August 5, 1997. If 
HCFA does not allow hospitals in urban areas to create additional 
programs after August 5, 1997, this commenter suggested that HCFA allow 
adjustments for primary care programs where the majority of training is 
in ambulatory care. One commenter requested that the Secretary consider 
the needs of elderly beneficiaries in rural areas and allow adjustments 
to a hospital's FTE cap for new medical residency training in geriatric 
medicine. Another commenter stated that the Secretary should be 
required to give special consideration to facilities that establish 
residency training programs on or after January 1, 1995 ``which meet 
the needs of geriatric populations, including mental health needs of 
the aged.''
    Response: As we have stated earlier, sections 1886(d)(5)(B)(v) and 
1886(h)(4)(F) limit the number of allopathic and osteopathic residents 
that a hospital may include in its FTE count for purposes of indirect 
and direct GME payments. The Conference Report further states that ``a 
facility limit on the number of residents was provided, rather than any 
direction on payments according to specialty of physicians in training, 
to specifically avoid the involvement by the Secretary in decision 
making about workforce matters. The Conferees emphatically believe that 
such decisions should remain within each facility, which is best able 
to respond to clinical needs and opportunities.''
    Since sections 1886(d)(5)(B)(v) and 1886(h)(4)(F) provide for an 
FTE cap for medical residents in all allopathic and osteopathic 
specialties and the Conference Report states that the Secretary should 
not be involved in workforce matters, we disagree with these commenters 
that we should allow for adjustments to FTE caps for programs that 
train primary care residents, programs that focus on ambulatory 
training or geriatric training programs. We believe the statute 
anticipates that each facility, within its FTE cap, will make decisions 
about training programs based on the needs of its own institution.
    c. Rural underserved areas. Consistent with section 1886(h)(4)(H), 
we provided a special rule for the application of the FTE cap to give 
special consideration to hospitals that meet the needs of underserved 
rural areas. Under this special rule, we provide adjustments to FTE 
caps for hospitals located in rural areas that established medical 
residency training programs on or after January 1, 1995. The caps can 
be adjusted for all programs created on or after January 1, 1995 
including programs created after the enactment of BBA. The adjustment 
to an individual hospital's FTE cap is based on the product of the 
number of first year residents participating in the newly established 
program in the program's third year of existence and the minimum 
accredited length for the program.
    Comment: Many commenters recommended that an exception to the FTE 
caps should be permitted to encourage existing programs to expand to 
meet the needs of rural, underserved areas. Several commenters also 
suggested providing an exception to the cap that would allow a 
geographic area with substantial population growth to expand existing 
medical residency training programs to hospitals which previously have 
not participated in residency training. Some commenters suggested that 
the needs of rural (and other underserved) areas are frequently met by 
facilities that do not exist within

[[Page 26335]]

those areas, but whose graduates subsequently practice there. This 
commenter requested that HCFA redesignate certain urban MSAs as rural 
for residency training purposes. One commenter suggested that the 
designation of programs in underserved areas receiving special 
consideration might better be phrased as ``programs whose graduates 
serve underserved areas,'' in order to be consistent with the purpose 
of this language. Many commenters stated that Congress' intent that 
special consideration be given to facilities that meet the needs of 
underserved rural areas was meant to include entire States that have 
low ``per population'' ratios of both physicians and residents. This 
commenter suggested that this special rule could be limited to the five 
States with lowest physician to population ratios.
    One commenter stated that without an exception, the FTE cap could 
have a ``chilling'' effect on urban hospitals sending residents to 
rural settings. This commenter stated that there have been several 
recent expansions in family practice residency programs that include a 
rural training track, with residents located in outlying hospitals, or 
with satellite programs designed specifically to train residents to 
work in areas with underserved populations. The commenter suggested 
that urban hospitals should be eligible for exceptions to the cap if 
they place residents in rural, underserved areas. One commenter 
recommended that the FTE cap should be adjusted for urban programs that 
provide 25 percent of their training in rural areas that are designated 
as medically underserved areas and/or health professional shortage 
areas.
    Another commenter stated that, given the value of rural training to 
the needs of underserved populations, HCFA should develop additional 
exception language for rural training tracks or programs that seek to 
train residents in working with underserved populations. The commenter 
recommended that HCFA consider, in designating rural and rural 
underserved areas, the population served by the program and where the 
graduates practice upon completion of the program rather than the 
location of the training of the residents. We received comments 
indicating that hospitals will be unlikely to benefit from the special 
rules for hospitals located in rural areas. The commenters believed 
that it is unlikely that a rural hospital will establish a residency 
program because the smallest program which may be accredited is for 12 
residents. Another commenter stated that the majority of physicians 
will settle within 100 miles of their residency training location and 
suggested that programs which serve underserved rural areas should be 
defined as:
    (a) Any residency program with more than 10 health professional 
shortage areas within 100 miles of the program;
    (b) Residencies that have identified themselves prior to August 5, 
1997 as having the mission of training rural physicians, and have 
placed more than 10 percent of residents in the preceding 2 years in 
rural underserved areas and more than 40 percent in rural areas; or
    (c) Residencies within States where greater than 70 percent of the 
land mass is rural; and
    (d) Programs meeting the above qualifications and those located 
within health professional shortage areas would be disqualified by 
being in a community of greater than 100,000.
    Response: We believe that the Congress enacted sections 
1886(d)(5)(B)(v) and 1886(h)(4)(F) because of a concern about the 
growing supply of physicians in combination with reports that the 
United States may be training too many physicians for practice in the 
21st century. The Conference Report accompanying the BBA states that 
the ``conference agreement provides for a `cap' or limit on the number 
of residents that may be reimbursed by the Secretary, on a national and 
a facility level.'' At the same time, the Conference Report 
acknowledged that the FTE caps could create problems in several 
circumstances. Accordingly, the statute provides for special rules for 
medical residency programs created on or after January 1, 1995, and 
directs the Secretary to ``give special consideration to facilities 
that meet the needs of rural underserved areas.''
    Given the hospital specific FTE caps mandated by the statute and 
the Conference Report language that the number of FTE residents paid 
for by Medicare should not exceed current levels, we believe our policy 
with regard to medical residency training programs created on or after 
January 1, 1995, establishes an appropriate balance between the 
competing goals of limiting the number of residents in training 
nationally and making appropriate payments for necessary training. 
Although we acknowledge that GME programs that provide a component of 
training in rural areas also include significant training in hospitals 
located in urban areas, we are concerned about the impact of providing 
adjustments to the FTE limit for hospitals located in non-rural areas 
until we have more experience with the current special rules. As we 
stated above, we will make adjustments to the caps for rural hospitals 
that establish new medical residency training programs and will allow 
those hospitals to affiliate with hospitals in nonrural areas. Taken 
together, these policies allow rural hospitals, in combination with 
urban hospitals, to establish training programs which can receive 
Medicare payment for direct and indirect GME. Finally, based on a 
review of the 1997/1998 Graduate Medical Education Directory, we would 
note that, in limited circumstances, family practice programs of fewer 
than 12 residents that focus on rural training may be accredited.
    Comment: One commenter suggested that many osteopathic training 
programs are located in underserved, urban areas called Empowerment 
Zones and that these programs should receive a waiver from the FTE 
caps. Another commenter recommends that exceptions be permitted for 
urban hospitals serving underserved populations.
    Response: As stated above, sections 1886(d)(5)(B)(v) and 
1886(h)(4)(F) cap the number of osteopathic and allopathic physicians a 
hospital may include in its FTE count. Section 1886(h)(4)(H)(i) 
requires the Secretary to prescribe special rules for application of 
the cap and the 3-year rolling average for medical residency training 
programs created on or after January 1, 1995, and states that the 
Secretary should give special consideration to hospitals that meet the 
needs of rural underserved areas in drafting these rules. The statute 
includes osteopathic medical residency training programs in the FTE 
caps and the Secretary is directed by the statute to give special 
preference only to rural underserved areas. Consistent with the 
statute, we are providing for adjustment to FTE caps for new medical 
residency training programs created on or after January 1, 1995 and are 
not providing for the types of adjustments suggested by these 
commenters.
    Comment: Several commenters noted that medicine is constantly 
evolving, leading to new specialty training programs. According to the 
commenters, new specialties do not necessarily replace old specialties 
so absent explicit recognition of new specialties, the cap on resident 
training will hamper the ability of teaching institutions to implement 
new training programs without downsizing or eliminating existing 
programs. The commenters urged HCFA, in consultation with the medical 
profession, to look at constructive ways to address this issue.
    Response: As we have stated earlier, sections 1886(d)(5)(B)(v) and 
(h)(4)(F) provide for limits on the number of

[[Page 26336]]

residents used in determining Medicare payment for indirect and direct 
GME. It does not preclude hospitals from establishing new medical 
training programs. Nevertheless, we do acknowledge that Medicare's 
payments for GME may be important in decisionmaking about training and 
the FTE caps mandated by the BBA may have an effect on the future 
developments in GME training. These issues would be appropriate 
consideration for Congress as well as the Medicare Payment Advisory 
Commission and the National Bipartisan Commission on the Future of 
Medicare. Section 4629 of the BBA requires the Medicare Payment 
Advisory Commission to report on the ``extent Medicare payment policies 
and other Federal policies regarding teaching hospitals and graduate 
medical education should be changed.'' Section 4021 of the BBA creates 
a National Bipartisan Commission on the Future of Medicare which is 
required to ``make recommendations regarding the financing of graduate 
medical education.''
    Comment: One commenter stated that there are no instructions on how 
to apply for an exception to the FTE cap.
    Response: Hospitals seeking to receive payments under the rules for 
a new medical residency training program should consult with and 
provide supporting documentation to their fiscal intermediary.
4. Aggregate Direct GME FTE Limit for Affiliated Institutions
    Section 1886(h)(4)(H)(ii) of the Act permits but does not require 
the Secretary to prescribe rules that allow institutions that are 
members of the same affiliated group (as defined by the Secretary) to 
elect to apply the FTE resident limit on an aggregate basis. This 
provision would permit hospitals flexibility in structuring rotations 
within a combined cap when they share residents.
    a. Definition of affiliated group. Pursuant to the broad authority 
conferred by the statute, in the August 29, 1997 final rule with 
comment period, we established criteria to define ``affiliated group''. 
We defined ``affiliated group'' as
    <bullet> Hospitals in the same geographic wage area that rotate 
residents to other hospitals of the group during the course of the 
approved program; or
    <bullet> Hospitals that are not located in the same geographic wage 
area and are jointly listed as ``major participating institutions'' as 
that term is used in the Graduate Medical Education Directory for one 
or more programs.
    Comment: Some commenters requested that we clarify whether the term 
geographic wage area included reclassification for purposes of the wage 
index or the national standardized amounts or both. These commenters 
have questioned whether ``geographic wage area'' means a metropolitan 
statistical area (MSA) before the effect of reclassification and some 
commenters were unsure whether the term geographic wage area included 
the effect of reclassification for the standardized amount or the wage 
index or both.
    Response: For purposes of defining an affiliated group, we are 
using the terms ``urban area'' and ``rural area'' before the effect of 
geographic reclassification under part 412. To avoid further confusion, 
we are revising Sec. 413.86(b) to use the terms ``urban area'' and 
``rural area'' (as those terms are defined in Sec. 412.62(f)) for the 
purpose of defining an affiliated group. Section 412.62(f) states that 
an urban area means a metropolitan statistical area or New England 
County Metropolitan Area as defined by the Executive Office of 
Management and Budget. A rural area means any area outside of an urban 
area.
    Comment: Some commenters recommended allowing hospitals to be part 
of an affiliated group if they are located in the same State or located 
in contiguous geographic wage areas.
    Response: We agree with this recommendation and are revising the 
criteria specified in Sec. 413.86(b) as follows. Specifically, we are 
revising this section to provide that hospitals in the same urban area 
or a contiguous urban area may be part of the same affiliated group if 
the hospitals participate jointly in training residents in at least one 
training program. If a hospital is located in a rural area, it may 
affiliate with any hospital in which it jointly participates in 
training residents in the same rural area or a contiguous area.
    Comment: Many commenters disagreed with the limitation of 
affiliated group to geographic areas. Some commenters stated that 
hospital systems today are geographically diverse, the wage area 
distinction is dysfunctional, and the requirement that hospitals be 
located in the same geographic wage area or jointly listed as major 
participating institutions in the Graduate Medical Education Directory 
is too limited. These commenters requested that the wage area and joint 
listing requirements be eliminated.
    Response: The criteria we established to determine whether two or 
more hospitals qualify to be an affiliated group were designed to 
identify hospitals that have relationships for training residents and 
to allow those hospitals to continue to have the flexibility to rotate 
residents under an aggregate FTE cap. By focusing on hospitals that 
rotate residents within a geographic area and on whether they are 
recognized for jointly participating in residency training by the 
accrediting body, we are identifying hospitals that are affiliated for 
purposes of GME training. We believe that our approach for identifying 
hospitals that require flexibility under an aggregate FTE cap is 
reasonable and consistent with section 1886(h)(5)(H) of the Act, which 
provides the Secretary with authority to define hospitals that are 
members of the same affiliated group. We believe that the geographic 
boundary provided by an urban or rural area is an appropriate basis 
upon which to identify hospitals that share residents for purposes of 
GME training. We agree, however, that focusing solely on hospitals 
located within an MSA is limiting and are making the qualifying 
criteria for being members of the same affiliated group less 
restrictive. Under this final rule, we are allowing hospitals to be 
members of the same affiliated group which jointly participate in 
residency training and are located in the same or a contiguous MSA or 
the same rural area and a contiguous area.
    Comment: One commenter stated that the rules regarding ``major 
participating institution'' are disadvantageous to residency programs 
in small towns and relatively small geographic wage areas because the 
definition of ``major participating institution'' requires that the 
hospital provide rotations of at least one-sixth of the program length 
or 6 months. Since rural hospitals are more likely to sponsor shorter 
rotations, hospitals in rural areas would be much less able to meet the 
criteria to become part of an affiliated group. The commenter believes 
this does not meet with Congressional intent to provide special 
consideration for rural areas.
    Response: As discussed above, we are modifying the definition of 
affiliated group to permit affiliations between hospitals located in 
rural areas and hospitals located in an area contiguous to the rural 
area.
    Comment: Some commenters recommended allowing entities under common 
ownership or part of the same ``system'' to be an affiliated group for 
purposes of aggregating their caps. Another commenter recommended 
creating an additional ``affiliated group'' definition that would allow 
aggregation of FTE residents for hospitals under common ownership and 
operation with one or more medical schools (the program sponsors) 
provided such

[[Page 26337]]

hospitals are within the geographic border of a single state. Another 
commenter suggested that hospitals that certify they operate as a 
single health care system should be considered an affiliated group, 
regardless of the hospitals' geographic locations. These systems 
functionally operate coordinated and centrally controlled GME programs 
and often rotate their residents among their various facilities 
depending on training needs and other considerations.
    Response: We agree with the commenters who suggested that hospitals 
that are under common ownership should be permitted to be part of the 
same affiliated group regardless of geographic boundaries and are 
modifying Sec. 413.86(b) accordingly.
    Comment: One commenter stated that Medicare's related party 
principle should be a basis for defining affiliated group because that 
would allow hospitals to better manage training of residents.
    Response: We do not agree that Medicare's related party principle 
should govern which hospitals qualify to be part of the same affiliated 
group. The criteria for being part of an affiliated group are intended 
to identify a relationship among hospitals for sharing residents. The 
related party principle is used under principles of Medicare cost 
reimbursement to determine the costs of a related party which may be 
claimed on a hospital's cost report. Under the related party principle, 
hospitals may claim costs of a related party which may not be a 
hospital. For instance, a hospital may include the costs of a related 
medical school on its cost report. Since the related party principle is 
used in determining which costs of a related party a hospital is 
entitled to claim and is not indicative of joint participation in a 
training program, we do not believe the related party principle is 
appropriate criteria for determining whether hospitals may be part of 
the same affiliated group.
    Comment: One commenter stated that the ``affiliation'' policy 
should allow for situations where not all affiliated institutions 
choose to elect to apply for an aggregate cap.
    Response: Hospitals that could qualify to be part of an affiliated 
group do not have to affiliate. As we describe in more detail below, 
for purposes of applying an aggregate cap hospitals must affiliate by 
explicit agreement. If a hospital does not affiliate, that hospital 
will remain subject to a cap based on its FTE count in its most recent 
cost reporting period ending on or before December 31, 1996. The 
aggregate cap will only be applied for hospitals that elect to be part 
of an affiliated group.
    Comment: Other commenters suggested that unrelated hospitals that 
jointly sponsor programs should be allowed to be part of the same 
affiliated group.
    Response: Under our regulations, common sponsorship will qualify 
two or more hospitals to be part of the same affiliated group. We are 
revising Sec. 413.86(b) to clarify that hospitals that are jointly 
listed for one or more medical residency training programs in the 
Graduate Medical Education Directory as a sponsor, primary clinical 
site or major participating institution may qualify to be an affiliated 
group for purposes of an aggregate FTE cap.
    Comment: Many commenters stated that program sponsors should be 
able to make decisions about where training should occur and the 
hospital FTE caps should be adjusted accordingly. Several commenters 
stated that hospitals in an affiliated group should be allowed to 
arrange residencies in the manner that best fits their community. One 
commenter stated that we should permit adjustments to caps to reflect 
rotations resulting from restructuring training programs brought about 
by changes in provider affiliations, giving preference to the 
sponsoring teaching hospital to subsume residency positions that were 
previously in affiliated institutions.
    Response: Although we agree that program sponsors are likely the 
best qualified to determine how and where training should occur, we do 
not believe that it would be appropriate to allow hospital specific 
adjustments to FTE caps based on unilateral decisions by program 
sponsors or the hospital which sponsors the training program. In 
situations where the sponsor of the program is a medical school and not 
a hospital, we do not believe it would be appropriate to make 
adjustments to hospital FTE caps based on the decision of an entity 
that has no relationship to the Medicare program. Furthermore, since 
medical schools do not provide cost reports or counts of FTE residents 
to Medicare, we do not believe there would be an appropriate mechanism 
for making adjustments to hospital FTE caps under the aggregate caps if 
decisions regarding affiliations and adjustments are not being made by 
hospitals. We would also note that hospitals may be involved in many 
medical residency training programs involving different program 
directors. Making adjustments to hospital caps based on the decisions 
of multiple people within the hospital would not be administratively 
feasible. Further, since hospitals may not sponsor all of the programs 
they participate in, we do not believe that it is appropriate to make 
downward adjustments in a hospital's FTE cap based on a unilateral 
decision of another hospital.
    Comment: Several commenters noted that the Graduate Medical 
Education Directory does not include osteopathic training programs and 
requested a reference to an official listing of American Osteopathic 
Association approved training programs.
    Response: We agree with the commenters who suggested that the 
regulation needs a comparable reference for osteopathic medical 
residency training programs to the Graduate Medical Education 
Directory, which only lists allopathic training programs. Medical 
residency programs accredited by the American Osteopathic Association 
are listed in a publication called Opportunities, Directory of 
Osteopathic Postdoctoral Programs. For purposes of this final rule, if 
two hospitals are not located in the same MSA or a contiguous MSA, they 
may qualify to be part of the same affiliated group if the hospitals 
are jointly listed for one or more programs in Opportunities as the 
sponsor or under the heading ``affiliations and outside rotations'' 
(413.86(b)).
    Comment: One commenter stated that the American Osteopathic 
Association is requiring all accredited osteopathic GME programs to be 
part of an osteopathic postdoctoral training institution (OPTI) by July 
1, 1999. There are several hospitals that are currently participating 
in an approved OPTI. The commenter was concerned that the OPTI is a 
consortium of providers and these consortia would not qualify as an 
affiliated group. The commenter recommended that HCFA recognize a 
formally organized osteopathic GME consortia without geographic limit. 
Further, the commenter stated that any affiliation should be recognized 
for aggregation purposes even if the hospitals are not in the same 
geographic wage area.
    Response: We have reviewed materials regarding the OPTI concept 
from the American Osteopathic Association and note that an OPTI may 
include an ``associate institution'' that provides 6 months or more of 
training per year and an ``affiliate institution'' where less than 6 
months of rotations per year are occurring. Since the OPTI concept is 
not yet fully implemented, we believe it would be premature to begin 
recognizing institutions which are part of an OPTI under the definition 
of affiliated groups for purposes of an aggregate FTE cap. However, we 
will continue to evaluate whether hospitals

[[Page 26338]]

participating in an OPTI could be part of an affiliated group, and we 
will specifically focus on the duration of rotations among hospitals 
within the OPTI in making this decision.
    Comment: Several commenters stated that accreditation requirements 
mandated an increase in their hospital's FTE resident count due to the 
transfer of residents from a Veterans Affairs Medical Center or a 
Department of Defense facility. These commenters stated that an 
exception to the FTE cap should be allowed when a hospital's resident 
count increased in situations where the aggregate count of residents 
among the affiliated hospitals, including Veterans' Affairs Medical 
Centers, remains unchanged. Other commenters recommended that HCFA give 
program sponsors the ability to transfer residents from Veterans 
Affairs' hospitals to non-Veterans' Affairs hospitals.
    Response: Sections 1886(d)(5)(B)(v) and (h)(4)(F) of the Act 
provide for FTE caps on the basis of a hospital's most recent cost 
reporting period ending on or before December 31, 1996. Section 
1886(h)(4)(H) of the Act allows hospitals that are part of the same 
affiliated group to apply the FTE cap on an aggregate basis. Veterans' 
Affairs and Department of Defense hospitals do not have cost reporting 
periods for Medicare payment purposes and do not provide data on FTE 
resident counts to Medicare. We believe that hospitals that do not 
participate in Medicare should not be part of an affiliated group since 
the statute caps the number of residents based on the number of 
residents reported by the hospital in its Medicare cost reporting 
periods. In addition, hospitals that do not participate in Medicare do 
not submit cost reports to a fiscal intermediary; therefore, we would 
be unable to apply an aggregate FTE cap to an affiliated group that 
included these hospitals.
    In summary, we are defining an affiliated group as follows:
    <bullet> Hospitals in the same urban area or in contiguous urban 
areas which rotate residents to other hospitals of the group during the 
course of the program year;
    <bullet> Hospitals located in the same rural area or in contiguous 
rural and urban areas that rotate residents to other hospitals of the 
group during the course of the program year; or
    <bullet> Hospitals that are--

--Jointly listed as the sponsor, primary clinical site or major 
participating institution as those terms are used in the Graduate 
Medical Education Directory for one or more programs; or
--Jointly listed as the program sponsor or under affiliations and 
outside rotations in Opportunities, the directory of osteopathic 
graduate medical education programs; or

    <bullet> Hospitals which are under common ownership.
    b. Application of the FTE caps to an affiliated group. In the 
August 29, 1997 final rule, we addressed application of the FTE cap for 
hospitals which are members of the same affiliated group. Hospitals 
which qualify to be part of the same affiliated group may elect to have 
the individual FTE caps applied on an aggregate basis. This means that 
we would apply a cap to the group as a whole, and the cap for the group 
would equal the sum of the individual FTE caps for all hospitals that 
are part of the affiliated group. Indirect and direct graduate medical 
education payment would be based on hospital specific FTE counts under 
an aggregate FTE cap. In the August 29, 1997 final rule with comment 
period, we stated that the aggregate FTE cap for an affiliated group 
would be applied on an institution-wide basis. We recognize that 
hospitals may participate in many different speciality programs and may 
share residents for one specialty program with one hospital but share 
residents for a different program with another hospital, but we did not 
believe it would be administratively feasible to apply the FTE cap on a 
program by program basis. That is, the aggregate cap under the August 
29, 1997 final rule with comment period would be the combined 
individual caps of each hospital that elects to be part of an 
affiliated group
    Comment: One commenter stated that hospitals may have rotation 
relationships with a number of different hospitals. According to these 
commenters, aggregation of resident counts among all hospitals is not 
practical or feasible. Many commenters suggested that we should permit 
hospitals to aggregate resident numbers at the program level if the 
hospitals provide supporting documentation that the aggregate count of 
residents within the program remains unchanged. One commenter who 
supported affiliations at the program level stated that HCFA should 
require hospitals to report FTEs by program sponsor and include a 
separate count of each program on the Medicare cost report. Hospitals 
would have multiple FTE caps and would be responsible for reconciling 
each individual program cap with the intermediary. Several commenters 
stated that HCFA should allow affiliated hospitals to transfer programs 
and that each hospital's cap be adjusted based on a joint letter from 
the affected providers.
    Response: As we stated in the August 29, 1997 final rule with 
comment period, we recognize that many hospitals may share residents 
for particular specialty programs. We stated that hospital affiliations 
must be on an institution-wide basis because of our concern about the 
administrative feasibility of allowing affiliations on a program-by-
program basis. Although we continue to have concerns that program 
specific affiliations may generate enormous complexity in monitoring 
FTE resident counts for fiscal intermediaries and may impose 
significant documentation burdens on hospitals, we agree with the 
commenters that it would be appropriate for Medicare to accommodate 
agreements between individual hospitals for specific programs. A 
hospital could have an agreement with one hospital for a particular 
program and another hospital for a different program. An agreement 
between two hospitals does not mean only those hospitals are an 
affiliated group, if those hospitals also have agreements with other 
hospitals. Rather, the affiliated group includes the original two 
hospitals that have an agreement and every hospital that has an 
agreement with any of those hospitals. We will continue to apply the 
FTE cap on an aggregate basis for institutions that are part of an 
affiliated group. That is, we will combine the individual caps for each 
institution that has an agreement to be an affiliated group to verify 
that the sum total of the resident counts for all institutions does not 
exceed the aggregate cap. We will make payment to individual hospitals 
based on hospital specific FTE counts.
    Each agreement must specify the adjustment to each hospital's FTE 
counts from the cost reporting period ending during calendar year 1996 
for purposes of applying the aggregate FTE cap for the period of the 
agreement. The agreements must specify the adjustment to the IME and 
direct GME FTE counts separately since hospitals are subject to two 
different FTE counts for each respective cap. Since medical residency 
training programs generally follow a July 1 to June 30 residency 
training year, each agreement should specify adjustments to FTE counts 
on a 12-month basis from July 1 to June 30 of each year. The agreements 
must be for a minimum of one program year but may be for more than one 
year. A hospital will be permitted to engage in multiple agreements 
with different hospitals as illustrated below. For example, hospital A 
can have an agreement with hospital B for an

[[Page 26339]]

internal medicine program and another agreement with hospital C for 
emergency medicine. Although hospitals B and C do not have an agreement 
for any program, the affiliated group is A, B, and C, we will apply the 
cap on an aggregate basis for A, B, and C; that is the FTE resident 
counts at hospitals A, B, and C can not exceed the sum of the combined 
caps for the three hospitals.
    If the combined FTE counts for hospitals A, B, and C does not 
exceed the aggregate cap, we will pay each hospital based on its 
hospital specific FTE count. If the combined FTE counts for hospitals 
A, B, and C exceed the aggregate cap, we need individual caps for each 
hospital in order to limit payment to the number of FTEs included under 
the aggregate FTE cap. In this situation, each hospital will be paid 
based on its actual FTE up to its individual FTE cap as adjusted per 
agreements. We will allow each respective institution's individual cap 
to reflect the adjustment per their individual agreements. However, we 
are requiring that agreements regarding application of the aggregate 
cap planned for the year be completed by the beginning of each 
residency training year (that is, July 1). The hospitals in the 
affiliated group may adjust the initial FTE counts by June 30 of each 
residency training year if actual FTE counts for the program year are 
different than projected in the original agreement.
    If a hospital cost report does not correspond with a July 1 to June 
30 residency training year, we will prorate the changes specified in 
the agreement to each hospital's FTE cap on the basis of a cost 
reporting period. In the example illustrated below, there is an 
agreement between hospitals A and B to allow hospital A an additional 
10 residents that were previously included in hospital B's FTE count. 
Hospital B also has an agreement with hospital C to allow hospital B an 
additional five residents previously counted by hospital C. We are also 
assuming that these agreements are for two years. The aggregate FTE cap 
for hospitals A, B, and C will be the combined FTE cap for the these 
hospitals. For instance, if hospital A, B, and C each have an FTE cap 
of 100 residents, the aggregate cap will be 300 residents. The cap will 
be applied as follows per the planned changes assuming hospital A has a 
July 1 to June 30 cost reporting period and hospital B has a October 1 
to September 30 cost reporting period and hospital C has a calendar 
year cost report:

----------------------------------------------------------------------------------------------------------------
                                                                                                  Planned change
                                                                         Planned change in FTE       for cost   
                Hospital                     Cost reporting period      count (for 07/01-06/30)      reporting  
                                                                                                      period    
----------------------------------------------------------------------------------------------------------------
Hospital A..............................  07/01/98-6/30/99..........  +10 per agreement with B..          +10.00
Hospital B..............................  10/01/97-09/30/98.........  -10 per agreement with A..           -2.50
                                          10/01/98-9/30/99..........  ..........................          -10.00
Hospital B..............................  10/01/97-09/30/98.........  +5 per agreement with C...           +1.25
                                          10/01/98-09/30/99.........  ..........................           +5.00
Hospital B (total)......................  10/01/97-09/30/98.........  -5 per total agreements...           -1.25
                                          10/01/98-09/30/99.........  ..........................           -5.00
Hospital C..............................  01/01/98-12/31/98.........  -5 per agreement with B...           -2.50
                                          01/01/99-12/31/99.........  ..........................           -5.00
----------------------------------------------------------------------------------------------------------------

    Since the agreements are effective July 1, 1998, the agreements are 
only in effect for 3 months or 25 percent of the year for hospital B's 
October 1, 1997 to September 30, 1998 cost report and the FTE reduction 
for the portion of the residency training year included in that cost 
report is a net -1.25 FTEs (-2.5 to 1.25) for agreements with hospitals 
A and C. The agreements are ongoing for the July 1, 1999 to June 30, 
2000 residency training year and the adjustment to hospital B's cap is 
a net -5.0 FTEs for the October 1, 1998 to September 30, 1999 cost 
reporting period (effectively -3.75 for the October 1, 1998 to June 30, 
1999 portion of the cost reporting period included in the residency 
training year and -1.25 for the July 1, 1999 to September 30, 1999 
portion of the cost reporting period included in the residency training 
year). Similarly, a prorated portion of the FTE reduction for hospital 
C is included in the January 1, 1998 to December 31, 1998 cost 
reporting period for the agreement with hospital B. That is, the FTE 
reduction for the portion of the July 1, 1998 to June 30, 1999 
residency training year included in hospital C's calendar year 1998 
cost report is -2.5 FTE.
Since the agreement is ongoing for the July 1, 1999 to June 30, 2000 
residency training year, there is a -5.0 FTE reduction for the calendar 
year 1999 cost report (effectively -2.5 for the January 1, 1999 to June 
30, 1999 portion of the residency training year included in the cost 
report and -2.5 FTE for the July 1, 1999 to December 30, 1999 portion 
of the residency training year included in the cost report). If the 
group's actual FTE count exceeds the aggregate cap, which equals the 
combined individual caps for each hospital (hospitals A, B, and C in 
the example above), we will apply the individual FTE caps as adjusted 
per agreements. For instance, the combined individual caps for 
hospitals A, B, and C equals 300 residents. If the total number of 
residents for the cost reporting periods ending in 1999 for hospitals 
A, B, and C exceeds 300 residents, we will make payments to each 
hospital based on the individual cap as adjusted per agreements. 
Hospital A would be paid with a cap based on 110 residents (100 + 10) 
for its July 1, 1998 to June 30, 1999 cost reporting period. Hospital B 
would be paid based on a cap of 95 residents for its October 1, 1998 to 
September 30, 1999 cost reporting period. Hospital C would be paid 
based on 95 residents for its January 1, 1999 to December 31, 1999 cost 
reporting period. Each hospital that exceeds its individual cap after 
the adjustments per the agreements will be paid based on the 
methodology described in August 29, 1997 final rule with comment period 
(62 FR 46004 and 46005) and repeated in the table found in the Appendix 
to this final rule. That is, we will multiply the hospital's unweighted 
FTE cap (as adjusted per the agreements) by the ratio of the weighted 
to unweighted FTE's for the cost reporting period.
    Each agreement must also specify the adjustment to each respective 
hospital cap in the event the agreement terminates, dissolves or, if 
the agreement is for a specified time period, for residency training 
years and cost reporting periods subsequent to the period of the 
agreement for purposes of applying the FTE cap on an aggregate basis. 
In the absence of an agreement on the FTE caps for each respective 
institution following the end of the

[[Page 26340]]

agreement, each hospital's FTE cap will be the indirect and direct 
medical education FTE count from each hospital's cost reporting periods 
ending in 1996 and the cap will not be applied on an aggregate basis. 
The net effect of adjustments to each hospital's FTE cap for each 
agreement must total zero on a program basis, as provided for in the 
above example. That is, if the agreement involves two hospitals, any 
positive adjustment for one hospital must be offset by a negative 
adjustment for the other hospital of at least the same amount.
    We are allowing individual hospitals to enter into agreements with 
multiple hospitals, as illustrated above with hospital B. However, we 
are concerned about the administrative feasibility of monitoring the 
aggregate FTE caps under these agreements. The situation that concerns 
us is reconciling adjustments to FTE caps under an aggregate cap when 
the agreements involve hospitals with different fiscal intermediaries. 
For instance, in the situation where hospital A and hospital B are 
serviced by the same fiscal intermediary but hospital C has a different 
intermediary, hospitals A and B's fiscal intermediary will receive two 
agreements: one between hospital A and hospital B and one between 
hospital B and C. Hospital C's fiscal intermediary must receive the 
agreement between hospitals A and B as well as the agreement between 
hospitals B and C, for the adjustments to be reconciled in the 
aggregate. In the absence of the agreement between hospitals B and C, 
hospital C's fiscal intermediary would be unaware that a downward 
adjustment to hospital C's cap is required. In the absence of the 
agreement between hospitals A and B, hospital C's fiscal intermediary 
would be unable to reconcile the aggregate FTE cap between hospitals A, 
B, and C.
    We believe the only way for aggregate FTE caps to be reconciled 
based on multiple agreements between hospitals is for each agreement to 
be sent to each hospital's fiscal intermediary. Attached to each 
agreement would be copies of other agreements that each hospital which 
is part of the original agreement has with other hospitals. This would 
require hospital A and B's fiscal intermediary to receive the 
agreements between hospitals A and B and hospitals B and C and any 
other hospitals which have agreements with those hospitals. Thus, if 
hospitals A, B, and C constitute the affiliated group, hospital A and 
B's fiscal intermediary would have to receive copies of the agreements 
between hospitals A and B and hospitals B and C. Hospital C's fiscal 
intermediary also would have to receive copies of the agreements 
between hospitals B and C and hospitals A and B. The original and 
subsequent agreements must include the provider number of each 
respective institution which is part of the agreement, signatures of 
each hospital representative, the date of the agreement, and the 
respective adjustment to each hospital's FTE cap for indirect and 
direct graduate medical education. Each agreement must indicate that 
copies are being sent to HCFA. Copies of the original agreement must be 
sent to: Division of Acute Care, C5-08-27, 7500 Security Boulevard, 
Baltimore, Maryland 21244. We will consider changes to the process 
described above if we find a less burdensome approach to reconciling 
individual FTE caps under aggregate caps.
    We are establishing this process for application of an aggregate 
FTE cap pursuant to section 1886(h)(4)(H) of the Act, which states that 
the ``Secretary may prescribe rules which allow institutions which are 
members of the same affiliated group (as defined by the Secretary) to 
elect to apply'' the FTE caps on an aggregate basis. The statute 
provides the Secretary with broad authority to define what is an 
affiliated group and how to apply the FTE caps to members of that group 
and we are establishing the process described above under this broad 
authority. Our policy provides a mechanism to make payments to 
individual hospitals under an overall cap that is consistent with the 
caps of the individual hospitals included in the affiliated group. As 
we have stated earlier, although we have concerns about the ability to 
reconcile multiple agreements, we are providing this policy to allow 
hospitals that jointly participate in training the flexibility to 
change arrangements for training residents.
    Comment: Some commenters stated that hospitals will not have 
incentives to form affiliated groups if one hospital will have to 
relinquish its FTEs included in its cap to another hospital. These 
commenters recommended that HCFA, through the aggregation rules, give 
program sponsors the ability to aggregate and then transfer residency 
positions between participating hospitals. Another commenter suggested 
that we consider allowing hospitals to aggregate FTEs at the level of 
the sponsoring institution. One commenter stated that medical schools 
that are not part of academic medical centers are at a particular 
disadvantage in assuring that they will be able to move their residents 
among affiliates.
    Response: As we have stated previously, sections 1886(d)(5)(B)(v) 
and (h)(4)(F) of the Act limit the number of FTEs that hospitals can 
count for Medicare payment for indirect and direct GME, respectively. 
While Congress did extend authority to the Secretary to develop rules 
that allow hospitals that are part of the same affiliated groups to 
elect to apply the FTE cap on an aggregate basis, section 
1886(h)(4)(H)(ii) of the Act states that ``institutions which are 
members of the same affiliated group'' may ``elect to apply the 
limitation of subparagraph (F) on an aggregate basis''. Since Medicare 
makes payment to hospitals and subparagraph (F) provides for the FTE 
cap on the basis of hospital cost reporting periods, we do not believe 
it would be appropriate to allow program sponsors that, as stated 
above, may or may not be hospitals to make decisions about hospital FTE 
caps for purposes of Medicare payment. Furthermore, participation in an 
affiliated group is voluntary. Even in situations where the program 
sponsor is a hospital, we believe it would be inappropriate to allow 
one hospital to make a decision about the application of individual FTE 
caps under an aggregate FTE cap, without the second hospital's 
agreement.
    We recognize that hospitals may be reluctant to agree to lower 
individual FTE caps under an aggregate cap. However, the aggregate 
limit is a voluntary provision. Affiliation is an option that hospitals 
may ``elect,'' in accordance with rules established by the Secretary, 
to allow for the movement of residents among participating hospitals 
under an aggregate FTE cap.
    Comment: One commenter stated that the IME resident-to-bed ratio 
and the FTE resident caps should be applied in the aggregate for 
institutions that are members of an affiliated group. The commenter 
believed that the application of the cap, as proposed, will have ``the 
unintended affect of discouraging multi-hospital and ambulatory site 
program configurations''. The commenter noted that there is no 
provision in the regulation which would allow an adjustment to the IME 
FTE and resident-to-bed ratio cap for affiliated groups.
    Response: We agree that Sec. 412.105 should reference 
Sec. 413.86(g)(4) for purposes of applying the IME FTE cap on an 
aggregate basis. Section 412.105 should also be modified to reference 
Sec. 413.86(g)(6) for purposes of adjusting the IME FTE cap for new 
medical residency training programs. We are including these references 
in Sec. 412.105. However, we disagree that the intern and resident-to-
bed ratio for an affiliated

[[Page 26341]]

group should be determined in the aggregate. Section 1886(h)(4)(H) of 
the Act gives the Secretary the authority to develop rules that allow 
affiliated hospitals to elect to apply the FTE caps on an aggregate 
basis. The statute applies the affiliation provision solely to the FTE 
cap.
    Comment: One commenter requested that HCFA further clarify the 
aggregate adjustment to the caps for affiliated programs. The commenter 
asked how the aggregate cap would be calculated for an institution that 
has several GME programs but is affiliated with another institution for 
only one program. The commenter requested that HCFA provide several 
examples of aggregate limit calculations. One commenter asked whether, 
in determining the aggregate FTE resident count, affiliated hospitals 
will pool their total unweighted FTE count from their respective cost 
reports ending on or before December 31, 1996.
    Response: We have provided more detailed information above on the 
application of the FTE caps for hospitals that are members of the same 
affiliated group.
    Comment: Several commenters recommended that an adjustment be made 
for hospitals that jointly participated in a residency training program 
prior to December 31, 1996 and subsequently ended the arrangement. If a 
hospital ended a joint training agreement, the sponsor will have to 
find another training site but may not be able to find an alternative 
unless the FTEs of the previously affiliated hospital can be counted by 
the new hospital that affiliates with the sponsor. Similarly, one 
commenter suggested that a group of hospitals that is ``legally'' 
affiliated should be allowed to include the base year FTEs of all 
member hospitals in application of the cap, even if those hospitals are 
no longer involved in resident training and the programs are moved to 
other hospitals in the group. Another commenter stated that HCFA should 
apply both institutional and aggregate caps using a flexible 
methodology that recognizes changes in hospital clinical and teaching 
affiliations. This commenter stated that the application of the 
resident cap should be governed by a methodology that ensures fair and 
equitable treatment of providers whose resident counts change as a 
consequence of disaffiliation or other major programmatic changes. One 
commenter recommended that hospitals that disaffiliate have the option 
of determining the distribution of resident counts among each of the 
hospitals so long as the aggregate limit is not exceeded. If hospitals 
cannot reach an agreement, limits could be based on their respective 
base year resident counts.
    Response: Hospitals that no longer have a relationship for training 
residents do not meet the criteria for being members of the same 
affiliated group even if those hospitals jointly participated in 
residency training in the past. The criteria for being members of the 
same affiliated group are intended to recognize that hospitals which 
have relationships for training residents need flexibility in those 
arrangements under an aggregate FTE cap. If hospitals no longer have a 
relationship for training residents, we do not believe there is a need 
for this same flexibility. We recognize there are situations where the 
sponsor of a training program terminated its relationship for training 
residents with a hospital after 1996 and, as a result, there may be 
fewer FTE residents that may be counted for indirect and direct 
graduate medical education payment purposes. However, this is a direct 
result of the Balanced Budget Act which specifically required FTE caps 
to be based on 1996 FTE counts.
    Comment: One commenter requested instructions on how hospitals 
should apply to be part of an affiliated group.
    Response: As stated above, hospitals seeking to receive payments as 
an affiliated group must provide agreements specifying adjustments to 
FTE caps by July 1 of each year for the contemporaneous residency 
training year.
    In summary, we will apply the FTE caps for an affiliated group as 
follows:
    <bullet> Hospitals that qualify to be members of the same 
affiliated group for the current residency training year and elect an 
aggregate cap must provide an agreement to the fiscal intermediary and 
HCFA specifying the planned changes to individual hospital counts under 
an aggregate FTE cap by July 1 for the contemporaneous (or subsequent) 
residency training year.
    <bullet> Each agreement must be for a minimum of one year and may 
specify the adjustment to each respective hospital cap under an 
aggregate cap in the event the agreement terminates, dissolves or, if 
the agreement is for a specified time period, for residency training 
years and cost reporting periods subsequent to the period of the 
agreement. In the absence of an agreement on the FTE caps for each 
respective institution following the end of the agreement, each 
hospital's FTE cap will be the IME and direct GME FTE count from each 
hospital's cost reporting periods ending in 1996.
    <bullet> Each agreement must specify that any positive adjustment 
for one hospital must be offset by a negative adjustment for the other 
hospital of at least the same amount.
    <bullet> The original agreements must be signed and dated by 
representatives of each respective hospital that is a party to the 
agreement and that agreement must be provided to the hospital's fiscal 
intermediary with a copy to the HCFA. Copies of agreements that each 
hospital which is part of the original agreement has with other 
hospitals must also be attached.
    <bullet> Hospitals that provided an earlier agreement for planned 
changes in hospital FTE counts may provide a subsequent agreement on 
June 30 of each year modifying the agreement for applying the 
individual hospital caps under an aggregate FTE cap.
    If the combined FTE counts for the individual hospitals that are 
members of the same affiliated group do not exceed the aggregate cap, 
we will pay each hospital based on its hospital specific FTE count. If 
the combined FTE counts for the individual hospitals that are members 
of the same affiliated group do not exceed the aggregate cap, we will 
pay each hospital based on its FTE cap as adjusted per agreements.

O. Payment to Managed Care Plans for Graduate Medical Education

    Section 4624 of the BBA amended section 1886(h)(3) of the Act to 
provide a 5-year phase-in of payments to teaching hospitals for GME 
associated with services to Medicare managed care discharges for 
portions of cost reporting periods occurring on or after January 1, 
1998. The amount of payment is equal to the product of the per resident 
amount, the total weighted number of FTE residents working in all areas 
of the hospital (and nonhospital settings in certain circumstances) 
subject to the limit on number of FTE residents under section 
1886(h)(4)(F) and the averaging rules under section 1886(h)(4)(G) of 
the Act, the ratio of the total number of inpatient bed days that are 
attributable to Medicare managed care enrollees to total inpatient 
days, and an applicable percentage. The applicable percentages are 20 
percent in 1998, 40 percent in 1999, 60 percent in 2000, 80 percent in 
2001, and 100 percent in 2002 and subsequent years.
    In the August 29 final rule with comment period, we revised 
Sec. 413.86(d)(2) to establish a 5-year phase-in payment methodology to 
hospitals for direct GME payments based on Medicare managed care 
enrollees for portions of cost reporting

[[Page 26342]]

periods beginning on or after January 1, 1998.
    Section 4001 of the BBA adds section 1853(a)(3)(C) of the Act. New 
section 1853(a)(3)(C) requires the Secretary to implement a risk 
adjustment methodology that accounts for variations in per capita costs 
based on health status and other demographic factors in Medicare 
payments to managed care organizations by no later than January 1, 
2000. The BBA also added section 1853(a)(3)(B) of the Act to require 
the Secretary to collect data necessary from managed care organizations 
to implement this provision.
    Comment: One commenter supported using teaching hospitals, not 
managed care plans, as the source of statistics for indirect and direct 
GME payments for Medicare managed care beneficiaries. This commenter 
also supported including payments for Medicare managed care 
beneficiaries in periodic interim payments (PIP) made to hospitals 
because of the current lengthy delays in receiving payments from 
managed care organizations. Another commenter supported careful 
implementation of this provision and expressed particular concern about 
identifying and verifying managed care patients days and discharges. 
One commenter stated that HCFA should use data from ``no pay'' claims 
from hospitals to make GME payments for Medicare managed care 
beneficiaries. This commenter had strong concerns that an alternate 
claims submission and reporting mechanism which relies upon managed 
care entities to submit DRG and related patient information is fraught 
with potential problems which will likely affect data integrity and 
cash flow. One commenter suggested that HCFA utilize the expertise 
available in the hospital field to develop an administratively simple 
and low-cost mechanism to make GME payments to hospitals for Medicare 
managed care patients.
    Response: As we stated in the final rule with comment published on 
August 29, 1997, section 4001 of the BBA requires the Secretary to 
implement a risk adjustment methodology that accounts for variations in 
per capita costs based on health status and other demographic factors 
in Medicare payments to managed care organizations. Section 
1853(a)(3)(B) requires the Secretary to collect the necessary data to 
implement the provision. Under section 4622 and 4624 of the BBA, 
teaching hospitals may receive indirect and direct GME payments 
associated with Medicare+Choice discharges. Since publication of the 
final rule with comment on August 29, 1997, we have consulted with 
hospitals, managed care plans, and fiscal intermediaries for purposes 
of developing a process to implement these provisions.
    We anticipate teaching hospitals will need to submit claims 
associated with Medicare+Choice discharges to the fiscal intermediaries 
for purposes of receiving indirect and direct medical education 
payments. When the claims are processed, the fiscal intermediaries will 
make the IME payment associated with a Medicare+Choice discharge 
directly to the teaching hospital. Teaching hospitals will also be 
required to submit bills associated with Medicare+Choice organizations 
to the managed care plans. The inpatient encounter data from these 
bills will be submitted by the managed care plans to HCFA for purposes 
of implementing the risk adjustment methodology. The fiscal 
intermediaries should revise interim payments to reflect the Medicare 
direct GME payment associated with Medicare+Choice discharges. However, 
until the fiscal intermediaries have more experience with paying 
hospitals for direct GME associated with Medicare+Choice discharges, we 
believe the fiscal intermediaries will have limited data upon which to 
base interim payment. We are making adjustments to the Medicare cost 
report to allow for settlement of the cost report reflective of direct 
GME payment associated with Medicare+Choice discharges.
P. Payment to Nonhospital Providers
    Under section 4625 of the BBA, for cost reporting periods beginning 
on or after October 1, 1997, the Secretary is authorized but not 
required to establish rules for payment to ``qualified nonhospital 
providers'' for the direct costs of medical education incurred in the 
operation of an approved medical residency training program. Under the 
statute, qualified nonhospital providers include Federally Qualified 
Health Centers, Rural Health Clinics, Medicare+Choice organizations and 
such other nonhospital providers the Secretary determines to be 
appropriate. We invited comments on how to implement this provision, 
particularly on how to determine appropriate payment for ambulatory 
sites.
    We recently published a proposed rule to implement section 4625 of 
the BBA.

Q. Payment for Combined Medical Residency Training Programs

1. Initial Residency Period
    Under Sec. 413.86(g)(2) residents within an initial residency 
period are weighted as 1.0 FTE for purposes of the direct GME payment. 
Section 413.86(g)(3) requires residents beyond the initial residency 
period to be weighted as 0.5 FTE for purposes of determining GME 
payment. The initial residency period is defined as the minimum number 
of years required to become board eligible in specialty and is 
determined at the time a resident enters a medical residency training 
program. In the August 30, 1996 final rule (61 FR 46211), we clarified 
that the initial residency period for residents in combined medical 
residency training programs is limited to the time required to complete 
the longer of the composite programs.
    Effective for residents in or beginning training on or after July 
1, 1997, section 4627 of the BBA amended section 1886(h)(5)(G) of the 
Act to require that for combined programs consisting only of primary 
care training, the initial residency period equals the longer of the 
composite programs plus one year. A primary care resident is a resident 
enrolled in an approved medical residency training program in family 
medicine, general internal medicine, general pediatrics, preventive 
medicine, geriatric medicine, or osteopathic general practice. This 
provision also added one year to the initial residency period for 
combined primary care and obstetrics and gynecology programs. In the 
August 29 final rule with comment period, we amended Sec. 413.86(g)(1) 
to implement the provisions of section 1886(h)(5)(G).
    Comment: One commenter sponsors a dual program in Family Practice/
Osteopathic Manipulative Medicine and noted that it was not recognized 
in the regulations as a combined primary care residency program that is 
eligible for an additional year in the initial residency period limit 
under the special rule for combined primary care medical residency 
programs.
    Response: Section 1886(h)(5)(H) defines primary care resident to 
mean a resident enrolled in an approved medical residency training 
program in family medicine, general internal medicine, general 
pediatrics, preventive medicine, geriatric medicine, or osteopathic 
general practice. Since osteopathic manipulative medicine is not 
included in the definition of a primary care resident, the special rule 
for primary care combined programs does not apply.

[[Page 26343]]

2. Effective Dates
    Comment: One commenter stated that the effective dates for IME and 
direct GME are inconsistent; one is ``effective for discharges on or 
after October 1, 1997'' while the other is for ``cost reporting periods 
on or after October 1, 1997''.
    Response: We have received a number of questions regarding the 
effective dates for the provisions of the BBA related to GME. Section 
4621(b) of the BBA, which amended section 1886(d)(5)(B)(v)of the Act to 
establish the FTE cap for the indirect medical education adjustment, is 
effective for discharges occurring on or after October 1, 1997. The cap 
on the intern and resident to bed ratio mandated by section 
1886(d)(5)(B)(vi) (as amended by section 4621(b) of the BBA) is 
effective beginning with the hospital's first cost reporting period 
occurring on or after October 1, 1997. Section 4623 of the BBA 
establishes the FTE cap for direct graduate medical education and is 
effective beginning with a hospital's first cost reporting period 
beginning on or after October 1, 1997.
3. Accrediting Body Reference
    Comment: One commenter recommended that we revise our regulations 
to indicate that the accrediting body for dental residencies is the 
Commission on Dental Accreditation rather than the Council on Dental 
Education.
    Response: We are amending Sec. 415.152 to reflect this comment.

R. Special Categories of Excluded Hospitals (Sec. 412.23)

    Section 4417(b) of the BBA allows certain hospitals with an average 
length of stay of less than 25 days to be excluded from the prospective 
payment system as a long-term care hospital. In order to be excluded 
under this provision, a hospital must have first been excluded as a 
long-term care hospital in calendar year 1986, have an average 
inpatient length of stay of greater than 20 days, and demonstrate that 
80 percent or more of its annual Medicare inpatient discharges in the 
12-month cost reporting period ending in Federal fiscal year 1997 have 
a principal diagnosis that reflects a finding of neoplastic disease. We 
revised Sec. 412.23(e) to implement this provision.
    Section 4418 of the BBA provides an additional category of 
hospitals that can qualify as cancer hospitals for purposes of 
exclusion from the prospective payment system. As amended, section 
1886(d)(1)(B)(v) of the Act includes a hospital that meets the 
following criteria:
    <bullet> The hospital was recognized as a comprehensive cancer 
center or clinical cancer research center by the National Cancer 
Institute of the National Institutes of Health as of April 20, 1983.
    <bullet> The hospital must have applied for and been denied, on or 
before December 31, 1990, classification as a cancer hospital.
    <bullet> The hospital was licensed for fewer than 50 acute care 
beds as of the date of enactment of this subclause (that is, August 5, 
1997).
    <bullet> The hospital is located in a State that, as of December 
19, 1989, was not operating a demonstration project under section 
1814(b) of the Act.
    <bullet> The hospital demonstrates that, for the 4-year period 
ending on December 31, 1996, at least 50 percent of the hospital's 
total discharges have a principal finding of neoplastic disease; that 
is, the discharge has a principal diagnosis code of 140-239, V58.0, 
V58.1, V66.1, V66.2, or 990.
    A hospital that meets these criteria is classified as an excluded 
cancer hospital for cost reporting periods beginning on or after 
January 1, 1991. In addition, for purposes of payment, the base period 
applicable to such a hospital is the hospital's cost reporting period 
beginning during FY 1990 or the period under new section 1886(b)(3)(F) 
of the Act. In the August 29 final rule with comment period, we revised 
the regulations at Sec. 412.23(f) to incorporate this provision.
    We received no public comments on these revisions.

S. Payment of Hospitals and Units Excluded from the Prospective Payment 
System (Sec. 413.40)

    The BBA significantly altered the payment provisions for excluded 
hospitals and units. Prior to the passage of the BBA, the payment 
provisions for excluded hospitals and units applied consistently to all 
categories of excluded providers (that is, psychiatric, rehabilitation, 
long-term care, children's, and cancer). However, effective for cost 
reporting periods beginning on or after October 1, 1997, there are 
specific payment provisions for psychiatric, rehabilitation, and long-
term care providers, and modifications to payment provisions for all 
excluded providers. We received 19 comments on our implementation of 
the BBA provisions for PPS-excluded hospitals and units. Below we 
discuss the statutory and regulatory provisions (see 62 FR 46016 
through 46020), as well as our comments and responses.
1. Rate-of-Increase Percentages for Excluded Hospitals and Units 
(Sec. 413.40(c) and (g))
    Section 4411 of the BBA amended section 1886(b)(3)(B) of the Act 
regarding the rate-of-increase percentages to be applied to target 
amounts. The applicable rate-of-increase percentage for the cost 
reporting period beginning during FY 1998 is 0 percent. For cost 
reporting periods beginning in FY 1999 through FY 2002, the applicable 
rate-of-increase percentage is the market basket rate of increase 
percentage minus a factor based on the percentage by which the 
hospital's operating costs exceed the hospital's ceiling for the most 
recent cost reporting period for which information is available.
    Comment: One commenter requested that we clarify the data needed to 
calculate the applicable rate-of-increase percentages under section 
4411(b).
    Response: Under section 1886(b)(3)(B)(vi) of the Social Security 
Act, as added by section 4411 of the BBA, the update factor for a given 
cost reporting period is determined by comparing the hospital's 
allowable costs ``for the most recent cost reporting period for which 
information is available'' to the hospital's target amount ``for such 
cost reporting period.'' In the August 29, 1997 final rule with comment 
period, we provided four examples of the calculation of the applicable 
rate-of-increase percentages for cost reporting periods beginning in FY 
1999. These examples reflect the information necessary to compute the 
applicable rate-of-increase percentages. The fiscal intermediary will 
compute the applicable rate-of-increase before the beginning of each 
cost reporting period, using the most recent cost report data.
2. Request for a new base period (Sec. 413.40(b))
    Sections 4413(a) and 4413(b) of the BBA amended sections 1886(b)(3) 
of the Act in order to permit excluded hospitals and units to elect 
(``in a form and manner determined by the Secretary'') a rebasing of 
the target amount for the 12-month cost reporting period beginning 
during FY 1998 (October 1, 1997 through September 30, 1998).
    Comment: One commenter argued that, if an excluded hospital or unit 
does not request a new base period under the new statutory payment 
methodologies of sections 4413(a) and (b), the hospital should 
nevertheless be permitted to obtain a new base period at any time 
pursuant to the previously published regulation at Sec. 413.40(i) and 
to receive

[[Page 26344]]

payments under the payment methodology of the new statutory provision. 
Another commenter asserted a hospital should be allowed to choose the 
five cost reporting periods for calculating a rebased FY 1998 target 
amount per discharge, in order to reflect expected cost report 
reopenings.
    Response: Under sections 4413(a) and (b) of BBA, an excluded 
hospital or unit may elect rebasing and receive a revised target amount 
for the hospital's 12-month cost reporting period beginning during FY 
1998 (October 1, 1997 through September 30, 1998). As indicated in the 
August 29 final rule with comment period, this is a one time option 
(for FY 1998 only). If a hospital does not elect rebasing for the cost 
reporting period beginning during fiscal year 1998, it cannot elect 
rebasing at a later date for a later cost reporting period.
    With regard to the suggestion of the commenter that we allow 
hospitals to choose which cost reports to use to calculate a rebased 
target amount, the statute requires the Secretary to use the five 
``most recent settled cost reports as of the date of enactment'' of the 
BBA (August 5, 1997).
    Comment: Three commenters believe that the timeframe for requesting 
a new base period under section 4413 is unduly short, arguing that the 
required information is difficult to obtain. One commenter suggested 
the timeframe be extended to 90 days after the beginning of the cost 
reporting period beginning in FY 1998.
    Response: In the August 29 final rule with comment period, we 
stated that a hospital that elects rebasing must submit its request for 
rebasing by the later of November 1, 1997 or 60 days prior to the 
beginning of its cost reporting period beginning during FY 1998. We 
believe that this is a reasonable timeframe for a hospital to elect 
rebasing. The information required for an election includes the 
hospital's name, provider number, cost reporting period, and the cost 
per case from the hospital's five most recent settled cost reports. All 
of this information should be readily available to the hospital.
    A hospital's target amount for a cost reporting period should be 
established before the beginning of the cost reporting period, so that, 
among other things, the hospital can appropriately structure its costs 
within the target amount. Due to the extremely short timeframe between 
the enactment of the BBA and the beginning of FY 1998, we established a 
special rule to address hospitals whose cost reporting periods begin 
early in FY 1998. As noted above, we believe our timeframes are 
reasonable and that is not necessary or appropriate to extend the 
timeframes.
    Comment: One commenter asked that we further clarify the 
calculation of the disproportionate share percentage to determine 
whether a long-term care hospital is eligible for rebasing under 
section 4413(b) of the BBA.
    Response: Under the statute, a long-term care hospital may elect 
rebasing under section 4413(b) of the BBA if, among other things, ``the 
hospital would have a disproportionate patient percentage of at least 
70 percent (as determined by the Secretary under subsection 
(d)(5)(F)(vi)) if the hospital were a subsection (d) hospital.'' As 
stated both in the preamble of the final rule (62 FR 46018) and at 
Sec. 413.40(v) of the regulation text (62 FR 46032), the calculation of 
the disproportionate patient percentage is addressed at Sec. 412.106 of 
the Medicare regulations. Fiscal intermediaries are familiar with the 
calculation of the disproportionate patient percentage and can assist a 
long-term care hospital if necessary.
3. Limitation on the Target Amount for Excluded Hospitals and Units 
(Sec. 413.40(c))
    Section 4414 of the BBA amended section 1886(b)(3) of the Act to 
establish caps on the target amounts for excluded hospitals or units 
for cost reporting periods beginning on or after October 1, 1997 
through September 30, 2002. The statute directs the Secretary to 
calculate ``the 75th percentile of target amounts'' for three classes 
of hospitals--psychiatric hospitals and units, rehabilitation hospitals 
and units, and long-term care hospitals--for ``cost reporting periods 
ending during fiscal year 1996.''
    Similarly, section 4416 of the BBA (discussed further below) 
establishes a new statutory payment methodology for new excluded 
hospitals. To determine payments for a new excluded hospital, the 
statute directs the Secretary to calculate ``110 percent of the 
national median of target amounts for hospitals in the same class as 
the hospital for cost reporting periods ending during fiscal year 
1996.'' The amount calculated in section 4416 is updated and adjusted 
for differences in area wage levels, and the resulting figure is a 
limit on payments for the new hospital or unit.
    Thus, sections 4414 and 4416 both direct the Secretary to examine 
target amounts for three classes of hospitals for cost reporting 
periods ending during FY 1996. However, section 4416, unlike section 
4414, requires that the calculation applicable to new hospitals reflect 
an adjustment for differences in area wage levels.
    The 75th percentile of the target amounts for cost reporting 
periods ending during fiscal year 1996, as updated by the market basket 
up to FY 1998 (as corrected in a correction notice published March 6, 
1998 (63 FR 11148)) are as follows:

    (1) Psychiatric hospitals and units: $10,534
    (2) Rehabilitation hospitals and units: $19,104
    (3) Long-term care hospitals: $37,688

    In the August 29, 1997 final rule with comment period, we stated 
that if a hospital has a target amount that is capped at the 75th 
percentile, the hospital would not be granted an exception payment as 
governed by Secs. 413.40(a) and (g) based solely on a comparison of its 
costs or patient mix in its base year to its costs or patient mix in 
the payment year would be irrelevant. However, exception payments would 
still be available for hospitals that have target amounts that are 
determined by the hospital's costs in a base year and are unaffected by 
the 75th percentile cap.
    Comment: One commenter suggested that Sec. 413.40(c)(4)(iii) of the 
regulations be modified to clarify that in the case of a psychiatric 
hospital or unit, rehabilitation hospital or unit, or long-term care 
hospital, the target amount for FYs 1998 through 2002 is equal to the 
lower of--
    <bullet> The hospital specific target amount (the net allowable 
costs in a base period increased by the update factor for the subject 
period); or
    <bullet> The 75th percentile of target amounts for hospitals in the 
same class (psychiatric hospital or unit, rehabilitation hospital or 
unit, or long-term care hospital) for cost reporting periods ending 
during FY 1996, increased by the applicable market basket percentage 
for the subject period.
    Response: We agree with the commenter and are modifying 
Sec. 413.40(c)(4)(iii) to incorporate this clarification.
    Comment: Five commenters argued that section 4414 requires the 
Secretary to estimate, but not implement, caps using the 75th 
percentile of the target amounts for psychiatric and rehabilitation 
hospitals or units, and long-term care hospitals. One commenter 
asserted that the Secretary should have waited for additional 
legislation to implement caps on the target amounts and then 
independently determine whether to implement in light of the impacts of 
other provisions of the BBA.
    Response: The title of section 4414 of the BBA is ``Cap on the 
TEFRA limits.'' The Conference Report indicates that

[[Page 26345]]

the provision limits, or caps, target amounts for hospitals excluded 
from PPS. The statute requires us to calculate a cap for cost reporting 
periods beginning during fiscal year 1998, and requires updates to the 
caps for cost reporting periods beginning during fiscal years 1999 
through 2002. We do not believe the Congress intended that we calculate 
these numbers but not apply them as a cap. Moreover, since the statute 
requires us to calculate a cap for cost reporting periods beginning 
during fiscal year 1998, we do not believe the application of the caps 
should be delayed until subsequent years.
    Comment: Two commenters believe the payment caps on target amounts 
for rehabilitation hospitals and units and long-term care hospitals 
under section 4414 and section 4416 are not correct because separate 
caps were not established within each class of excluded hospital (in 
particular rehabilitation and long-term care hospitals) to reflect 
hospitals specializing in the treatment of high cost patients, such as 
a rehabilitation unit which specializes in treating Medicare patients 
with spinal cord injuries.
    Response: Section 4414 provides that, ``In the case of a hospital 
or unit that is within a class of hospital described in clause (iv), 
the Secretary shall estimate the 75th percentile of the target amounts 
for such hospitals within such class * * *.'' Similarly, section 4416 
provides that ``in the case of a hospital or unit that is within a 
class described in subparagraph (B) which first receives payments under 
this section on or after October 1, 1997,'' the amount of payment is 
based in part on ``110 percent of the national median of the target 
amount for hospitals in the same class as the hospital * * *.'' Both 
statutory provisions list three classes of hospitals and indicate that 
each ``shall be treated as a separate class of hospitals.'' We believe 
the best reading of the statutory language is that we calculate the 
caps for each class of hospital as a whole. If a hospital chooses to 
subspecialize in high cost patients, it will need to consider the 
impacts the caps on the target amounts will have on its reimbursement.
    Comment: Four commenters believed the caps on the target amounts 
that were calculated under section 4414 are not correct because 
discharge weighting and wage adjustments were not applied to the FY 
1996 target amounts in determining the 75th percentile caps on the 
target amounts.
    Response: The statute directs the Secretary to ``estimate the 75th 
percentile of the target amounts'' for three classes of hospitals. 
Section 4414 does not direct the Secretary to estimate the 75th 
percentile of discharge-weighted target amounts.
    Several commenters contended that we should implement a wage 
adjustment in applying the caps for individual hospitals. Under such a 
wage adjustment, the hospitals within a class of hospitals would be 
capped at different numbers, reflecting different wage adjustments for 
different geographic areas. Implementation of a wage adjustment would 
adversely affect some hospitals. In the August 29 final rule with 
comment period, we calculated the caps without wage adjustments. We 
continue to believe that our methodology for establishing the caps 
reflects the best interpretation of the statute. As discussed below, we 
believe that the statutory language, the statutory scheme, and the 
legislative history, viewed together, strongly argue against making a 
wage adjustment in applying the TEFRA caps.
    Section 1886(b)(3)(H)(i) of the Act, as added by section 4414 of 
the BBA, states that, ``In the case of a hospital or unit that is 
within a class of hospital described in clause (iv), the Secretary 
shall estimate the 75th percentile of the target amounts for such 
hospitals within such class for cost reporting periods ending during 
fiscal year 1996.'' (Emphasis added.) Clause (iv), in turn, lists three 
classes of hospitals and indicates that each ``shall be treated as a 
separate class of hospital.'' Thus, the statute directs the Secretary 
to examine target amounts in a prior period and to calculate a single 
number--the 75th percentile of those target amounts--for each of three 
classes of hospitals.
    Pursuant to this mandate, we examined the best available data to 
identify hospitals within each class of hospitals for the cost report 
period ending during fiscal year 1996, to identify those hospitals that 
were actually subject to a target amount for the cost reporting period 
ending during fiscal year 1996, and to determine the target amounts for 
those hospitals. We then calculated the 75th percentile of those target 
amounts for each class. Thus, we did exactly what the statute directs 
us to do.
    The statutory language directs the Secretary to calculate the 75th 
percentile of target amounts, but it does not explicitly direct or even 
authorize the Secretary to make adjustments to that number after the 
number is calculated. Contrary to the belief of some commenters, our 
decision not to implement a wage adjustment is not based solely on the 
fact that the statute does not explicitly require one. We agree that 
the absence of an explicit instruction, in and of itself, does not 
necessarily mean that the Secretary cannot implement a wage adjustment. 
However, congressional ``silence'' on this issue must be construed in 
light of the statutory scheme and the legislative history, as well as 
policy considerations.
    Two aspects of the statutory scheme argue against making a wage 
adjustment in applying the caps. First, as discussed above, section 
4414 requires us to calculate a separate number for each class of 
hospitals. Congress has established a scheme which directs us to 
recognize differences across types of hospitals, but does not direct us 
to recognize differences in wages. If we were to calculate numbers as 
directed by Congress, and then adjust those numbers for factors that 
the Congress did not address, we would arguably undermine the scheme 
established by the Congress.
    In addition to the ``scheme'' of section 4414 itself, one should 
also consider section 4414 in light of the other statutory provisions. 
Several commenters have pointed out that in several other statutory 
provisions the Congress did explicitly require a wage adjustment. We 
agree that this is significant, but unlike the commenters we believe it 
argues against making a wage adjustment in this context. We concluded 
that, because the Congress explicitly requires wage adjustments in some 
contexts, congressional failure to require a wage adjustment in this 
context reflects a judgment by the Congress that the agency should not 
make one here.
    In addition to the statutory text and scheme, the legislative 
history also supports a single cap applied to all hospitals within each 
class of hospitals. The Conference Report indicates that, under the 
House Bill, a target amount for a PPS-exempt hospital ``could not be 
greater than the 90th percentile of the target amounts for cost 
reporting periods beginning during that fiscal year.'' This language 
indicates that all hospitals within a class would be capped at a single 
number (the 90th percentile). The Conference Report indicates that the 
Senate Amendment contained a similar provision ``except that the target 
amount could not be greater than the 75th percentile of the target 
amount for each class of hospitals.'' Again, this language indicates 
that all hospitals within a given class would be capped at the same 
number (in this case, the 75th percentile rather than the 90th 
percentile).
    The Conference Report then indicates that ``[t]he conference 
agreement includes the House bill, with

[[Page 26346]]

amendments. The Secretary would be required to estimate the 75th 
percentile of the target amounts for each category of hospitals * * 
*.'' There is no reference anywhere in the Conference Report to a wage 
adjustment to the TEFRA caps.
    Thus, we believe the statutory text, the statutory scheme, and the 
legislative history all support a cap that is not adjusted for wages. 
None of these factors by itself is necessarily dispositive, but taken 
together, we believe the best interpretation of the statute is that we 
should not make a wage adjustment.
    While from a broad policy perspective a wage adjustment might be 
appropriate, policy considerations do not dictate a wage adjustment. 
While a wage adjustment might be preferable policy, the lack of a wage 
adjustment is not unreasonable. Congress could reasonably have made a 
judgment that all hospitals within a class should be subject to the 
same cap, whether for administrative ease, budgetary considerations, or 
some other reason.
    Some commenters argue that failure to make a wage adjustment is 
inconsistent with other Medicare payment policies. But a payment cap is 
different from a payment rate. A payment cap does not affect every 
hospital, only hospitals that are above the cap. Therefore, a wage 
adjustment is less imperative in this context. And one could reasonably 
conclude that the Congress made a judgment that the 75th percentile 
reflects a reasonable cap regardless of geographic area. Although we 
believe implementation of the cap without a wage adjustment represents 
the best reading of the statute, we believe that accounting for area 
wage differences is an appropriate policy and would support a hospital 
sponsored legislative change. We would work with Congress to develop 
such a policy and its ramifications.
    Taking into consideration the statutory language, the statutory 
scheme, and the legislative history, we believe the best reading of the 
statute enacted by the Congress is that we should calculate a single 
number for hospitals within each class and not apply a wage adjustment. 
We believe that, in any event, the Secretary's policy is consistent 
with the statute and is reasonable.
    Comment: Three commenters objected to the data we used to calculate 
the caps on the target amounts for long-term care hospitals under 
section 4414. Six commenters objected to the data we used to calculate 
110 percent of the national median of target amounts for long-term care 
hospitals under section 4416. The commenters asserted that the data set 
used to compute the cap incorrectly excluded hospitals, incorrectly 
included hospitals, and reflected inaccurate 1996 target amounts for 
Medicare certified long-term care hospitals. One commenter recommended 
that the caps on target amounts for long-term care hospitals be 
recalculated from ``time to time'' to reverify the data.
    Response: As explained in the final rule with comment period (62 FR 
46018), we developed the caps on the target amounts using the best 
available data to identify hospitals in each class that were subject to 
a target amount and to determine the target amounts for those 
hospitals. We verified the data to the extent possible during the 
extraordinarily short timeframe between the enactment of the BBA 
(August 5, 1997) and the required publication date of the final rule 
(August 29, 1997).
    The commenters contended that the data we used to calculate the 
caps was faulty. First, they argue that we incorrectly excluded 20 
hospitals that were subject to a target amount in 1996 from the 
calculation of the new hospital cap. We have determined that this 
argument is largely erroneous. In fact, 16 of these 20 hospitals were 
new hospitals in their exemption period during 1996; these hospitals 
were exempt from the target amount system and were not subject to a 
target amount in their cost reporting period ending during FY 1996. The 
statute directs us to calculate the 75th percentile ``of target 
amounts,'' so these hospitals were correctly excluded from the 
calculation.
    Of the remaining four hospitals, two hospitals became PPS hospitals 
during or after FY 1996 but did have a target amount for the cost 
reporting period ending in FY 1996. When we were developing the August 
29, 1997 rule, we believed that the two remaining hospitals were in 
their exemption period during FY 1996, but in light of the comments, we 
have determined that these hospitals were subject to a target amount 
during their cost reporting period ending during FY 1996. As discussed 
further below, we are revising the caps (prospectively) to reflect the 
target amounts for these four hospitals.
    The commenters also asserted that the Secretary has the discretion 
to include an additional 15 target amounts for long-term care hospitals 
that were in their exemption period for the cost reporting period 
during FY 1996. The commenters argue that the cost reporting period 
ending during FY 1996 serves as the base period for these hospitals and 
thus the Secretary should include the data for these hospitals in the 
110 percent of the median calculation. Based on the comments, we 
reexamined these hospitals and confirmed that these 15 hospitals were 
in their exemption period for the cost reporting period ending during 
FY 1996. If a hospital was within its exemption period, it was not 
subject to a target amount for the cost reporting period ending in FY 
1996, whether or not that period was ultimately used as the hospital's 
base period for calculating the target amount for future years. Since 
the statute directs us to examine ``target amounts,'' the data for 
these hospitals were properly excluded from the calculations.
    The commenters also contended that we inappropriately included 
hospitals with an average length of stay of less than 25 days in the 
110 percent of the median calculation. Under the statute, a hospital 
may be excluded as a long-term hospital if its average length of stay 
is greater than 25 days. Under our implementing regulations, a hospital 
qualifies to be paid as a long-term care hospital for a given cost 
reporting period if its average length of stay for a prior period is 
greater than 25 days. Therefore, a hospital may be classified as a 
long-term care hospital for a given cost reporting period even if its 
average length of stay for that period ultimately turns out to be less 
than 25 days.
    The hospitals cited by the commenters were classified as long-term 
care hospitals for the cost reporting period ending during FY 1996, and 
were paid under the target amount methodology. Accordingly, these 
hospitals were properly included in the calculations.
    Thus, the commenter's assertions regarding our data were largely 
erroneous. Nevertheless, in light of the information that is now 
available to us, including information in the public comments, we are 
revising the calculations. We are revising the 110 percent of the 
median calculation to include the target amounts for the two hospitals 
described earlier that converted to PPS after the cost reporting ending 
during FY 1996, and the target amounts for the two hospitals that we 
originally believed to be in the exemption period in FY 1996. The 
target amounts for these hospitals appropriately should be included in 
the 110 percent of the median and 75th percentile calculation. The 
addition of these data did not change the 75th percentile calculation. 
We are also including the target amounts for three hospitals which were 
previously excluded because of a lack of wage index data. The target 
amounts for these three hospitals were already included in the 75th 
percentile calculation because

[[Page 26347]]

a lack of wage index data did not impact the calculation of the 75th 
percentile cap.
    As a result of these revisions, the updated 110 percent of the 
national median target amounts for new long-term care hospitals is 
$21,494 for FY 1998. The labor-related share is $15,380 and non labor-
related share $6,114.
    We are applying these revised caps prospectively. For a new long-
term care hospital whose cost reporting period began prior to the 
effective date of this final rule, the revised calculations would apply 
to the portion of the cost reporting period that occurs after the 
revision becomes effective. We note that these revised caps shall be 
the basis for the caps applicable for future cost reporting periods.
    We are making a one-time mid-year revision to the caps because of 
the extraordinary circumstances presented by the timing of the 
enactment of the BBA. We do not agree with the commenter who argued 
that the caps on target amounts for long-term care hospitals should be 
recalculated from ``time to time'' in order to reverify the data. The 
statute provides that the cap in a future year shall be determined by 
taking the cap for the previous year and applying an update factor.
    Comment: One commenter disagreed with the elimination of exception 
payments for a hospital with a target amount that was capped.
    Response: Section 4414 of the BBA establishes a cap, that is, a 
limit, on the target amounts for rehabilitation hospitals and units, 
psychiatric hospitals and units, and long-term care hospitals. 
Generally, we believe it would be anomalous to set a cap on a 
hospital's target amount and then grant the hospital an exception so 
that it could receive payments above the cap.
4. Bonus and Relief Payments (Sec. 413.40(d))
    a. Bonus payments. Section 4415 of the BBA amended section 
1886(b)(1)(A) of the Act to provide that for cost reporting periods 
beginning on or after October 1, 1997, the amount of a bonus payment is 
the lower of the following:
    (1) 15 percent of the difference between the inpatient operating 
costs and the ceiling, or
    (2) 2 percent of the ceiling.
    In addition, section 4415 of the BBA amended section 1886(b)(2) of 
the Act to provide for ``continuous improvement bonus payments'' for 
hospitals that meet certain criteria.
    b. Relief payments. Section 4415 of the BBA amended section 
1886(b)(1) of the Act to provide that for cost reporting periods 
beginning on or after October 1, 1997, if a hospital's operating costs 
are greater than the ceiling but less than 110 percent of the ceiling, 
payment will equal the ceiling. If a hospital's costs are greater than 
110 percent of the ceiling, payment will equal the ceiling plus 50 
percent of the costs in excess of 110 percent of the ceiling. Total 
payment may not exceed 110 percent of the ceiling. Because section 4415 
of the BBA does not provide relief for costs that are within 110 
percent of the ceiling, we made a corresponding change to the exception 
payment provision at Sec. 413.40(g)(1) so that qualification for the 
amount of an exception payment does not encompass costs within 110 
percent of the ceiling.
    We received no public comments on this corresponding change.
5. New Excluded Hospitals and Units (Sec. 413.40(f))
    With the enactment of sections 4416 and 4419 of the BBA, which 
amended section 1886(b)(4) of the Act and added section 1886(b)(7) of 
the Act, Congress established a new framework for payments for new 
excluded providers. First, section 4419(a) amended section 
1886(b)(4)(A)(i) of the Act, to eliminate ``exemptions'' for all 
classes of excluded entities except children's hospitals. Second, 
section 4416 added a new section 1886(b)(7) of the Act to establish a 
new statutory payment methodology for psychiatric hospitals and units, 
rehabilitation hospitals and units, and long-term care hospitals which 
first receives payments on or after October 1, 1997. For these 
hospitals, the amount of payment for each of the first two cost 
reporting periods is the lesser of (1) the operating costs per case, or 
(2) 110 percent of the national median of target amounts for the same 
class of hospitals for cost reporting periods ending during FY 1996, 
updated to the first cost reporting period and adjusted for differences 
in area wage levels. The target amount for the succeeding cost 
reporting periods will be based on the payment amount in the second 12-
month cost reporting period increased by the applicable update factors.
    Comment: One commenter requested clarification as to whether the 6-
month qualification period, during which a long-term care hospital 
demonstrates an average length of stay of greater than 25 days, will be 
included as part of the 2-year exemption period for new excluded 
hospitals under section 4419.
    Response: As explained in the August 29 final rule with comment 
period (62 FR 46019), section 4419 eliminates the 2-year exemption 
period for all classes of excluded hospitals except children's 
hospitals. Thus, effective October 1, 1997, we will no longer grant an 
exemption for new long-term care hospitals. If a hospital qualifies as 
a new-long term care hospital, the statutory payment methodology under 
section 4416 applies for the hospital's first two years as a long-term 
care hospital. A hospital is not classified as a long-term care 
hospital during the 6-month qualification period.
    Comment: Two commenters suggested that Sec. 413.40(f) of the 
regulations be modified to state that the new statutory payment 
methodology of section 4416 does not apply to a hospital or unit that 
changes the basis of its exclusion (for example, from long-term care to 
rehabilitation) on or after October 1, 1997. One commenter, a long-term 
care hospital chain, objected to our policy and asserted that we had 
engaged in retroactive rulemaking and incorrect statutory 
interpretation because an existing PPS hospital that is acquired and 
recertified as a long-term care hospital on or after October 1, 1997 
will now be subject to lower new long-term care hospital caps.
    Response: Section 1886(b)(7) of the Act, as amended by section 4416 
of the BBA, applies ``in the case of a hospital or unit that is within 
a class of hospital described in subparagraph (B) which first receives 
payments on or after October 1, 1997.'' Thus, the statutory payment 
methodology of section 4416 of the BBA applies if two conditions are 
met: (1) the hospital or unit is within one of the classes of hospitals 
specified in the statute (psychiatric, rehabilitation, long-term care), 
and (2) the hospital ``first receives payments on or after October 1, 
1997.'' We believe these two conditions should be read together. That 
is, section 4416 applies if the hospital first receives payments on or 
after October 1, 1997 as a hospital within one of the excluded classes.
    Thus, if a hospital first receives payments on or after October 1, 
1997 as a PPS-excluded hospital in one of the specified classes 
(psychiatric, rehabilitation, or long-term care), then it is subject to 
the statutory payment methodology for new excluded hospitals under 
section 1886(b)(7) of the Act. The methodology for new excluded 
hospitals applies if a hospital received payments as a PPS hospital 
before October 1, 1997 and became excluded on or after October 1, 1997. 
If a hospital received payments as a PPS-excluded hospital in one of 
the classes before October 1, 1997, the hospital would be subject to 
the cap for non-new hospitals under section 1886(b)(3)(H) of the Act, 
as added by section 4414 of the BBA.

[[Page 26348]]

6a. Grandfathering of Certain Hospitals-Within-Hospitals
    Section 4417 of the BBA specifies that a hospital that was 
classified by the Secretary on or before September 30, 1995 as an 
excluded long-term hospital shall continue to be so classified, 
notwithstanding that it is located in the same building as, or on the 
same campus as another hospital. While this provision is specific to 
long-term care hospitals, we believe the considerations underlying the 
legislation also apply to other types of hospitals-within-hospitals. 
Therefore, as explained in the preamble to the August 29, 1997 interim 
final rule with comment period (62 FR 46014), we revised our 
regulations applicable to prospective payment system exclusions of 
``hospitals within hospitals'' to implement section 4417 (a)(1) of the 
BBA, by specifying that if a hospital was excluded from the prospective 
payment system on or before September 30, 1995, the criteria applicable 
to hospitals within hospitals do not apply to it (see Sec. 412.22(f)). 
We also noted that in light of this revision, we were withdrawing our 
earlier proposal to include a specific provision for State-owned 
hospitals-within-hospitals. That provision, described in the June 2, 
1997 proposed rule (62 FR 29902), was designed to allow continued 
exclusion of State-owned facilities that had been operated for many 
years as hospitals-within-hospitals but had not been able to 
restructure themselves because of the requirements of State law.
    Since publication of the August 29, 1997 final rule with comment 
period, some hospital managers and representatives have asked whether 
Sec. 412.22(f) applies only to hospitals that were and were also 
organized as hospitals-within-hospitals on or before September 30, 
1995, or to any hospitals that may have been excluded from the 
prospective payment system on or before that date.
    We wish to clarify that the rule is a grandfathering provision that 
applies only to those hospitals that were excluded from the prospective 
payment system on or before September 30, 1995, and were also organized 
as hospitals-within-hospitals on or before that date. Hospitals that 
were PPS-excluded on or before September 30, 1995, but were not 
excluded as hospitals-within-hospitals at that time, do not qualify for 
exclusion under section 4417(a). If they choose to reorganize 
themselves in ways that result in application of the hospital-within-a-
hospital criteria, they will have to meet these criteria to preserve 
their prospective payment system exclusion status. We are making 
changes in Sec. 412.22(f) to clarify this point.
6b. Capital Payments for Excluded Hospitals and Units (Sec. 413.40(j))
    Section 4412 of the BBA amended section 1886(g) of the Act to 
establish a 15 percent reduction on capital payments for certain 
hospitals and hospital distinct part units excluded from the 
prospective payment system for cost reporting periods beginning on or 
after October 1, 1997, through September 30, 2002. The capital 
reduction applies to psychiatric hospitals and units, rehabilitation 
hospitals and units, and long-term care hospitals.
    Comment: One commenter suggested that Sec. 413.40(j) of the 
regulations be modified to state that the 15-percent reduction for 
capital-related costs required by section 4412 of the BBA does not 
apply to capital-related costs for outpatient services.
    Response: We agree with the commenter and are modifying 
Sec. 413.40(j).
7. Report on Adjustment Payments to the Ceiling (Sec. 413.40(g))
    Section 4419(b) of the BBA amended section 1886(b)(4) of the Act to 
require the Secretary to publish annually, in the Federal Register, a 
report describing the total adjustment payments made to excluded 
hospitals and units for cost reporting periods ending during the 
previous fiscal year. We will publish this report in the annual 
rulemaking documents for the hospital inpatient prospective payment 
systems.

T. Limited-Service Rural Hospital Program

    Prior to the BBA, the statute authorized a seven State Essential 
Access Community Hospital (EACH) and Rural Primary Care Hospitals 
(RPCH) program. RPCHs were limited-service rural hospitals that 
provided outpatient and short-term inpatient hospital care on an urgent 
or emergency basis and then released patients or transferred them to an 
EACH or other acute care hospital.
    Montana also has a separate, limited service hospital program 
called the Medical Assistance Facility (MAF), that has been in 
operation since 1988 and operates under a demonstration waiver from 
HCFA. These limited service hospitals are reimbursed for providing 
treatment to Medicare beneficiaries even though they are not required 
to meet all requirements applicable to hospitals. A total of 12 MAFs 
have been licensed and certified.
    The BBA replaced the EACH/RPCH program with the Medicare Rural 
Hospital Flexibility Program (MRHFP).
    The MRHFP is available in any State that chooses to set up such a 
program and provides HCFA with the necessary assurances that it has 
developed, or is in the process of developing, a State rural health 
care plan meeting certain requirements, and that it has designated, or 
is in the process of designating, rural nonprofit hospitals or 
facilities as critical access hospitals (CAHs).
    To be eligible as a CAH, a facility must be a rural public or 
nonprofit hospital located in a State that has established a MRHFP, and 
must be either located more than a 35-mile drive from any other 
hospital or CAH or certified by the State as being a necessary provider 
of health care services to residents in the area. In mountainous 
terrain or in areas with only secondary roads available, the mileage 
criterion is 15 miles. In addition, the facility must make available 
24-hour emergency care services, provide not more than 15 beds for 
acute (hospital-level) inpatient care, and keep each inpatient for no 
longer than 96 hours, unless a longer period is required because of 
inclement weather or other emergency conditions, or a PRO or other 
equivalent entity, on request, waives the 96-hour restriction. An 
exception to the 15-bed requirement is made for swing-bed facilities, 
which are allowed to have up to 25 inpatient beds that can be used 
interchangeably for acute or SNF-level care, provided that not more 
than 15 beds are used at any one time for acute care. The facility is 
also required to meet certain staffing and other requirements that 
closely parallel the requirements for RPCHs.
    The BBA also defined a rural health network as an organization 
consisting of at least one CAH and at least one acute care hospital, 
the members of which have entered into agreements with at least one 
other member regarding patient referral and transfer, the development 
and use of communications systems, and the provision of emergency and 
nonemergency transportation. In addition, each CAH in a network must 
have an agreement for credentialing and quality assurance with at least 
one hospital that is a member of the network, or with a PRO or 
equivalent entity, or with another appropriate and qualified entity 
identified in the rural health care plan for the State.
    Under the BBA, no new EACH designations will be made, but rural 
hospitals designated as EACHs under previous statutory provisions may 
continue to be paid as sole community

[[Page 26349]]

hospitals. The previous payment provisions applicable to RPCHs are 
repealed, and the statute instead provides that CAHs will be paid on a 
reasonable cost basis for their inpatient and outpatient services. The 
statute specifically provides that existing RPCHs and MAFs will be 
deemed as CAHs if these facilities or hospitals are otherwise eligible 
to be designated by the State as CAHs. Under a special provision 
applicable to the MAF program, the MAF demonstration project is 
extended until at least October 1, 1998, to allow for an appropriate 
transition between the MAF and CAH programs.
    The BBA also provided considerable flexibility to a CAH with a 
swing-bed agreement to use inpatient beds for either SNF or acute care, 
as long as the total number of inpatient beds does not exceed 25 and 
the number of beds used at any one time for acute care does not exceed 
15.
    To allow the changes made by the enactment of the BBA to be 
implemented by the statutory effective date of October 1, 1997, we 
published the August 29, 1997 final rule with comment period that 
retained the provisions of then existing RPCH regulations, except where 
the BBA clearly required us to make a change. In the August 29 final 
rule with comment period, we described in detail the substantive 
changes that we made to parts 409, 410, 412, 413, and 485 to implement 
the section 4201 amendments (62 FR 46008). We also made nomenclature 
changes to reflect the statutory change from RPCHs to CAHs.
    In the August 29 final rule with comment period, we discussed in 
detail the process for review and acceptance of State assurances from 
States interested in establishing a MRHFP (62 FR 46009). Specifically, 
we described the assurances and information that must be included in a 
State's application. We solicited comments on whether the information 
and assurances were sufficient, or whether other information or 
assurances are needed.
    Section 1820(k) of the Act, as in effect prior to the enactment of 
the BBA, explicitly authorized States with EACH programs to designate 
facilities in adjacent States as EACHs or RPCHs if certain conditions 
were met. Section 4201 of BBA revoked that authority. Therefore, a 
facility can be designated as a CAH only by a State in which it is 
located. We revised Sec. 485.606 to remove any reference to this 
authority.
    Section 1820(f)(1)(B) of the Act, as in effect prior to the 
enactment of the BBA, explicitly allowed, under certain circumstances, 
States with EACH programs to designate facilities as RPCHs even though 
the facilities had closed and were no longer functioning as hospitals 
at the time they applied for RPCH status. The BBA removed that 
authority so there is now no basis on which a closed facility can be 
designated as a CAH. We revised Sec. 485.612 to reflect this change.
    We received 33 letters of comment. We summarize the comments and 
give our responses below.
1. State Rural Health Care Plan Review and Approval
    Comment: One commenter stated that in view of differences between 
the various States that may set up a MRHFP, HCFA should not impose 
common standards or criteria on all State plans or, if some common 
standards are needed, should give States advance notice of the 
standards and how they will be applied. Other commenters stated that 
the regulations regarding the development of State rural health plans 
should allow States maximum flexibility in the development of CAHs in 
rural areas of the State. Specifically, the commenters suggested that 
the reference to ``certain requirements'' for the State rural health 
care plan be clarified. The commenters believed that States should be 
given maximum flexibility within a defined format to plan for their 
rural heath care access needs. Also, since the creation of a State 
rural health care plan is reflective of the needs of the health care 
recipients in a given State, the commenters believed it would be 
appropriate to give the regional offices authority to approve these 
State plans. Another commenter stated the CAHs need to be designed to 
permit as much flexibility as possible and to allow linkages with other 
programs to maximize their abilities to serve the frontier areas of the 
individual state. The State rural health care plan must address the 
unique needs and conditions of the particular rural settings within 
their boundaries.
    Response: We recognize that the factors limiting access to care can 
vary from State to State, and even from one rural area to another 
within a State. To account for this diversity, we agree that States 
should be allowed as much flexibility as possible to tailor plans to 
meet the unique needs of their residents and the conditions of the 
particular rural setting, including the needs of those living in 
frontier areas. We also agree that CAHs within a State be given as much 
flexibility as possible. At the same time, however, the BBA requires 
that all State rural health care plans meet certain minimum 
requirements.
    Regarding State responsibilities, the statute specifies that the 
rural health care plan must provide for the creation of one or more 
rural health networks, promote regionalization of rural health services 
in the State, and improve access to hospital and other health services 
for rural residents of the State. In addition, the statute requires the 
State to develop the rural health care plan in consultation with the 
hospital association of the State, rural hospitals located in the 
State, and the State office of rural health. We intend to impose the 
common standards for State rural health care plans only to the extent 
that they are mandated by statute. If HCFA develops any additional 
common standards for the State rural health care plan beyond those 
mandated by the current statute to ensure that the new legislation is 
administered in a fair and predictable way, those requirements would be 
communicated through regulation. Regarding regional office approval, we 
agree that the regional offices should have authority to approve the 
State rural health care plans, and have issued instructions that allow 
them to do this. We do, of course, expect that the regional offices 
will consult with HCFA's central office on any issues having national 
policy significance.
    Comment: Other commenters stated that given their experience under 
the RPCH program, they recommend greater emphasis on the creation and 
maintenance of a rural health network. They suggested that the MRHFP 
will be better served by more fully defining network requirements and 
mandating network membership for CAHs. Another commenter noted that the 
financial incentives used for network formation benefit Medicare 
beneficiaries. They stated that their rural health network has been 
extremely helpful as an enhancement to the care they can provide. One 
commenter suggested that there needs to be a better definition of the 
network described in the regulations, regarding the actual functions of 
the network.
    Response: We support the creation of rural health networks as 
envisioned in the legislation. However, the legislation does not 
preclude an otherwise eligible hospital from becoming a CAH solely 
because it is not a network member. In view of this, we do not believe 
it would be appropriate at this point to mandate network membership. We 
also note that section 1820(d) of the Act defines ``rural health 
network'' and does not explicitly authorize the imposition of any 
additional requirements on networks. In view of these considerations, 
at this point, we have decided not to mandate network membership for 
CAHs or

[[Page 26350]]

impose further requirements on networks.
    Comment: Given the fragile and unstable financial condition of 
small rural hospitals, a lengthy process for reviewing and approving 
State rural health care plans is untenable. Several commenters 
suggested that HCFA should set a 30 or 60 day time limit for review and 
approval of State rural health care plans, and allow States to proceed 
to designate and certify facilities as CAHs based on assurances in a 
draft rural health plan, as long as the State pledges to complete the 
plan in a timely fashion. Another commenter did not specify a timeframe 
for action, but emphasized that HCFA should act quickly on State rural 
health care plans and that all requests for additional information 
should be reasonable in scope, with consistency among regional offices 
as to the type and extent of additional information requested.
    Response: We agree that State rural health care plans should be 
reviewed and approved as quickly as possible, and that requests for 
additional information should be reasonable and specific, so that the 
approval process is not unduly delayed. However, we do not believe a 
self-imposed deadline would be useful to help achieve an expedited 
approval process. States are free to designate facilities under a draft 
plan, but no facility will be assigned a CAH provider number and give a 
provider agreement until the State rural health care plan has been 
approved and the CAH is certified as meeting all the requirements 
following an initial survey by the State agency.
    Comment: Because changes in their circumstances may affect rural 
hospitals' interest in participating in the MRHFP, any list of 
facilities that the State has designated or plans to designate as CAHs 
will not be static, but will change frequently. Commenters suggested 
that instead of requiring the State to submit such a list, HCFA should 
simply ask for a description of the process for State designation, and 
of the criteria used to select hospitals for designation.
    Response: We recognize that there may be frequent changes in any 
list of facilities that the State plans to designate, and agree that it 
is important for the State to describe its selection process and 
criteria clearly. However, we continue to believe a list of current and 
prospective designees is useful in developing an overall view of the 
State program.
    Comment: Some commenters stated that HCFA should allow States great 
flexibility in making ``necessary provider'' certifications, and in 
defining key terms such as ``mountainous terrain'' or ``secondary 
roads.'' The commenter recommended that States be allowed to perform 
these functions without special waivers or centralized review. One 
commenter asked that we refer to States as ``designating'' rather than 
certifying necessary providers. Another commenter stated that the 
statute gives States broad authority to designate facilities as CAHs, 
even if they do not meet statutory requirements such as distance. Still 
another commenter suggested that necessary provider status be dependent 
solely on State designation with no Federal oversight. However, one 
commenter took the opposite view, stating that it is important that 
HCFA provide clear implementation instructions that allow providers and 
HCFA staff to know whether the criteria are met. This commenter 
believed that unless such criteria are developed and issued, there 
could be confusion as to what constitutes mountainous terrain or 
secondary roads.
    Response: We agree that States should have great flexibility in 
making these certifications and in determining how to apply the 
distance requirements in making State designations. However, consistent 
implementation of the statute requires that the regional office also 
exercise oversight over these functions through the State rural health 
care plan approval process, and by ensuring that hospitals are given 
CAH status by the Secretary only if they meet applicable statute and 
regulations. To emphasize the importance of complying with applicable 
statute and regulations, we are revising Sec. 485.606(b)(1) to specify 
that facilities (other than grandfathered facilities) will be 
recognized as CAHs by HCFA only after they have been surveyed and found 
to meet applicable requirements.
    We are also revising the section heading for Sec. 485.606 and the 
paragraph for Sec. 485.606(b) to refer to ``certification'' rather than 
designation by HCFA. This change in terminology is being made for 
consistency with section 1820(e) of the Act which also refers to 
certification by the Secretary.
    Regarding the terms used to describe State findings of necessary 
provider status, we will continue to refer to hospitals ``certified'' 
by the State as necessary providers because that is the term used in 
the statute (section 1820(c)(2)(B)(i)(II) of the Act) and because 
designation is used in another context to denote a finding by the State 
that the hospital meets all requirements to be a CAH under its plan, 
not merely the location requirements (sections 1820(b)(2) and (c)(1) 
and (2) of the Act).
2. Criteria for Designation as a CAH
    Comment: One commenter stated that the existence of the 35-mile 
restriction fails to recognize the value of providing services even 
when certain rural providers are within 35 miles of another hospital, 
and that it fails to take into account the significantly greater 
population density of these rural areas and the importance of 
maintaining service for an older and poorer population where no 
significant transportation systems are in place. The commenter 
encouraged HCFA to reconsider its policy encouraging such limits as the 
35-mile and rather encourage overall implementation of CAH status for 
many rural hospitals in the country. Commenters also noted that in some 
States there are no hospitals located more than 35 miles from others, 
and recommended that the regulations be revised to allow States to 
develop alternative mileage criteria for State designations.
    Response: The statute at section 1820(c)(2)(B)(i)(I) of the Act 
specifically includes the requirement that a hospital seeking CAH 
status be more than 35 miles (or, in mountainous areas or those with 
only secondary roads, 15 miles) from the nearest other hospital or CAH, 
and HCFA does not have the authority to allow States to substitute 
another standard. However, the statute also authorizes States to 
designate otherwise eligible facilities that do not meet the standard 
as CAHs if the State finds the facility is a ``necessary provider''. We 
believe this provision allows States adequate flexibility to deal with 
specific situations in which access is limited even though the 
prospective CAH is within 35 miles of another hospital.
    Comment: One commenter was concerned about the location 
requirements at Sec. 485.610(b)(4) which provide that a CAH must be 
located more than a 35-mile drive from a hospital or another CAH or the 
CAH must be certified by the State as being a necessary provider of 
health care services to residents in the area. The commenter 
interpreted this provision to mean that either the quantified criteria 
fit a particular situation or it is left to the State to determine the 
appropriateness of the necessary provider situation. The commenter also 
stated that the second means of establishing CAH eligibility is not a 
waiver of the first standard; it simply stands apart from the mileage 
criteria.
    Response: As stated previously, section 1820(c)(2)(B)(i)(I) of the 
Act includes a general requirement that a hospital seeking CAH status 
be more than 35 miles (or, in mountainous areas

[[Page 26351]]

or those with only secondary roads, 15 miles) from the nearest hospital 
or CAH. Section 1820(c)(2)(B)(i)(II) provides an exception to that 
general requirement for a hospital that is certified by the State as a 
necessary provider of health care services to residents in the area. We 
do not agree with the commenter's view that the provision for 
``necessary provider'' certification somehow stands apart from the 
basic requirement. On the contrary, it clearly is set up as an 
alternative method of qualifying for a facility which cannot meet the 
basic mileage rule. In this context, we also wish to clarify that the 
necessary provider certification must be specific to each hospital, and 
that we would not accept a blanket statement, unsupported by any other 
information, to the effect that a State considers all hospitals it has 
designated as CAHs to be ``necessary providers.'' We would expect that 
State criteria for making the ``necessary provider'' certification will 
be defined in the State rural health care plan. The States can make the 
designation of necessary provider of health care services to residents 
of an area, however, this is just one of several criteria the facility 
must satisfy to qualify as a CAH. The assertion that these other 
criteria have been met is subject to Secretarial review and approval. 
Section 1820(b)(3) makes it clear that the Secretary may require, as 
part of the application process, ``other information and assurances.'' 
As to the ``necessary provider'' determination, the Secretary may 
require the State to submit the information that formed the basis of 
the State's determination.
    Comment: One commenter suggested that the regulations be clarified 
to allow a State's ``necessary provider'' certification as an 
alternative to the distance criteria. The commenter believed that State 
criteria should be related to community needs and access issues, and 
State criteria should be outlined in the State rural health care plan.
    Response: While we agree that the State should outline its criteria 
in its plan, the regulations at Sec. 486.610(b)(4) already provide for 
certification by the State of a ``necessary provider'' in place of the 
distance requirement and we believe no further clarification is 
necessary.
    Comment: One commenter stated that a per-stay limitation on the 
length of inpatient stay, such as the 96-hour limit imposed under the 
MRHFP, may be more restrictive than the average length of stay rule 
applicable to RPCHs. The commenter noted that PROs are authorized to 
waive the per-stay limit for particular cases, but suggested that 
obtaining such waivers would be burdensome for both the facility and 
the PRO and therefore should be used only rarely. Therefore, the 
commenter indicated an interest in seeking a legislative change to 
return to a rule based on a facility-wide average length of stay, 
saying that such a limit would allow CAHs greater flexibility to serve 
patients.
    Response: Because a change in the statute would be needed to 
authorize use of a length-of-stay limit based on facility averages, we 
have not revised the regulations based on this comment. We will, of 
course, consider the commenter's views in deciding whether to support 
any proposed amendments to the provisions imposing a per-stay limit.
    Comment: One commenter noted that the definition of ``rural'' used 
under both the RPCH and MRHFP regulations, which is the same definition 
used for other Medicare payment purposes, considers each individual 
county to be either ``urban'' or ``rural'' in its entirety. The 
commenter pointed out that there are some large counties that encompass 
both densely populated urban areas and very small, remote rural areas. 
Another commenter expressed the view that the statute should be changed 
to allow use of a definition that recognizes some areas of such 
counties as being ``rural,'' and asked that we support such a change. 
Another commenter simply asked that the implementing regulation at 
Sec. 485.610(b)(2) be changed to reflect this type of situation.
    Response: We agree that a change in the statute would be needed to 
authorize such a definition, since section 1820(c)(2)(B)(i) of the Act 
mandates use of the ``rural'' definition in section 1886(d)(2)(D) of 
the Act. Thus we did not revise the regulations based on these 
comments.
    Comment: One commenter stated that in order to extend acute care 
services to areas that have not previously had access to these 
services, facilities other than hospitals should be considered eligible 
for designation as critical access hospitals. The commenter suggested 
that Congress intended that this be done so that extremely remote 
areas, such as some parts of Alaska, would have access to hospital-
level services for the first time through the MRHFP.
    Response: We do not agree that the intent of the legislation as 
enacted was to expand acute care capacity into new areas. On the 
contrary, we believe it is intended to preserve existing acute care 
capacity by encouraging appropriate downsizing and reduction in the 
scope of services in order to use the remaining capacity in the most 
efficient manner. Furthermore, we note that section 1820(c)(2)(B)(i) of 
the Act, specifies that a State may designate a facility as a CAH only 
if the facility is a hospital. In view of the specificity of the 
statute on this point, we do not believe that either the States or HCFA 
have discretion to designate nonhospital facilities as CAHs.
3. Grandfathering/Transition Issues
    Comment: One commenter asked that we clarify the statutory language 
that would allow RPCHs to be grandfathered as CAHs. A commenter 
suggested that the regulations be revised to grandfather all existing 
RPCHs as CAHs immediately, and all MAFs as CAHs effective October 1, 
1998, following the phaseout of the MAF program. Another commenter 
suggested that existing RPCHs be grandfathered as CAHs without regard 
to whether they are otherwise eligible for State designation. Another 
commenter expressed concern regarding the interpretation of the term 
``otherwise eligible''; the intent being that RPCH facilities that do 
not meet all the new requirements will not be grandfathered in. They 
believe that automatic designation of all existing MAFs and RPCHs as 
CAHs is the only approach that reflects the common meaning of the term 
``grandfathering.'' One commenter believed all existing RPCH facilities 
must be grandfathered and be consistent with the current rules that 
were in effect when the facility was designated as such.
    Response: Under section 1820(h) of the Act, grandfathering is 
available only to MAFs operating in Montana and to RPCHs designated as 
such by the Secretary under section 1820 prior to enactment of the BBA 
(August 5, 1997), if they are otherwise eligible for designation by the 
State under section 1820(c). We have no authority to extend 
grandfathering to other facilities that do not meet these requirements. 
Moreover, when a State represents that a facility should qualify as a 
grandfathered CAH, HCFA may request data to support that representation 
pursuant to section 1820(b)(3) of the Act.
    Comment: One commenter suggested that some special provision be 
made for facilities that were designated as RPCHs under previous 
legislation, but cannot meet the 35-mile distance criterion imposed by 
the new legislation. The commenter noted that such facilities will 
likely be designated as CAHs under the new legislation, and suggested 
that they continue to be treated as RPCHs at least until the State has 
submitted a rural health care plan under the new MRHFP.
    Response: As noted in previous responses, the statute has provided

[[Page 26352]]

States with the authority to certify facilities as ``necessary 
providers'' if the 35-mile criterion is not met. However, for a RPCH to 
be treated as a CAH (assuming it meets the other statutory 
requirements) in lieu of the 35 mile criterion, it will need to be 
certified by the State as being a necessary provider of health care 
services to residents in its area by the beginning of its next cost 
reporting period. However, section 1820(h) of the Act allows 
grandfathering of a MAF or RPCH only if the facility or hospital is 
otherwise eligible and we intend to implement this provision of the 
statute.
4. Payment Issues
    Comment: Under the EACH/RPCH program, EACHs participating in the 
program received sole community status as an incentive for 
participating as a member of a EACH/RPCH network. One commenter pointed 
out that while the regulations allow for the continuation of enhanced 
reimbursement to EACHs, there is no such enhanced payment to acute care 
facilities serving as resources to CAH facilities. The commenter 
recommended sole community reimbursement to those acute care hospitals 
that will assist CAHs.
    Response: Section 4201(c)(4) of the BBA authorized the continuation 
of payment for those hospitals who had participated as EACHs in the 
EACH/RPCH program and, thus, were designated sole community hospitals. 
The regulations reflect this statutory provision. However, we have no 
statutory authority to adopt the commenter's recommendation of allowing 
sole community status for those hospitals assisting the CAHs under the 
MRHFP.
    Comment: One commenter stated that the amendments made by the BBA 
do not necessarily eliminate the all-inclusive payment option for 
outpatient services that was explicitly provided for under prior law 
(section 1834(g)(1)(B) of the Act, as in effect before enactment of the 
BBA). The commenter noted that section 1834(g) of the Act was amended 
to provide for payment of the reasonable cost of the CAH in providing 
the outpatient services, and suggested that the all-inclusive rate 
method, as a cost-based method, would be permitted by the new 
legislation. Commenters also argued that the all-inclusive rate method 
furthers one of the goals of the BBA, in that it encourages the 
development of integrated rural health networks. Thus, the commenter 
recommended that the regulations be revised to again make the all-
inclusive rate method available for outpatient services. Another 
commenter also recommended that the all-inclusive rate option be made 
available to critical access hospitals or, as an alternative, that the 
RPCHs that had elected the all-inclusive method continue to be paid 
under that method at least until October 1, 1998.
    One commenter stated that some facilities that had operated 
provider-based rural health clinics in the past closed those clinics 
and instead elected payment under the all-inclusive rate option, 
thereby benefiting by being able to claim payment at levels of cost 
higher than would be permitted under the physician fee schedule. The 
commenter stated that such facilities may choose to reopen their rural 
health clinics if they are not allowed to continue to claim payment 
under the all-inclusive rate method. The commenter suggested that 
reopening the facilities as RHCs would entail considerable 
administrative expense for the facility and suggested that this could 
be avoided if the all-inclusive option were retained. One commenter 
stated that because of the all-inclusive method they have been able to 
enter into legally binding contracts with health professionals to 
provide skilled medical services. To interrupt these contracts (by 
discontinuing the all-inclusive method) could result in the 
discontinuation of these services to their patients and could prove 
financially detrimental to the well-being of the hospital.
    Other commenters also expressed concern regarding the elimination 
of the all-inclusive method. Of these commenters, one stated that this 
method enabled small rural hospitals to recruit and retain physicians 
because they could integrate the physician and hospital payments. 
Another stated that this method simplified the billing process because, 
by combining the professional portion of an encounter with the 
technical service, time and paperwork are reduced. Several commenters 
stated that elimination of the all-inclusive method will have 
significant financial implications, prevent some hospitals who would 
otherwise benefit from the program from participating, and many rural 
patients will lose access to specialists because this option 
strengthened the ability to recruit traveling physician clinics. 
Another commenter stated that the all-inclusive-rate method should be 
reinstated or, at a minimum, a professional fee should be included in 
the facility cost structure for CAHs.
    Response: We reviewed the commenters' concerns carefully, but we do 
not agree that we have discretion to retain the all-inclusive rate 
option. Under Medicare, physician services to hospital patients are not 
paid through the hospital, but are billed separately to the Medicare 
carrier and paid for under the physician fee schedule (sections 
1832(a)(1), 1861(s)(1), and 1842 of the Act). Facility services are 
billed to the Medicare intermediary. Previous law (specifically, 
section 1834(g)(1)(B) of the Act, as in effect before the enactment of 
the BBA), explicitly authorized an exception to this practice, in that 
it permitted RPCHs to elect to be paid for services to outpatients 
under an all-inclusive rate method, described in that section, which 
reflects the costs of both facility and physician services.
    The BBA amended section 1834(g) of the Act to eliminate the RPCH 
payment methods, including the all-inclusive rate option. Under the 
statute, as amended, the option of paying for physician services to 
hospital patients through payment to the CAH for its costs no longer 
exists. On the contrary, CAHs are to be paid for their reasonable costs 
of facility services. Physician services will be billed separately to 
the Medicare Part B carrier, and payment will be made under the 
physician fee schedule. We also considered the proposal that RPCHs that 
had elected to be paid for outpatient services under the all-inclusive 
rate method be allowed to continue receiving payment under that method 
until October 1, 1998. At this time, we are allowing existing RPCHs 
that are to be grandfathered as CAHs to continue to receive payment 
under the all-inclusive payment until each facility's first cost 
reporting period beginning after October 1, 1997. However, since the 
statute made no provision for extension of this payment methodology for 
CAHs, this payment methodology will be eliminated at the end of the 
period stated above. Continuation of previous payment methods for MAFs 
through September 30, 1998, is possible because section 4201(c)(6) of 
the BBA explicitly authorizes such a transition period for them. 
However, there is no similar provision for RPCHs.
    Regarding RHC conversions, we do not accept the commenter's claim 
that eliminating the all-inclusive payment method will force hospitals 
to set up RHCs. Physicians who provide services to outpatients of CAHs 
are entitled to bill for these services on the same basis as if they 
had been furnished in a hospital outpatient department.
    We agree that one major goal of the legislation is to foster 
networking and appropriate integration of services. However, we believe 
that integration of services through improved coordination, sharing of 
patient information, and other clinical measures does not require that 
physician billing

[[Page 26353]]

and facility billing be integrated, nor that such financial integration 
necessarily encourages clinical integration.
    Comment: Several commenters requested that HCFA clarify that 
coinsurance amounts for CAH services are to be determined based on the 
hospital's charges, as is the case for full-service hospitals and most 
other providers.
    Response: We agree and have made appropriate revisions to 
Sec. 410.152(k) in these final rules.
    Comment: The principle of lesser of cost or charges was not applied 
to RPCH payment determinations under previous statutory provisions. 
Commenters recommended that HCFA clarify that this principle also does 
not apply in determining the amount of payment for CAH services.
    Response: We agree and have made revisions to Secs. 413.13(c)(2) 
and 413.70 to specify that this principle does not apply to CAH payment 
determinations.
    Comment: One commenter stated that some CAHs may need to use locum 
tenens (temporary substitute) physicians to maintain the availability 
of emergency services on a 24-hour basis. The commenter recommended 
that the regulations be revised to state that costs of locum tenens 
physicians are allowable.
    Response: As is the case for full-service hospitals, standby costs 
of emergency room physicians who are present at the emergency room are 
allowable costs and will, to the extent they are reasonable in amount, 
be taken into account in computing Medicare payment. However, Medicare 
does not recognize costs of ``on-call'' physicians as allowable costs 
of operating a CAH.
    Comment: One commenter asked for clarification as to which specific 
reasonable cost payment principles will be applied in determining 
payment to CAHs. Specifically the commenter asked whether, for 
inpatient services, CAHs would be subject to the principles of lesser 
of cost or charges, ceilings on the rate of hospital cost increases, 
limits on payment for services of physical, occupational, and other 
therapy services furnished under arrangements, reasonable compensation 
equivalent (RCE) limits on payments for services of physicians to 
providers, and the SNF routine nursing service cost limits. With 
respect to outpatient services, the commenter asked whether payment 
would be subject to the principles of lesser of cost or charges, 
reasonable compensation equivalent (RCE) limits on payments for 
services of physicians to providers, the 5.8 percent operating cost 
reduction, the capital cost reduction, blended payment amounts for ASC, 
radiology, and other diagnostic services, and the fee schedule for 
clinical laboratory tests.
    Response: We plan to apply the limits on physical, occupational, 
speech, and other therapy services furnished under arrangements in 
determining the reasonableness of costs of both inpatient and 
outpatient services. We do not plan to apply the principles of lesser 
of cost or charges; ceilings on the rate of hospital cost increases; 
any type of reductions of operating or capital costs under Sec. 413.24 
or Sec. 413.130(j)(7); the blended payment amounts for ambulatory 
surgical centers (ASC) services, radiology, and other diagnostic 
services; or the clinical laboratory fee schedule. We do not plan to 
apply RCE limits on payments of physicians to providers. However, we 
note that the costs of these services will be subject to both the 
prudent buyer principle (section 2103 of the Medicare Provider 
Reimbursement Manual) and the requirement that costs not be 
``substantially out of line'' with those of other, similar institutions 
(Sec. 413.9(c)(2)). Intermediaries are authorized to examine all 
claimed costs to make sure they are not substantially out of line. An 
intermediary might in this respect refer to the RCE limits as one guide 
as to what may be reasonable in a given case. We have not specified 
that the SNF routine cost limits do not apply to CAHs, since this is 
self-evident.
    Comment: One commenter suggested that, to ensure that payment 
policies are applied uniformly in all States and to make it easier for 
critical access hospitals to have questions answered and problems 
resolved, a single national intermediary should be designated to handle 
all CAH payment.
    Response: In the case of both hospitals and CAHs, the intermediary 
for a particular facility is determined by the location of the 
facility. In general, each facility is serviced by a nonprofit or 
commercial insurance plan that also administers other health insurance 
programs for facilities in the State, and is familiar with 
characteristics of health care delivery systems in that State. 
Therefore, use of the existing intermediaries to make payment to CAHs 
should help contribute to an orderly transition to the new program, 
since the intermediary servicing a facility as a CAH would also have 
serviced it as a hospital or RPCH and would be fully familiar with the 
facility's operation and cost characteristics. However, we agree that 
use of a single national intermediary (or regional intermediaries) 
would appear to have some advantages in terms of ensuring that payment 
is made uniformly and consistently. We will consider this suggestion 
further and evaluate the feasibility of a single national intermediary 
at some time in the future.
5. Other Issues
    Comment: One commenter stated that both the RPCH and CAH 
regulations allow facilities to close at times when there are no 
inpatients, as long as the emergency services requirements in 
Sec. 485.618 are met. The commenter stated that existing regulations 
allow emergency services to be provided through a triage and on-call 
system, while anti-dumping requirements under section 1867 of the Act 
require that all patients coming to the emergency room be seen by a 
physician or midlevel practitioner. The commenter stated that 
compliance with the provisions of section 1867 of the Act will increase 
a CAH's cost of operating an outpatient department and suggested that 
retention of the all-inclusive rate is needed to meet the added cost.
    Response: The emergency services requirements for CAHs are exactly 
the same as they were for RPCHs, as are the section 1867 provisions on 
examination and treatment for emergency medical conditions and women in 
labor (as implemented under Secs. 489.20(q) and 489.24). Except for the 
change in terminology from RCPH to ``critical access hospital'', the 
regulations at Sec. 485.618 were not changed in any way. With respect 
to personnel, these regulations provide (in paragraph (d)) that there 
must, on a 24-hour a day basis, be a practitioner with training and 
experience in emergency care on call and immediately available by 
telephone or radio contact, and available on site within 30 minutes. 
The practitioner referred to may be an M.D. or D.O, a physician 
assistant, or a nurse practitioner. Within this minimum staffing 
requirement, the CAH is obligated by the regulations at Sec. 489.24 to 
provide an appropriate medical screening examination and, if necessary, 
stabilizing treatment to any person who comes to the emergency room and 
requests examination or treatment, or has such a request made on his or 
her behalf. As noted in Sec. 489.24, these services need only be 
provided within the capability of the CAH's emergency department. Thus, 
the transition to CAH status should not generate any additional costs 
for the facility.
    Comment: One commenter stated that Congress clearly intended to 
allow CAHs to maintain swing beds, and suggested that restricting CAH 
swing-bed agreements to those facilities that

[[Page 26354]]

had such agreements as full-service hospitals or as RPCHs would be 
unfair to other hospitals and former RPCHs, and could limit access to 
skilled nursing services for Medicare patients. Therefore, the 
commenter suggested that we revise the regulations to make it clear 
that hospitals or RPCHs that do not have swing-bed agreements at the 
time they become CAHs are free to enter into those agreements later, if 
they meet the requirements in Sec. 485.645.
    Response: We agree and have revised Sec. 485.645(a)(1) to eliminate 
the requirement that a facility have had a hospital swing-bed agreement 
when it applied for CAH designation.
    Comment: One commenter recommended that, for purposes of waiving 
the 96-hour length of stay restriction under Sec. 482.620(b), we 
provide that peer review organizations (PROs) should have discretion to 
base decisions only on clinical judgment of specific cases, without 
having to follow guidelines imposed by HCFA. One commenter also states 
that the 96 hours length of stay should be an average of 96 hours.
    Response: We agree that PROs will necessarily have to make case-
specific clinical judgements to implement this waiver provision, and do 
not plan to release any guidelines to them in the near future. However, 
further experience with the program may indicate a need for centralized 
guidelines to ensure that the waiver provision is implemented uniformly 
in all States, and if such guidelines are needed they will be issued. 
As to an average of 96 hours length of stay, the statute is clear that 
the longest stay permitted will be a 96-hour period, that is, the 96-
hour limit will be applied on a per-stay basis rather than to the 
facility-wide average length of stay. Consequently, we made no changes 
in the regulations based on this comment.
    Comment: One commenter stated that revised Sec. 485.612 
(``Compliance with hospital requirements at time of application'') 
would effectively eliminate participation in the CAH program by 
hospitals that are licensed but not certified. The commenter believed 
the intent of Congress was to limit CAH candidates to only hospitals in 
full compliance with the Medicare/Medicaid conditions of participation 
at the time of application.
    Response: We agree, the MRHFP was established through changes to 
the Medicare law and its purpose is to preserve access to services by 
Medicare beneficiaries. Hospitals that do not participate in Medicare 
cannot be paid for nonemergency services to Medicare patients, and thus 
do not serve as a source of care for most Medicare services. In view of 
this, we do not believe there is any basis for making CAH designations 
available to these hospitals. This approach is consistent with previous 
RPCH policy and with the statutory requirement that only hospitals be 
designated as CAHs.
    Comment: One commenter stated that it would serve the Medicare 
program well to permit CAHs more flexibility in the realm of surgery. 
As a RPCH, they performed only ambulatory type surgeries, while as an 
acute care hospital they performed several types of low complexity 
general surgeries. These low complexity cases were done safely, 
economically, and close to home. They believe that this flexibility 
would serve to enhance their ability in emergency cases.
    Response: Under previous statute and regulations (section 
1820(f)(1)(F)(ii) and 42 CFR 485.614(b)(3)), RPCHs were restricted to 
certain types of inpatient surgical and other services requiring 
general anesthesia, except in emergency cases where the attending 
physician certified that the risk of transfer to a hospital outweighed 
the benefits of the transfer. This restriction was removed by the BBA, 
and Sec. 485.614 was also removed in the August 29, 1997 final rule 
with comment period. Of course, CAHs are still required to comply with 
any State licensure laws affecting their scope of services.
    Comment: One commenter stated that CAH legislation requires 
credentialing and quality assurance review to be done by another 
facility. Currently, many providers that might seek CAH designation do 
their own credentialing and quality assurance review. The commenter 
believes that requiring outside performance of these functions would be 
unreasonable and would recommend some type of grandfathering of these 
responsibilities.
    Response: The commenter correctly notes that the statute requires 
that a network CAH's credentialing and quality assurance review be done 
by an outside entity. We have amended Sec. 485.603(c) to reflect this 
and require all network CAHs to have an agreement for credentialing and 
quality assurance with at least one hospital that is a network member, 
one PRO or equivalent entity, or one other appropriate and qualified 
entity identified in the State rural health care plan. We have also 
made a conforming change and have revised Sec. 485.641(b)(4) to allow 
the same three options for the review of the quality and 
appropriateness of the diagnosis and treatment furnished by doctors of 
medicine or osteopathy at the CAH. We recognize that where a facility 
is located in an extremely remote area, performance review and 
credentialing by an outside entity can present practical problems. On 
the other hand, given the small numbers of practitioners furnishing 
services in a CAH, it may be difficult or impossible to achieve 
objective in-house review. The majority of CAHs have a limited number 
of staff and resources to accomplish credentialing and quality 
assurance in an efficient and effective manner. Assistance from a 
knowledgeable source outside the facility will enable the CAH to be 
more efficient in the utilization of their immediate resources. We 
encourage CAHs to develop strategies for electronic sharing of patient 
records and other data related to practitioner performance and quality 
assurance.
    Comment: One commenter noted that the statutory provision 
authorizing grandfathering of essential access community hospitals 
(EACHs) required only that the hospitals have been designated by the 
Secretary as EACHs under the statute in effect on September 30, 1997 
(section 1886(d)(5)(D) of the Act, as amended by section 4201(c)(4) of 
the BBA). In this commenter's view the revised regulations at 
Sec. 412.109(a) are more restrictive, in that they would require the 
hospital, to retain its EACH status, to comply with the terms, 
conditions, and limitations that were applicable when HCFA designated 
the hospital as an EACH. The commenter noted that the definition of 
``network'' under the new legislation differs from the regulatory 
criteria for EACH designation that were in effect before October 1, 
1997, in that previously regulations required the EACH to provide 
emergency and medical backup services to RPCHs participating in the 
network of which it is a member as well as to other RPCHs throughout 
its service area, while the new statutory definition of a ``network'' 
does not include a specific requirement for emergency and medical 
backup services. The commenter stated that an EACH should not lose its 
EACH designation solely because it changes its network agreements to 
conform to the new statutory requirements.
    Response: This commenter is correct in noting that the network 
definition under the current statute differs from the EACH designation 
criteria previously in effect. We agree that network agreements entered 
into after the effective date of the new provision (October 1, 1997) 
should reflect current statutory requirements. However, it does not 
necessarily follow that a hospital should be able to change the terms 
of its agreements made under a previous statutory provision, while 
maintaining

[[Page 26355]]

an advantageous level of payment available under that same previous 
statutory provision. Thus, if a hospital designated as an EACH under 
prior statute wants to retain its sole community hospital status, it 
will have to abide by the agreements it made in order to obtain its 
EACH designation. If the hospital wants to scale down its 
responsibilities to the level required by current statute for an acute 
care hospital that is a network member, it is free to do so but will no 
longer be able to claim sole community hospital status. The hospital 
clearly will not be permitted to scale down its obligations but 
continue to be paid as if it were assuming those responsibilities.
    Comment: Two commenters asserted that managed care involvement 
should be allowed with recognition and protection for low volume. They 
recommended that Medicare+Choice plans should allow for CAH 
participation.
    Response: There is no prohibition on the use of CAH services under 
managed care or Medicare+Choice. However, we have no authority to 
mandate the level of payment by these plans to the CAHs.
    Comment: Two commenters recommended that CAHs be allowed to link 
formally with other Federal programs such as Rural Health Clinics, 
Public Health, and emergency medical service.
    Response: Under the new legislation, a new MRHFP was established. 
Under this program, States are encouraged to set up rural health 
networks. These networks are defined as an organization consisting of 
at least one CAH and at least one full-service hospital. As to the CAH 
linking with other types of organizations, there is no statutory 
prohibition against a State establishing these linkages under its rural 
health care plan, and there is nothing in the regulations that 
precludes CAHs from participating in other Federal programs. Each 
program would be required to independently meet the applicable Federal 
regulations. A CAH that participates in any additional Federal programs 
would be responsible for compliance with all the Medicare CAH 
requirements and any other program requirements in which it 
participates.
    Comment: Communities with CAHs should receive an exception to the 
EMS restrictions, since they do not have the funds to provide quality 
EMS service.
    Response: We do not believe our emergency medical service 
requirements are complicated or complex requirements. Rather, in our 
development of the original conditions of participation, we attempted 
to be flexible and sympathetic to the need of these facilities. We do 
not believe we can be any more flexible and remain within the confines 
of the statute.
    Comment: Several commenters requested additional funding to support 
survey and certification activities. They believe that Federal grant 
funding should be used to support survey and certification activities, 
combined CAH and hospital surveys should be allowed, and States should 
recognize CAH participation in EMS and trauma planning.
    Response: Congress did not authorize an appropriation of additional 
funds to survey critical access hospitals. CAH initial surveys will be 
scheduled and conducted by the State survey agencies in accordance with 
national priorities which reflect statutorily mandated workload 
requirements and budget realities. Federal grant funding is not 
authorized to support survey and certification activities. In addition, 
CAH and hospital surveys would not be combined, as these providers are 
statutorily and categorically different entities and subject to 
separate requirements. We do not see the added value of attempting to 
combine hospital and CAH surveys. Regarding the comment that States 
should recognize CAH participation in EMS and trauma planning, we 
believe this comment is addressed to the States rather than to HCFA in 
implementation of the MRHFP.
    Comment: Some commenters recommended that HCFA take action to 
increase understanding of the Medicare Rural Hospital Flexibility 
Program and simplify its implementation.
    Response: We agree, and have attempted to provide interim guidance 
wherever possible to clarify the requirements of the Medicare Rural 
Hospital Flexibility Program legislation. For example, we recently 
provided our regional offices with guidance on implementing the 
requirement that a hospital seeking CAH designation provide not more 
than 15 (or, in the case of a swing-bed facility, 25) acute care 
inpatient beds. Because of the specificity of the law on this point, a 
State rural health care plan would not be approvable unless it 
specified that potential CAHs would provide not more than the allowed 
number of acute care inpatient beds, and a hospital that provided more 
than the allowed number of beds would not be eligible for State 
designation as a CAH, and could not be certified by the Secretary as a 
CAH. CAHs are, as limited-service facilities, subject to less rigorous 
standards than full-service hospitals and it is important to ensure 
that they are truly low-volume, short-stay facilities as envisioned in 
the statute. However, this does not mean that each hospital seeking CAH 
designation must necessarily reduce its State licensure to the 15 or 
25-bed level. It does mean the hospital must reduce its number of 
Medicare certified beds to the allowed level (15 or 25 beds) and that 
it has to actually provide no more than the number of inpatient acute 
beds for which it is Medicare-certified, or risk termination of its 
Medicare participation agreement and loss of all Medicare revenue. 
Since the CAH designation is related to how the facility is certified 
for participation under the Medicare program, we believe the use of 
Medicare certified beds is appropriate. Further, the use of Medicare 
certified beds is consistent with the policies on hospital and CAH 
swing-beds (see Secs. 482.66 and 485.645).
    We note that for cost reporting and certain payment provisions (for 
example, Medicare-dependent hospitals and the indirect medical 
education adjustment), a facility's bed size is based on the average 
number of beds available and maintained over the cost reporting period. 
We do not believe it would be appropriate to use this measure of bed 
size for purposes of CAH certification. First, it is based on an 
average number of beds that are available over the cost reporting 
period. The statute establishes an absolute limit on the number of beds 
that may be provided at any point in time during the cost reporting 
period. Secondly, this measure can only determine bed size 
retrospectively and is not useful as a prospectively applicable measure 
of compliance with the limits on beds provided by CAHs.
    Comment: Two commenters suggested that CAHs and their communities 
that have been given incentives to provide services in underserved 
areas (HPSAs or MUAs) should be allowed to keep those incentives after 
the need for them has passed, so the practitioners recruited through 
the incentives do not leave, leading to new shortages.
    Response: With regard to the commenters' concern regarding 
previously given incentives, such incentives were not granted by us, 
and therefore; we have no authority to permit the continuance of such 
incentives. The MRHFP was established to assist such rural hospitals 
that may need the support of other facilities by setting up networks 
with agreements with full service facilities concerning transportation 
and communications, not as an incentive for recruitment of 
practitioners.

[[Page 26356]]

III. Provisions of the Final Rule

    In summary, in this final rule, we are making changes to the 
following regulations in 42 CFR as described in the preceding portions 
of this preamble:

<bullet> Section 410.152
<bullet> Section 412.105
<bullet> Section 413.13
<bullet> Section 413.40
<bullet> Section 413.70
<bullet> Section 413.86
<bullet> Section 415.152
<bullet> Section 485.603
<bullet> Section 485.641
<bullet> Section 485.645

Technical Corrections

    <bullet> Regarding the Medicare geographic classifications, we are 
making two technical changes:

--In Sec. 412.230, paragraph (e)(3), the phrase ``If a hospital is a 
rural referral center,'' is revised to read ``If a hospital was ever a 
rural referral center''.
--In Sec. 412.256, paragraph (a)(2), the phrase ``the month preceding'' 
is revised to read ``the 13-month period preceding''.

<bullet> In regard to inpatient hospital capital costs, we are making a 
cross-reference change in Sec. 412.322(a)(1) to change the phrase 
``under Sec. 412.105(g)'' to read ``under Sec. 412.105(f)''.

IV. Impact Statement

    We have examined the impact of this final rule as required by 
Executive Order 12866 and the Regulatory Flexibility Act (RFA) (Public 
Law 96-354). Executive Order 12866 directs agencies to assess all costs 
and benefits of available regulatory alternatives and, when regulation 
is necessary, to select regulatory approaches that maximize net 
benefits (including potential economic, environmental, public health 
and safety effects; distributive impacts; and equity). The Regulatory 
Flexibility Act (RFA) requires agencies to analyze options for 
regulatory relief for small businesses, unless we certify that the 
regulation would not have a significant economic impact on a 
substantial number of small entities. For purposes of the RFA, most 
hospitals, and most other providers, physicians and health care 
suppliers are small entities, either by nonprofit status or by having 
revenues of $5 million of less annually.
    Also, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a final rule may have a significant 
impact on the operations of a substantial number of small rural 
hospitals. This analysis must conform to the provisions of section 603 
of the RFA. With the exception of hospitals located in certain New 
England counties, for purposes of section 1102(b) of the Act, we define 
a small rural hospital as a hospital with fewer than 100 beds that is 
located outside of a Metropolitan Statistical Area (MSA) or New England 
County Metropolitan Area (NECMA). Section 601(g) of the Social Security 
Amendments of 1983 (Public Law 98-21) designated hospitals in certain 
New England counties as belonging to the adjacent NECMA. Thus, for 
purposes of the prospective payment system, we classify these hospitals 
as urban hospitals. We are not preparing an analysis for section 
1102(b) of the Act because we have determined, and we certify, that 
this final rule will not have a significant impact on the operations of 
a substantial number of small rural hospitals.
    In the August 29, 1997 final rule with comment period, we discussed 
in detail the impact of the provisions of the BBA (62 FR 46115). We 
stated that several provisions of the statute made significant changes 
in inpatient hospital payments for the operating and capital 
prospective payment systems during FY 1998. The major portion of this 
final rule merely responds to comments on the August 29 final rule with 
comment period and makes clarifying changes. However it does make a few 
policy changes that have an impact on hospitals as follows:

1. Graduate Medical Education

    Section 4623 of the BBA established a limitation on the number of 
residents that a hospital can receive Medicare direct and indirect 
medical education payments. This final rule will provide hospitals with 
more opportunities to receive adjustments to the FTE caps for GME for 
medical residency programs established on or after January 1, 1995. 
While this may result in Medicare paying for more residents than under 
the policies announced in the August 29, 1997 final rule with comment 
period, we anticipate this impact will be modest. In addition, 
hospitals that are members of the same affiliated group will also have 
more flexibility relative to the August 29, 1997 final rule with 
comment period under an aggregate FTE cap. We believe that these 
changes will have a minimal (if any) financial impact on the Medicare 
program.

2. Excluded Hospitals and Units

a. Limitations on the Target Amount
    In accordance with section 4416 of the BBA, we calculated a cap on 
the TEFRA target amounts for new PPS-excluded hospitals. This cap is 
set at 110 percent of the median target amount for each type of 
hospital. We have recalculated the 110 percent of the median target 
amount for new long-term care hospitals, based on a review of the data. 
As a result the limit will be revised from $18,947 to $21,494. 
Therefore, fewer new long-term care hospitals will be adversely 
affected by the cap. Although we do not know the precise financial 
impact of this change, we estimate that any additional costs to the 
Medicare program will be small given the small number of long-term care 
hospitals that could potentially be affected.
b. Critical Access Hospitals--Credentialing and Quality Assurance
    We are requiring all CAHs to have an agreement for credentialing 
and quality assurance with at least one hospital that is a network 
member, one PRO or equivalent entity, or one other appropriate and 
qualified entity identified in the State rural health care plan. For 
facilities located in an extremely remote area, performance review and 
credentialing by an outside entity can present practical problems. 
However, given the small numbers of practitioners furnishing services 
in a CAH, it may be difficult or impossible to achieve objective in-
house review. Therefore, making the requirements consistent will allow 
the providers more flexibility in selecting an entity to perform the 
credentialing and quality assurance functions. We believe that this 
requirement would not present an additional financial burden to the 
provider.
c. Critical Access Hospitals--Swing-Bed Agreements
    Previously, swing-bed agreements were restricted to those 
facilities that had hospital swing-bed agreements at the time of their 
becoming a CAH. However, due to comments received, we have changed the 
regulations to clarify that hospitals or rural primary care hospitals 
that do not have swing-bed agreements at the time they become CAHs may 
enter into such agreements at a later time if they meet the swing-bed 
requirements. This change will increase the number of CAHs that may 
qualify for swing-bed agreements, and thus may lead to additional 
utilization of SNF-level services and higher costs. However, at this 
time, we are unable to estimate the number of facilities that will 
request participation in the swing-bed program, or estimate whether or 
not utilization and costs will increase.
    For purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside a Metropolitan 
Statistical Area and has

[[Page 26357]]

fewer than 50 beds. We are not preparing an analysis for section 
1102(b) of the Act because we have determined, and we certify, that 
this final rule will not have a significant impact on the operations of 
a substantial number of small rural hospitals.
    In accordance with the provisions of Executive Order 12866, this 
final rule was reviewed by the Office of Management and Budget.

List of Subjects

42 CFR Part 410

    Health facilities, Health professions, Kidney diseases, 
Laboratories, Medicare, Rural areas, X-rays.

42 CFR Part 412

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

42 CFR Part 413

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

42 CFR Part 415

    Health facilities, Health professions, Medicare, Reporting and 
recordkeeping requirements.

42 CFR Part 485

    Grant programs-health, Health facilities, Medicaid, Medicare, 
Reporting and recordkeeping requirements.

    42 CFR chapter IV is amended as set forth below:
    A. Part 410 is amended as set forth below:

PART 410--SUPPLEMENTARY MEDICAL INSURANCE (SMI) BENEFITS

    1. The authority citation for part 410 continues to read as 
follows:

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

Subpart I--Payment of SMI Benefits


Sec. 410.152  [Amended]

    2. In Sec. 410.152, paragraph (k), second sentence, the phrase 
``coinsurance amounts, as described in Sec. 413.70(b)(3) of this 
chapter'' is revised to read ``coinsurance amounts with Part B 
coinsurance being calculated as 20 percent of the customary (in so far 
as reasonable) charges of the CAH for the services''.
    B. Part 412 is amended as set forth below:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

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

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

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

    2. In Sec. 412.22, paragraph (f) is revised to read as follows:


Sec. 412.22  Excluded hospitals and hospital units: General rules.

* * * * *
    (f) Application for certain hospitals. If a hospital was excluded 
from the prospective payment systems under the provisions of this 
section on or before September 30, 1995, and at that time occupied 
space in a building also used by another hospital, or in one or more 
buildings located on the same campus as buildings used by another 
hospital, the criteria in paragraph (e) of this section do not apply to 
the hospital.
* * * * *

Subpart G--Special Treatment of Certain Facilities Under the 
Prospective Payment System for Inpatient Operating Costs

    3. In Sec. 412.105, the last sentence of paragraph (a)(1) is 
revised, the parenthetical phrase in the last sentence of paragraph 
(f)(1)(v) is revised, and new paragraphs (f)(1)(vi) and (vii) are added 
to read as follows:


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

* * * * *
    (a) * * *
    (1) * * * Except for the special circumstances for affiliated 
groups and new programs described in paragraphs (f)(1)(vi) and 
(f)(1)(vii) of this section, for a hospital's cost reporting periods 
beginning on or after October 1, 1997, this ratio may not exceed the 
ratio for the hospital's most recent prior cost reporting period.
* * * * *
    (f) * * *
    (1) * * *
    (v) * * * (subject to the requirements set forth in paragraphs 
(f)(1)(ii)(C) and (f)(1)(iv) of this section) * * *
    (vi) Hospitals that are part of the same affiliated group (as 
described in Sec. 413.86(b)) may elect to apply the limit at paragraph 
(f)(1)(iv) of this section on an aggregate basis.
    (vii) If a hospital establishes a new medical residency training 
program, the hospital's FTE cap may be adjusted in accordance with the 
provisions of Sec. 413.86(g)(6)(i) through (iv).
* * * * *

Subpart L--The Medicare Geographic Classification Review Board


Sec. 412.230  [Amended]

    4. In Sec. 412.230, paragraph (e)(3), the phrase ``If a hospital is 
a rural referral center,'' is revised to read ``If a hospital was ever 
a rural referral center''.


Sec. 412.256  [Amended]

    5. In Sec. 412.256, paragraph (a)(2), the phrase ``the month 
preceding'' is revised to read ``the 13-month period preceding''.

Subpart M--Prospective Payment System for Inpatient Hospital 
Capital Costs


Sec. 412.322  [Amended]

    6. In Sec. 412.322(a)(1), the phrase ``under Sec. 412.105(g)'' is 
revised to read ``under Sec. 412.105(f)''.
    C. Part 413 is amended as set forth below:

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

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

    Authority: Secs. 1102, 1861(v)(1)(A), and 1871 of the Social 
Security Act (42 U.S.C. 1302, 1395x(v)(1)(A), and 1395hh).

Subpart A--Introduction and General Rules

    2. In section 413.13, a new paragraph (c)(2)(iv) is added to read 
as follows:


Sec. 413.13  Amount of payment if customary charges for services 
furnished are less than reasonable costs.

* * * * *
    (c) * * *
    (2) * * *
    (iv) Critical access hospital (CAH) services. The lesser of costs 
or charges principle does not apply in determining payment for 
inpatient or outpatient services furnished by a CAH under Sec. 413.70.
* * * * *

[[Page 26358]]

Subpart C--Limits on Cost Reimbursement

    3. Section 413.40 paragraphs (c)(4)(iii) and (j) are revised to 
read as follows.


Sec. 413.40  Ceiling on the rate-of-increase in hospital inpatient 
costs.

* * * * *
    (c) * * *
    (4) * * *
    (iii) In the case of a psychiatric hospital or unit, rehabilitation 
hospital or unit, or long-term care hospital, the target amount is the 
lower of--
    (A) The hospital-specific target amount (the net allowable costs in 
a base period increased by the applicable update factors); or
    (B) One of the following for the applicable cost reporting period--
    (1) For cost reporting periods beginning during fiscal year 1998, 
the 75th percentile of target amounts for hospitals in the same class 
(psychiatric hospital or unit, rehabilitation hospital or unit, or 
long-term care hospital) for cost reporting periods ending during FY 
1996, increased by the applicable market basket percentage up to the 
first cost reporting period beginning on or after October 1, 1997.
    (2) For cost reporting periods beginning during fiscal years 1999 
through 2002, the amount determined under paragraph (c)(4)(iii)(B)(1) 
of this section, increased by the market basket percentage up through 
the subject period, subject to the provisions of paragraph (c)(4)(iv) 
of this section.
* * * * *
    (j) Reduction to capital-related costs. For psychiatric hospital 
and units, rehabilitation hospitals and units, and long-term care 
hospitals, the amount otherwise payable for capital-related costs for 
hospital inpatient services is reduced by 15 percent for portions of 
cost reporting periods occurring on or after October 1, 1997 through 
September 30, 2002.

Subpart E--Payments to Providers

    4. Section 413.70 is revised to read as follows:


Sec. 413.70  Payment for services of a CAH.

    (a) Except as provided in paragraph (b) of this section, payment 
for inpatient and outpatient services of a CAH is the reasonable costs 
of the CAH in providing such services, as determined in accordance with 
section 1861(v)(1)(A) of the Act and the applicable principles of cost 
reimbursement in this part and in part 415 of this chapter.
    (b) The following payment principles are excluded when determining 
payment for CAH inpatient and outpatient services:
    (1) For inpatient services--
    (i) Lesser of cost or charges;
    (ii) Ceilings on hospital operating costs; and
    (iii) Reasonable compensation equivalent (RCE) limits for physician 
services to providers;
    (2) For outpatient services--
    (i) Lesser of costs or charges;
    (ii) RCE limits;
    (iii) Any type of reduction to operating or capital costs under 
Sec. 413.124 or Sec. 413.130(j)(7) of this part;
    (iv) Blended payment amounts for ASC, radiology, and other 
diagnostic services; and
    (v) Clinical laboratory fee schedule.

Subpart F--Specific Categories of Costs

    5. In Sec. 413.86, the definition of ``affiliated group in 
paragraph (b) is revised, paragraph (g)(5) is amended by adding new 
sentences at the end of the paragraph, and paragraphs (g)(6)(i), 
(g)(6)(ii), and (g)(7) are revised to read as follows:


Sec. 413.86  Direct graduate medical education payments.

* * * * *
    (b) * * *
    Affiliated group means--
    (1) Two or more hospitals located in the same urban or rural area 
(as those terms are defined in Sec. 412.62(f) of this subchapter) or in 
contiguous areas if individual residents work at each of the hospitals 
during the course of the program; or
    (2) If the hospitals are not located in the same or a contiguous 
urban or rural area, the hospitals are jointly listed--
    (i) As the sponsor, primary clinical site or major participating 
institution for one or more of the programs as these terms are used in 
Graduate Medical Education Directory, 1997-1998; or
    (ii) As the sponsor or under ``affiliations and outside rotations'' 
for one or more programs in operation in Opportunities, Directory of 
Osteopathic Postdoctoral Education Programs.
    (3) The hospitals are under common ownership.
* * * * *
    (g) Determining the weighted number of FTE residents. * * *
* * * * *
    (5) * * * If a hospital qualifies for an adjustment to the limit 
established under paragraph (g)(4) of this section for new medical 
residency programs created under paragraph (g)(6) of this section, the 
count of residents participating in new medical residency training 
programs above the number included in the hospital's FTE count for the 
cost reporting period ending during calendar year 1996 is added after 
applying the averaging rules in this paragraph for a period of years. 
Residents participating in new medical residency training programs are 
included in the hospital's FTE count before applying the averaging 
rules after the period of years has expired. For purposes of this 
paragraph, the period of years equals the minimum accredited length for 
the type of program. The period of years begins when the first resident 
begins training.
    (6) * * *
    (i) If a hospital had no residents before January 1, 1995, and it 
establishes a new medical residency training program on or after that 
date, the hospital's unweighted FTE resident cap under paragraph (g)(4) 
of this section may be adjusted based on the product of the highest 
number of residents in any program year during the third year of the 
first program's existence for all new residency training programs and 
the number of years in which residents are expected to complete the 
programs based on the minimum accredited length for the type of 
program. For these hospitals the cap will only be adjusted for the 
programs established on or after January 1, 1995. Except for rural 
hospitals, the cap will not be revised for new programs established 
after the 3 years. Only rural hospitals that qualify for an adjustment 
to its FTE cap under this paragraph are permitted to be part of the 
same affiliated group for purposes of an aggregate FTE limit.
    (ii) If a hospital had residents in its most recent cost reporting 
period ending before January 1, 1995, the hospital's unweighted FTE cap 
may be adjusted for new medical residency training programs established 
on or after January 1, 1995 and on or before August 5, 1997. 
Adjustments to the hospital's FTE resident limit for the new program 
are based on the product of the highest number of residents in any 
program year of the newly established program and the number of years 
in which residents are expected to complete each program based on the 
minimum accredited length for the type of program. The hospital's 
unweighted FTE limit for a cost reporting period may be adjusted to 
reflect the number of residents in its most recent cost reporting 
period ending on or before December 31, 1996, and up to the incremental 
increase in its FTE count only for the newly established programs.
* * * * *

[[Page 26359]]

    (7) For purposes of paragraph (g) of this section, a new medical 
residency training program means a medical residency that receives 
initial accreditation by the appropriate accrediting body or begins 
training residents on or after January 1, 1995.
* * * * *
    D. Part 415 is amended as set forth below:

PART 415--SERVICES FURNISHED BY PHYSICIANS IN PROVIDERS, 
SUPERVISING PHYSICIANS IN TEACHING SETTINGS, AND RESIDENTS IN 
CERTAIN SETTINGS

    1. The authority citation for Part 415 continues to read as 
follows:

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

Subpart D--Physician Services in Teaching Settings


Sec. 415.152  [Amended]

    2. In Sec. 415.152, under the definition of ``approved graduate 
medical education (GME)'', the phrase ``Council on Dental Education of 
the American Dental Association'' is revised to read ``Commission on 
Dental Accreditation of the American Dental Association'.
    E. Part 485 is amended as set forth below:

PART 485--CONDITIONS OF PARTICIPATION: SPECIALIZED PROVIDERS

    1. The authority citation for Part 485 continues to read as 
follows:

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

Subpart F--Conditions of Participation: Critical Access Hospitals 
(CAHs)

    2. Section 485.603 is amended by revising paragraph (c) to read as 
follows:


Sec. 485.603  Rural health network.

* * * * *
    (c) Each CAH has an agreement with respect to credentialing and 
quality assurance with at least--
    (1) One hospital that is a member of the network when applicable;
    (2) One PRO or equivalent entity; or
    (3) One other appropriate and qualified entity identified in the 
State rural health care plan.
    3. In 485.606, the section heading, the heading and introductory 
text of paragraph (b), and paragraph (b)(1) are revised to read as 
follows:


Sec. 485.606  Designation and Certification of CAHs

* * * * *
    (b) Criteria for HCFA certification. HCFA certifies a facility as a 
CAH if--
    (1) The facility is designated as a CAH by the State in which it is 
located and has been surveyed by the State survey agency or by HCFA and 
found to meet all conditions of participation in this Part and all 
other applicable requirements for participation in Part 489 of this 
chapter.
* * * * *
    4. In Sec. 485.641 the introductory text of paragraph (b) is 
republished and paragraph (b)(4) is revised to read as follows:


Sec. 485.641  Condition of participation: Periodic evaluation and 
quality assurance review.

* * * * *
    (b) Standard: Quality assurance. The CAH has an effective quality 
assurance program to evaluate the quality and appropriateness of the 
diagnosis and treatment furnished in the CAH and of the treatment 
outcomes. The program requires that--
* * * * *
    (4) The quality and appropriateness of the diagnosis and treatment 
furnished by doctors of medicine or osteopathy at the CAH are evaluated 
by--
    (i) One hospital that is a member of the network, when applicable;
    (ii) One PRO or equivalent entity; or
    (iii) One other appropriate and qualified entity identified in the 
State rural health care plan; and
* * * * *
    5. Section 485.645 is revised to read as follows:


Sec. 485.645  Special requirements for CAH providers of long-term care 
services (``swing-beds'')

    A CAH must meet the following requirements in order to be granted 
an approval from HCFA to provided post-hospital SNF care, as specified 
in Sec. 409.30 of this chapter, and to be paid for SNF-level services, 
in accordance with paragraph (c) of this section.
    (a) Eligibility. A CAH must meet the following eligibility 
requirements:
    (1) The facility has been certified as a CAH by HCFA under 
Sec. 485.606(b) of this subpart; and
    (2) The facility provides not more than 25 inpatient beds, and the 
number of beds used at any time for acute care inpatient services does 
not exceed 15 beds. Any bed of a unit of the facility that is licensed 
as distinct-part SNF at the time the facility applies to the State for 
designation as a CAH is not counted under paragraph (a) of this 
section.
    (b) Facilities participating as rural primary care hospitals 
(RPCHs) on September 30, 1997. These facilities must meet the following 
requirements:
    (1) Notwithstanding paragraph (a) of this section, a CAH that 
participated in Medicare as a RPCH on September 30, 1997, and on that 
date had in effect an approval from HCFA to use its inpatient 
facilities to provide post-hospital SNF care may continue in that 
status under the same terms, conditions and limitations that were 
applicable at the time those approvals were granted.
    (2) A CAH that was granted swing-bed approval under paragraph 
(b)(1) of this section may request that its application to be a CAH and 
swing-bed provider be reevaluated under paragraph (a) of this section. 
If this request is approved, the approval is effective not earlier than 
October 1, 1997. As of the date of approval, the CAH no longer has any 
status under paragraph (b)(1) of this section and may not request 
reinstatement under paragraph (b)(1) of this section.
    (c) Payment. Payment for inpatient RPCH services to a CAH that has 
qualified as a CAH under the provisions in paragraph (a) of this 
section is made in accordance with Sec. 413.70 of this chapter. Payment 
for post-hospital SNF-level of care services is made in accordance with 
the payment provisions in Sec. 413.114 of this chapter.
    (d) SNF services. The CAH is substantially in compliance with the 
following SNF requirements contained in subpart B of part 483 of this 
chapter:
    (1) Residents rights (Sec. 483.10(b)(3) through (b)(6), (d) (e), 
(h), (i), (j)(1)(vii) and (viii), (l), and (m) of this chapter).
    (2) Admission, transfer, and discharge rights (Sec. 483.12(a) of 
this chapter).
    (3) Resident behavior and facility practices (Sec. 483.13 of this 
chapter).
    (4) Patient activities (Sec. 483.15(f) of this chapter), except 
that the services may be directed either by a qualified professional 
meeting the requirements of Sec. 485.15(f)(2), or by an individual on 
the facility staff who is designated as the activities director and who 
serves in consultation with a therapeutic recreation specialist, 
occupational therapist, or other professional with experience or 
education in recreational therapy.
    (5) Social services (Sec. 483.15(g) of this chapter).
    (6) Comprehensive assessment, comprehensive care plan, and 
discharge planning (Sec. 483.20(b), (d), and (e) of this chapter).
    (7) Specialized rehabilitative services (Sec. 483.45 of this 
chapter).
    (8) Dental services (Sec. 483.55 of this chapter).

[[Page 26360]]

    (9) Nutrition (Sec. 483.25(i) of this chapter).

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

    Dated: April 24, 1998.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.
    Dated: May 1, 1998.
Donna E. Shalala,
Secretary.

    Note: The following appendix will not appear in the Code of 
Federal Regulations.

Appendix: Illustration of Determination of GME Payment

             Hospital Cost Reporting Period Ending 12/31/96             
------------------------------------------------------------------------
                                                               Number of
                         Type of FTE                              FTEs  
------------------------------------------------------------------------
Unweighted...................................................    \1\ 100
Weighted.....................................................     \1\ 90
------------------------------------------------------------------------
\1\ Allopathic and Osteopathic Residents.                               


            Hospital Cost Reporting Period Beginning 1/12/97            
------------------------------------------------------------------------
                                                               Number of
                         Type of FTE                             FTEs   
------------------------------------------------------------------------
Unweighted..................................................  \1\ 110   
Weighted....................................................  \1\ 100   
Adjusted Weighted...........................................  \2\ 100.00
Dentists and Podiatrists....................................        5.00
                                                             -----------
    Total...................................................      105.00
------------------------------------------------------------------------
\1\ Allopathic and Osteopathic Residents.                               
\2\ Since the FTE cap does not apply until 01/01/98 the adjusted        
  weighted FTEs are equal to the weighted FTEs.                         


            Hospital Cost Reporting Period Beginning 1/12/98            
------------------------------------------------------------------------
                                                               Number of
                         Type of FTE                             FTEs   
------------------------------------------------------------------------
Unweighted..................................................  \1\ 110   
Weighted....................................................  \1\ 100   
Adjusted Weighted...........................................   \2\ 90.91
Dentists and Podiatrists....................................        5.00
                                                             -----------
    Total...................................................       95.91
------------------------------------------------------------------------
\1\ Allopathic and Osteopathic Residents.                               
\2\ The adjusted weighted=((Current year's Weighted FTEs/Current year's 
  Unweighted FTEs) * FTE cap)=((100/110) * 100).                        


            Hospital Cost Reporting Period Beginning 1/12/99            
------------------------------------------------------------------------
                                                               Number of
                         Type of FTE                             FTEs   
------------------------------------------------------------------------
Unweighted..................................................   \1\ 90   
Weighted....................................................   \1\ 90   
Adjusted weighted...........................................       90   
Dentists and podiatrists....................................        5.00
                                                             -----------
    Total...................................................       95.00
------------------------------------------------------------------------
\1\ Allopathic and Osteopathic Residents.                               


Determination of Payments for Hospital Cost Reporting Period Beginning 1/
                                  12/99                                 
------------------------------------------------------------------------
                                       Per                      Total   
         Type of resident            resident       FTEs       resident 
                                      amount                    amount  
------------------------------------------------------------------------
Primary Care.....................      $50,000        80.00   $4,000,000
Other............................       47,000        15.00      705,000
                                  --------------------------------------
                                                      95.00    4,705,000
------------------------------------------------------------------------


                                                                                                                
        Total resident amount                 Total number of FTEs               Average per resident amount    
$4,705,000..........................                          95.00                           \1\ $49,526       
----------------------------------------------------------------------------------------------------------------


                                                                        
                                    Total # of   Total # of     3-year  
  Total # of FTEs (for 01/01/97)    FTEs (for    FTEs (for     average  
                                    01/01/98)    01/01/99)       FTEs   
105.00...........................        95.91        95.00    \2\ 98.64
------------------------------------------------------------------------


                                                                                                                
     Average per resident amount               3-Year average FTEs                Aggregate approved amount     
$49,526.............................                          98.64                        \3\ $4,885,096       
----------------------------------------------------------------------------------------------------------------


                                                                                                                
      Aggregate approved amount               Medicare patient load                  Direct GME payment         
$4,885,096..........................                            0.5                        \4\ $2,442,548       
----------------------------------------------------------------------------------------------------------------
\1\ The Average Per Resident Amount = (Total Resident Amount/Total number of FTEs).                             
\2\ The 3-Year Average = (the sum of the Total number of FTEs for 3 cost reporting periods/3).                  
\3\ The Aggregate Amount = (Average Per Resident Amount * 3-year Average FTEs).                                 
\4\ The Direct GME Payment = (Aggregate Approved Amount * Medicare Patient Load).                               


[FR Doc. 98-12231 Filed 5-8-98; 8:45 am]
BILLING CODE 4120-01-P