26318 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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

Copies: To order copies of the Federal

Register containing this document, send

your request to: New Orders,

Superintendent of Documents, P.O. Box

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Specify the date of the issue requested

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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:

• The hospital operating payment

update factor. (Sections 4401(a) and (b))

• The hospital capital rate reduction.

(Section 4402)

• Reductions in payments to

disproportionate share hospitals.

(Section 4403)

• Elimination of payment of indirect

medical education (IME) and

disproportionate share adjustment on

outlier payments. (Section 4405)

• Base payment rate to Puerto Rico

hospitals. (Section 4406)

• Special reclassification of Stanly

County, North Carolina for purposes of

the prospective payment system.

(Section 4408)

• New guidelines for geographic

reclassification of certain hospitals for

Federal fiscal year 1998 and subsequent

fiscal years. (Sections 4409 and 4410(c))

• Floor on area wage index. (Sections

4410(a) and (b))

• 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)

• Classification of rural referral

centers (RRC) for FY 1998 and
Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations 26319

subsequent fiscal years. (Section

4202(b))

• Special treatment of Medicaredependent, small rural hospitals

(MDHs). (Section 4204)

• Reinstatement of the add-on

payment for blood clotting factor for

inpatient beneficiaries with hemophilia.

(Section 4452)

• Counting residents for direct

graduate medical education. (Section

4623)

• Payments to managed care plans for

graduate medical education. (Section

4624)

• Payment to nonhospital providers

for the direct costs of medical education

incurred in the operation of an

approved medical residency training

program. (Section 4625)

• Payment for combined medical

residency training programs. (Section

4627)

• Payment update for excluded

hospitals and hospital units. (Section

4411)

• Reductions in capital payment

amounts for certain excluded hospitals

and hospital units. (Section 4412)

• Rebasing target amounts for

excluded hospitals. (Section 4413)

• 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)

• Bonus and relief payments to

excluded hospitals and hospital units.

(Section 4415)

• Change in payment and target

amount for new providers. (Sections

4416 and 4419)

• Treatment of certain long-term care

hospitals. (Sections 4417(a) and 4417(b))

• Exclusion of certain cancer

hospitals from the prospective payment

system. (Section 4418)

• 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)

• 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 § 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
26320 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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

§ 412.107 to the regulations and revised

§ 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

§ 412.352) to the unadjusted standard

Federal capital payment rate (as

described in § 412.308(c)) effective

September 30, 1997, and the unadjusted

hospital-specific rate (as described in

§ 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 § 412.308(c). The

annual Federal rate is the result of that

determination process in § 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 § 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 §§ 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 § 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.
Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations 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 lowincome 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

§ 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 § 412.320 references the

operating DSH definition of low income

patients at § 412.106(b) and uses the

definition of the disproportionate

patient percentage at § 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 § 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 § 412.80(c). Conforming changes

were made to § 412.105(a) (IME

adjustment) and § 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 § 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-GastoniaRock 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
26322 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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 §§ 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

§ 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: • The hospital’s average hourly wage

must be at least 108 percent of the

Statewide rural hourly wage. • 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 § 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

(§ 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 § 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
Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations 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-tobeds 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 offsite 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

§ 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 § 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 § 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 § 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
26324 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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 § 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 residentto-bed ratio; and the 3-year rolling

average resident count. We are revising

§ 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-tobeds (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
Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations 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 residentto-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 costcutting 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 § 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

§ 412.105(f) of the operating regulation.

Since the BBA provisions affected

§ 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 § 412.105(f) of the

operating IME regulations. Since the

capital IME regulations reference the

operating IME regulation at § 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,
26326 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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 § 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 (§ 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, §§ 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 Medicaredependent, 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.
Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations 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 §§ 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
26328 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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 residentspecific information to their fiscal

intermediaries under longstanding

requirements of § 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

§ 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 wellestablished 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
Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations 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 hospitalspecific 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 § 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
26330 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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

§ 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.

• 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.

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

§ 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

§ 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
26332 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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

(§ 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
26334 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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 § 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
Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations 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
26336 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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

• Hospitals in the same geographic

wage area that rotate residents to other

hospitals of the group during the course

of the approved program; or

• 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 § 413.86(b) to

use the terms ‘‘urban area’’ and ‘‘rural

area’’ (as those terms are defined in

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

§ 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
26338 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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 nonVeterans’ 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:

• 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;

• 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

• 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

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

Hospital Cost reporting period Planned change in FTE count (for 07/

01–06/30)

Planned

change for

cost 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
26340 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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 multihospital 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 residentto-bed ratio cap for affiliated groups.

Response: We agree that § 412.105

should reference § 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

§ 413.86(g)(6) for purposes of adjusting

the IME FTE cap for new medical

residency training programs. We are

including these references in § 412.105.

However, we disagree that the intern

and resident-to-bed ratio for an affiliated
Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations 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:

• 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.

• 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.

• 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.

• 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.

• 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

§ 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
26342 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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 § 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 § 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.
Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations 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 § 415.152

to reflect this comment.

R. Special Categories of Excluded

Hospitals (§ 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

§ 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:

• 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.

• The hospital must have applied for

and been denied, on or before December

31, 1990, classification as a cancer

hospital.

• 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).

• 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.

• 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 § 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 (§ 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 longterm 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

(§ 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

(§ 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 § 413.40(i) and to receive
26344 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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 longterm 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 § 413.40(v) of

the regulation text (62 FR 46032), the

calculation of the disproportionate

patient percentage is addressed at

§ 412.106 of the Medicare regulations.

Fiscal intermediaries are familiar with

the calculation of the disproportionate

patient percentage and can assist a longterm care hospital if necessary.

3. Limitation on the Target Amount for

Excluded Hospitals and Units

(§ 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

§§ 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 § 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 longterm care hospital, the target amount for

FYs 1998 through 2002 is equal to the

lower of—

• The hospital specific target amount

(the net allowable costs in a base period

increased by the update factor for the

subject period); or

• The 75th percentile of target

amounts for hospitals in the same class

(psychiatric hospital or unit,

rehabilitation hospital or unit, or longterm 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

§ 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
Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations 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 dischargeweighted 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
26346 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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

(§ 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 § 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

(§ 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 § 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.
26348 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

6a. Grandfathering of Certain HospitalsWithin-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-withinhospitals. 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 § 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-withinhospitals. 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-withinhospitals 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

§ 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 hospitalswithin-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 hospitalwithin-a-hospital criteria, they will have

to meet these criteria to preserve their

prospective payment system exclusion

status. We are making changes in

§ 412.22(f) to clarify this point.

6b. Capital Payments for Excluded

Hospitals and Units (§ 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 § 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

§ 413.40(j).

7. Report on Adjustment Payments to

the Ceiling (§ 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 limitedservice 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
Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations 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 § 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

§ 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
26350 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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 § 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 § 485.606 and the paragraph

for § 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 § 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
Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations 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 § 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 § 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
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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 allinclusive 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 costbased 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 allinclusive method continue to be paid

under that method at least until October

1, 1998.

One commenter stated that some

facilities that had operated providerbased 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 allinclusive 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 allinclusive-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 allinclusive 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 allinclusive 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
Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations 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 fullservice hospitals and most other

providers.

Response: We agree and have made

appropriate revisions to § 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 §§ 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 fullservice 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 § 413.24 or § 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 (§ 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

§ 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 §§ 489.20(q) and

489.24). Except for the change in

terminology from RCPH to ‘‘critical

access hospital’’, the regulations at

§ 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 § 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 § 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 swingbed agreements to those facilities that
26354 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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 § 485.645.

Response: We agree and have revised

§ 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 § 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 § 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 § 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

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

§§ 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.
26356 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

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:

• Section 410.152

• Section 412.105

• Section 413.13

• Section 413.40

• Section 413.70

• Section 413.86

• Section 415.152

• Section 485.603

• Section 485.641

• Section 485.645

Technical Corrections

• Regarding the Medicare geographic

classifications, we are making two

technical changes:

—In § 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 § 412.256, paragraph (a)(2), the

phrase ‘‘the month preceding’’ is

revised to read ‘‘the 13-month period

preceding’’.

• In regard to inpatient hospital capital

costs, we are making a cross-reference

change in § 412.322(a)(1) to change

the phrase ‘‘under § 412.105(g)’’ to

read ‘‘under § 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 PPSexcluded 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 SNFlevel services and higher costs.

However, at this time, we are unable to

estimate the number of facilities that

will request participation in the swingbed 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
Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations 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

§ 410.152 [Amended]

2. In § 410.152, paragraph (k), second

sentence, the phrase ‘‘coinsurance

amounts, as described in § 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 CapitalRelated Costs

2. In § 412.22, paragraph (f) is revised

to read as follows:

§ 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 § 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:

§ 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

§ 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

§ 413.86(g)(6)(i) through (iv).

* * * * *

Subpart L—The Medicare Geographic

Classification Review Board

§ 412.230 [Amended]

4. In § 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’’.

§ 412.256 [Amended]

5. In § 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

§ 412.322 [Amended]

6. In § 412.322(a)(1), the phrase

‘‘under § 412.105(g)’’ is revised to read

‘‘under § 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:

§ 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

§ 413.70.

* * * * *
26358 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

Subpart C—Limits on Cost

Reimbursement

3. Section 413.40 paragraphs (c)(4)(iii)

and (j) are revised to read as follows.

§ 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:

§ 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

§ 413.124 or § 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 § 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:

§ 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 § 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.

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

§ 415.152 [Amended]

2. In § 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:

§ 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:

§ 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 § 485.641 the introductory text of

paragraph (b) is republished and

paragraph (b)(4) is revised to read as

follows:

§ 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:

§ 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 posthospital SNF care, as specified in

§ 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 § 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 § 413.70 of this

chapter. Payment for post-hospital SNFlevel of care services is made in

accordance with the payment provisions

in § 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 (§ 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 (§ 483.12(a) of this chapter).

(3) Resident behavior and facility

practices (§ 483.13 of this chapter).

(4) Patient activities (§ 483.15(f) of

this chapter), except that the services

may be directed either by a qualified

professional meeting the requirements

of § 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 (§ 483.15(g) of this

chapter).

(6) Comprehensive assessment,

comprehensive care plan, and discharge

planning (§ 483.20(b), (d), and (e) of this

chapter).

(7) Specialized rehabilitative services

(§ 483.45 of this chapter).

(8) Dental services (§ 483.55 of this

chapter).
26360 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 /Rules and Regulations

(9) Nutrition (§ 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

Type of FTE Number

of FTEs

Unweighted ................................... 1 100

HOSPITAL COST REPORTING PERIOD

ENDING 12/31/96—Continued

Type of FTE Number

of FTEs

Weighted ....................................... 1 90

1Allopathic and Osteopathic Residents.

HOSPITAL COST REPORTING PERIOD

BEGINNING 1/12/97

Type of FTE Number of

FTEs

Unweighted ................................. 1 110

Weighted ..................................... 1 100

Adjusted Weighted ...................... 2 100.00

Dentists and Podiatrists .............. 5.00

Total ..................................... 105.00

1Allopathic and Osteopathic Residents.

2Since 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

Type of FTE Number of

FTEs

Unweighted ................................. 1 110

Weighted ..................................... 1 100

Adjusted Weighted ...................... 2 90.91

Dentists and Podiatrists .............. 5.00

Total ..................................... 95.91

1Allopathic and Osteopathic Residents.

2The 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

Type of FTE Number of

FTEs

Unweighted ................................. 1 90

Weighted ..................................... 1 90

Adjusted weighted ...................... 90

Dentists and podiatrists .............. 5.00

Total ..................................... 95.00

1Allopathic and Osteopathic Residents.

DETERMINATION OF PAYMENTS FOR HOSPITAL COST REPORTING PERIOD BEGINNING 1/12/99

Type of resident Per resident

amount FTEs

Total resident

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 FTEs

(for 01/01/97)

Total # of

FTEs

(for 01/01/

98)

Total # of

FTEs

(for 01/01/

99)

3-year average 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

1The Average Per Resident Amount = (Total Resident Amount/Total number of FTEs).

2The 3-Year Average = (the sum of the Total number of FTEs for 3 cost reporting periods/3).

3The Aggregate Amount = (Average Per Resident Amount * 3-year Average FTEs).

4The 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