[Federal Register Volume 63, Number 147 (Friday, July 31, 1998)]
[Rules and Regulations]
[Pages 40954-41131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20459]



[[Page 40953]]

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Part II





Department of Health and Human Services





_______________________________________________________________________



Health Care Financing Administration



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42 CFR Parts 405, 412, and 413



Medicare Program: Changes to the Hospital Inpatient Prospective Payment 
Systems and Fiscal Year 1999 Rates; Final Rule

Federal Register / Vol. 63, No. 147 / Friday, July 31, 1998 / Rules 
and Regulations

[[Page 40954]]



DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 405, 412, and 413

[HCFA-1003-F]
RIN 0938-AI22


Medicare Program; Changes to the Hospital Inpatient Prospective 
Payment Systems and Fiscal Year 1999 Rates

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

ACTION: Final rule.

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SUMMARY: We are revising the Medicare hospital inpatient prospective 
payment systems for operating costs and capital-related costs to 
implement applicable statutory requirements, including section 4407 of 
the Balanced Budget Act of 1997 (BBA), as well as changes arising from 
our continuing experience with the systems. In addition, in the 
addendum to this final rule, we describe changes in the amounts and 
factors necessary to determine rates for Medicare hospital inpatient 
services for operating costs and capital-related costs. These changes 
are applicable to discharges occurring on or after October 1, 1998. We 
also set forth rate-of-increase limits as well as changes for hospitals 
and hospital units excluded from the prospective payment systems. 
Finally, we are implementing the provisions of section 4625 of the BBA 
concerning payment for the direct costs of graduate medical education.

DATES: The provisions of this final rule are effective October 1, 1998. 
This rule is a major rule as defined in Title 5, United States Code, 
section 804(2). Pursuant to 5 U.S.C. section 801(a)(1)(A), we are 
submitting a report to the Congress on this rule on July 31, 1998.

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FOR FURTHER INFORMATION CONTACT:
Nancy Edwards, (410) 786-4531, Operating Prospective Payment, DRG, and 
Wage Index Issues.
Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded 
Hospitals, and Graduate Medical Education Issues.

SUPPLEMENTARY INFORMATION:

I. Background

A. Summary

    Sections 1886(d) and (g) of the Social Security Act (the Act) set 
forth a system of payment for the operating and capital costs of acute 
care hospital inpatient stays under Medicare Part A (Hospital 
Insurance) based on prospectively-set rates. Under these prospective 
payment systems (PPS), Medicare payment for hospital inpatient 
operating and capital-related costs is made at predetermined, specific 
rates for each hospital discharge. Discharges are classified according 
to a list of diagnosis-related groups (DRGs).
    Certain specialty hospitals are excluded from the prospective 
payment systems. Under section 1886(d)(1)(B) of the Act, the following 
hospitals and units are excluded from PPS: psychiatric hospitals or 
units, rehabilitation hospitals or units, children's hospitals, long 
term care hospitals, and cancer hospitals. For these hospitals and 
units, Medicare payment for operating costs is based on reasonable 
costs subject to certain limits.
    Under section 1886(a)(4) of the Act, costs incurred in connection 
with approved graduate medical education (GME) programs are excluded 
from the operating costs of inpatient hospital services. Hospitals with 
approved GME programs are paid for the direct costs of GME in 
accordance with section 1886(h) of the Act; the amount of payment for 
direct GME costs for a cost reporting period is based on the number of 
the hospital's residents in that period and the hospital's costs per 
resident in a base year.
    The regulations governing the hospital inpatient prospective 
payment system are located in 42 CFR part 412. The regulations 
governing excluded hospitals are located in both parts 412 and 413, and 
the graduate medical education regulations are found in part 413.

B. Summary of the Provisions of the May 8, 1998 Proposed Rule

    On May 8, 1998, we published a proposed rule in the Federal 
Register (63 FR 25576) setting forth proposed changes to the Medicare 
hospital inpatient prospective payment systems for both operating costs 
and capital-related costs, which would be effective for discharges 
occurring on or after October 1, 1998. We also proposed changes in 
payments for excluded hospitals and payments for graduate medical 
education costs. The following is a summary of the major issues 
addressed and changes we proposed to make:
    <bullet> We proposed changes to the FY 1999 DRG classifications and 
relative weights, as required by section 1886(d)(4)(C) of the Act.
    <bullet> We proposed to update the hospital wage data for FY 1999. 
We also proposed changes to the data categories included in the wage 
index and revisions to the wage index based on hospital redesignations.
    <bullet> We discussed several provisions of the regulations in 42 
CFR parts 412 and 413 and set forth certain proposed changes concerning 
definition of transfer cases, rural referral centers, disproportionate 
share adjustment, bad debts, and direct graduate medical education 
programs.
    <bullet> We discussed several provisions of the regulations in 42 
CFR Part 412 and set forth certain proposed changes and clarifications 
concerning capital indirect medical education payments and payments to 
new hospitals.
    <bullet> We discussed the criteria governing excluded hospitals 
including caps on the target amounts for FY 1999 and exceptions.
    <bullet> In the addendum to the proposed rule, we set forth 
proposed changes to the amounts and factors for determining the FY 1999 
prospective payment rates for operating costs and capital-related 
costs. We also proposed update factors for determining the rate-of-
increase limits for cost reporting periods

[[Page 40955]]

beginning in FY 1999 for hospitals and hospital units excluded from the 
prospective payment system.
    <bullet> In Appendix A of the proposed rule, we set forth an 
analysis of the impact that the proposed changes would have on affected 
entities.
    <bullet> In Appendix B of the proposed rule, we set forth the 
technical appendix on the proposed FY 1999 capital cost model.
    <bullet> In Appendix C, as required by section 1886(e)(3)(B) of the 
Act, we set forth a report to Congress on our initial estimate of a 
recommended update factor for FY 1999 for both hospitals included in 
and hospitals excluded from the prospective payment systems.
    <bullet> In Appendix D of the proposed rule, we set forth our 
recommendation of the appropriate percentage change for FY 1999 for the 
large urban area and other area average standardized amounts (and 
hospital-specific rates applicable to sole community and Medicare-
dependent, small rural hospitals) for hospital inpatient services paid 
for under the prospective payment system for operating costs.
    <bullet> In Appendix D of the proposed rule, we also set forth our 
recommendation of the appropriate percentage change for FY 1999 for 
target rate-of-increase limits to the allowable operating costs of 
hospital inpatient services furnished by hospitals and hospital units 
excluded from the prospective payment system.
    <bullet> In the proposed rule, we discussed in detail the March 1, 
1998 recommendations concerning hospital inpatient policies made by the 
Medicare Payment Advisory Commission (MedPAC) as well as our responses 
to those recommendations. Under section 1805(b) of the Act, MedPAC is 
required to submit a report to Congress, not later than March 1 of each 
year, that reviews and makes recommendations on Medicare payment 
policies.

C. Public Comments Received in Response to the Proposed Rule

    A total of 214 items of correspondence containing comments on the 
proposed rule were received timely. The main areas of concern addressed 
by the commenters were the change in the definition of transfer cases 
and the revisions to the wage index. We also received a number of 
comments on the proposal to pay qualified nonhospital providers for the 
direct costs of graduate medical education.
    Summaries of the public comments received and our responses to 
those comments are set forth below under the appropriate section.

II. Changes to DRG Classifications and Relative Weights

A. Background

    Under the prospective payment system, we pay for inpatient hospital 
services on the basis of a rate per discharge that varies by the DRG to 
which a beneficiary's stay is assigned. The formula used to calculate 
payment for a specific case takes an individual hospital's payment rate 
per case and multiplies it by the weight of the DRG to which the case 
is assigned. Each DRG weight represents the average resources required 
to care for cases in that particular DRG relative to the average 
resources used to treat cases in all DRGs.
    Congress recognized that it would be necessary to recalculate the 
DRG relative weights periodically to account for changes in resource 
consumption. Accordingly, section 1886(d)(4)(C) of the Act requires 
that the Secretary adjust the DRG classifications and relative weights 
annually. These adjustments are made to reflect changes in treatment 
patterns, technology, and any other factors that may change the 
relative use of hospital resources. The changes to the DRG 
classification system and the recalibration of the DRG weights for 
discharges occurring on or after October 1, 1998 are discussed below.

B. DRG Reclassification

1. General
    Cases are classified into DRGs for payment under the prospective 
payment system based on the principal diagnosis, up to eight additional 
diagnoses, and up to six procedures performed during the stay, as well 
as age, sex, and discharge status of the patient. The diagnosis and 
procedure information is reported by the hospital using codes from the 
International Classification of Diseases, Ninth Revision, Clinical 
Modification (ICD-9-CM). The Medicare fiscal intermediary enters the 
information into its claims system and subjects it to a series of 
automated screens called the Medicare Code Editor (MCE). These screens 
are designed to identify cases that require further review before 
classification into a DRG can be accomplished.
    After screening through the MCE and any further development of the 
claims, cases are classified by the GROUPER software program into the 
appropriate DRG. The GROUPER program was developed as a means of 
classifying each case into a DRG on the basis of the diagnosis and 
procedure codes and demographic information (that is, sex, age, and 
discharge status). It is used both to classify past cases in order to 
measure relative hospital resource consumption to establish the DRG 
weights and to classify current cases for purposes of determining 
payment. The records for all Medicare hospital inpatient discharges are 
maintained in the Medicare Provider Analysis and Review (MedPAR) file. 
The data in this file are used to evaluate possible DRG classification 
changes and to recalibrate the DRG weights.
    Currently, cases are assigned to one of 496 DRGs in 25 major 
diagnostic categories (MDCs). Most MDCs are based on a particular organ 
system of the body (for example, MDC 6, Diseases and Disorders of the 
Digestive System); however, some MDCs are not constructed on this basis 
since they involve multiple organ systems (for example, MDC 22, Burns).
    In general, cases are assigned to an MDC based on the principal 
diagnosis, before assignment to a DRG. However, there are five DRGs to 
which cases are directly assigned on the basis of procedure codes. 
These are the DRGs for liver, bone marrow, and lung transplant (DRGs 
480, 481, and 495, respectively) and the two DRGs for tracheostomies 
(DRGs 482 and 483). Cases are assigned to these DRGs before 
classification to an MDC.
    Within most MDCs, cases are then divided into surgical DRGs (based 
on a surgical hierarchy that orders individual procedures or groups of 
procedures by resource intensity) and medical DRGs. Medical DRGs 
generally are differentiated on the basis of diagnosis and age. Some 
surgical and medical DRGs are further differentiated based on the 
presence or absence of complications or comorbidities (hereafter CC).
    Generally, GROUPER does not consider other procedures; that is, 
nonsurgical procedures or minor surgical procedures generally not 
performed in an operating room are not listed as operating room (OR) 
procedures in the GROUPER decision tables. However, there are a few 
non-OR procedures that do affect DRG assignment for certain principal 
diagnoses, such as extracorporeal shock wave lithotripsy for patients 
with a principal diagnosis of urinary stones.
    We proposed several changes to the DRG classification system for FY 
1999. The proposed changes, the comments we received concerning them, 
our responses to those comments, and the final DRG changes are set 
forth below. Unless otherwise noted, our DRG analysis is based on the 
full (100 percent) FY 1997 MedPAR file based on

[[Page 40956]]

bills received through September 30, 1997.
2. MDC 5 (Diseases and Disorders of the Circulatory System)
    In the August 29, 1997 hospital inpatient final rule with comment 
period (62 FR 45974), we noted that, because of the many recent changes 
in heart surgery, we were considering conducting a comprehensive review 
of the MDC 5 surgical DRGs. We have begun that review, and based upon 
our analysis thus far, we proposed the following DRG changes.
    a. Coronary Bypass. There are two DRGs that capture coronary bypass 
procedures: DRG 106 (Coronary Bypass with Cardiac Catheterization) and 
DRG 107 (Coronary Bypass without Cardiac Catheterization). The 
procedures that allow a coronary bypass case to be assigned to DRG 106 
include percutaneous valvuloplasty, percutaneous transluminal coronary 
angioplasty (PTCA), cardiac catheterization, coronary angiography, and 
arteriography.
    In analyzing the FY 1997 MedPAR file, we noted that, of cases 
assigned to DRG 106, the average standardized charges for coronary 
bypass cases with PTCA were significantly higher than those cases 
without PTCA. There were approximately 4,400 cases in DRG 106 where 
PTCA is performed as a secondary procedure. These cases had an average 
standardized charge of approximately $69,000. The average charge of the 
approximately 95,000 cases in DRG 106 without PTCA was approximately 
$52,000.
    Based on this analysis, we proposed to create a new DRG for 
coronary bypass cases with PTCA. The cases currently in DRG 106 without 
PTCA would be assigned to another DRG and the cases currently assigned 
to DRG 107 would be unmodified. Because we would replace two DRGs with 
three new DRGs, we proposed to revise the DRG numbers and titles 
accordingly. The new DRGs and their titles are set forth below:

DRG 106  Coronary Bypass with PTCA
DRG 107  Coronary Bypass with Cardiac Catheterization
DRG 109  Coronary Bypass without Cardiac Catheterization

We note that DRG 109 has been an empty DRG for the last several years.
    We received several comments regarding this proposal.
    Comment: While the commenters supported the creation of a new DRG 
to capture coronary bypass surgeries with PTCA, some of the commenters 
were concerned about the renumbering of the current DRGs 106 and 107. 
They believe splitting the cases currently assigned to DRG 106 into new 
DRGs 106 and 107 and reassigning the cases currently assigned to DRG 
107 to DRG 109 will make it difficult to conduct DRG trend analyses. 
The commenters suggested that DRGs 106 and 107 should not be modified 
and that DRG 109 be used to capture coronary bypass with PTCA. Two 
commenters stated that a DRG that has been invalidated (109) should not 
be reintroduced.
    Response: Although we understand the commenters' concern, we also 
believe that the sequencing of surgical DRGs in hierarchy order is 
appropriate. In this case, our alternative to the proposed revision 
would have been to delete DRGs 106 and 107 and create three new DRGs 
that would have been placed at the end of the DRG table, that is, after 
current DRG 503. Because we did have an empty surgical DRG in MDC 5 and 
it was numerically close to DRGs 106 and 107, we believed our proposed 
retitling was the best alternative.
    We note that the surgical DRGs in MDC 5 have been renumbered and 
retitled several times since they were first introduced in 1983. As 
stated above, we are currently conducting a comprehensive review of the 
MDC 5 surgical DRGs. If that review results in the reclassification of 
procedures among the current DRGs, we will probably renumber and 
retitle those DRGs.
    Comment: We received one comment requesting clarification of the 
DRG assignment for PTCA and cardiac catheterization procedures when 
performed in conjunction with coronary bypass. The commenter suggested 
that we add the phrase ``without PTCA'' to the titles of DRGs 107 and 
109 to more aptly describe the cases assigned to those DRGs.
    Response: Coronary bypass performed in conjunction with single or 
multiple PTCA or percutaneous valvuloplasty will be assigned to DRG 
106. The procedure codes for PTCA and percutaneous valvuloplasty are as 
follows: 35.96, 36.01, 36.02, and 36.05. Procedures assigned to DRG 107 
would include any coronary bypass with cardiac catheterization, 
coronary angiography, or coronary arteriography, and DRG 109 is for 
cases with the coronary bypass procedure only. We believe that the 
proposed titles accurately describe the cases assigned to each of the 
DRGs and that adding the phrase ``without PTCA'' to the titles of DRGs 
107 and 109 is unnecessary. We are incorporating our proposed DRG 
changes and DRG numbers and titles in the final DRG classifications.
    b. Implantable heart assist system and annuloplasty. In the August 
29, 1997 final rule with comment period, we moved implant of an 
implantable, pulsatile heart assist system (procedure code 37.66) from 
DRGs 110 and 111 (Major Cardiovascular Procedures) <SUP>1</SUP> to DRG 
108 (Other Cardiothoracic Procedures). Although this move improved 
payment for these procedures, they were still much more expensive than 
the other cases in DRG 108 ($96,000 for heart assist versus an average 
of $54,000 for all other cases in the FY 1996 MedPAR file). We stated 
that we would continue to review the MDC 5 surgical DRGs in an attempt 
to find a DRG placement for these cases that would be more similar in 
terms of resource use.
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    \1\ A single title combined with two DRG numbers is used to 
signify pairs. Generally, the first DRG is for cases with CC and the 
second DRG is for cases without CC. If a third number is included, 
it represents cases with patients who are age 0-17. Occasionally, a 
pair of DRGs is split between age >17 and age 0-17.
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    As discussed in the proposed rule, in reviewing the FY 1997 MedPAR 
file, we noted that heart assist system implant continues to be the 
most expensive procedure in DRG 108. In fact, other than heart 
transplant, heart assist system implant is the most expensive procedure 
in MDC 5. The average FY 1997 charge for these cases, when assigned to 
DRG 108, is over $150,000 compared to about $53,000 for all cases in 
DRG 108. Obviously, the charges for heart assist implant are increasing 
at a much greater rate than the average charges for DRG 108. In 
addition, the length of stay for cases coded with 37.66 is 
approximately 32 days compared to about 11 days for all other DRG 108 
cases.
    One possibility for improving payment for these cases is to move 
them to DRGs 104 and 105 (Cardiac Valve Procedures). Those DRGs, which 
split on the basis of the performance of cardiac catheterization, have 
average charges of approximately $66,000 and $51,000, respectively. 
While heart assist implant cases are still more expensive than the 
average case in these DRGs, payment would be improved. Clinically, 
placement of heart assist implant in DRGs 104 and 105 is not without 
precedent. Effective with FY 1988, we placed implant of a total 
automatic implantable cardioverter defibrillator (AICD) in these DRGs. 
In addition, the vast majority of procedures assigned to DRG 108 
involve surgically splitting open the sternum to perform the procedure. 
However, implant of the heart assist device does not require this 
approach.
    While reviewing the DRG 108 cases, we also noted that procedure 
code 35.33

[[Page 40957]]

(annuloplasty) is assigned to this DRG. Annuloplasty is a valve 
procedure and is clinically more similar to the cases assigned to DRGs 
104 and 105 than it is to the cases assigned to DRG 108. In addition, 
the average standardized charge for annuloplasty cases assigned to DRG 
108 is about $67,000, well above the overall average charge of 
approximately $53,000 for cases in DRG 108. Therefore, we proposed to 
move annuloplasty from DRG 108 to DRGs 104 and 105.
    In order to more accurately reflect the cases assigned to DRGs 104 
and 105, we proposed to retitle them as follows:

DRG 104  Cardiac Valve and Other Major Cardiothoracic Procedures 
with Cardiac Catheterization
DRG 105  Cardiac Valve and Other Major Cardiothoracic Procedures 
without Cardiac Catheterization.

    We received only supportive comments for our proposal to move 
annuloplasty to DRGs 104 and 105; therefore, that change is included in 
the final DRGs.
    Comment: Commenters generally appreciated any improvement in the 
payment for heart assist devices. However, some of them continue to 
urge HCFA to reclassify these cases to DRG 103 (Heart Transplant) or to 
their own DRG. Two commenters were unsure if we had proposed a 
classification change which was reflected in the proposed DRG weights 
or had merely requested comment on such a change. Another commenter was 
concerned that cases reassigned to DRG 105 (those in which there is no 
cardiac catheterization performed) would receive a lower payment than 
they currently do in DRG 108.
    Response: First, we note that the proposed DRG weights did include 
this change; that is, we moved over 2,000 heart assist implant cases 
from DRG 108 to DRGs 104 and 105 before recalibrating the proposed 
weights. In addition, although the final FY 1999 weight for DRG 105 is 
slightly lower than the weight for DRG 108 (5.7099 and 5.9764, 
respectively), the much higher DRG 104 weight (7.3690) results in an 
overall improvement in payment for these cases when reclassified. Using 
the FY 1997 MedPAR cases, we estimate that at least 40 percent of the 
heart assist implant cases will be assigned to DRG 104. Thus, as long 
as a hospital treats a mix of heart assist implant cases, with and 
without the cardiac catheterization procedure, its overall payment 
should be higher under the revised classification. We presume this will 
be the case for virtually all hospitals.
    With regard to the comments concerning reclassification of this 
procedure to DRG 103 or a new DRG, we refer the reader to our response 
to a similar comment in the August 29, 1997 final rule (62 FR 45967).
3. MDC 22 (Burns)
    Under the current DRG system, burn cases are assigned to one of six 
DRGs in MDC 22 (Burns), which have not been revised since 1986. In our 
FY 1998 hospital inpatient proposed rule (June 2, 1997; 62 FR 29912), 
in response to inquiries we had received, we indicated that we would 
conduct a comprehensive review of MDC 22 to determine whether changes 
in these DRGs could more appropriately capture the variation in 
resource use associated with different classes of burn patients. We 
solicited public comments on this issue, particularly asking for 
recommendations on ways to categorize related diagnosis and procedure 
codes to produce DRG groupings that would be more homogeneous in terms 
of resource use.
    In our May 8, 1998 proposed rule (63 FR 25579), we discussed in 
detail the results of our review of MDC 22. We received a proposal 
(endorsed by the American Burn Association (ABA)) for restructuring the 
DRGs based on several statistical and clinical criteria, including age, 
severity of the burn, and the presence of complications or 
comorbidities. Subsequently, we worked closely with representatives of 
the ABA and with the clinicians who developed the proposal in order to 
refine it for Medicare purposes. Based on this work, we proposed to 
replace the six existing DRGs in MDC 22 with eight new DRGs. For ease 
of reference and classification, the current DRGs in MDC 22, DRGs 456 
through 460 and 472, would no longer be valid, and we would establish 
new DRGs 504 through 511 to contain all cases that currently group to 
MDC 22. (The complete titles of the new DRGs are set forth below.)
    In reviewing the Medicare burn cases, we found that the most 
important distinguishing characteristic in terms of resource use was 
the amount of body surface affected by the burn and how much of that 
burn was a 3rd degree burn. The second most important factor was 
whether or not the patient received a skin graft. Thus, a patient with 
burns covering at least 20 percent of body area, with at least 10 
percent of that a 3rd degree burn, consumed the most resources. 
However, if a patient met these criteria and did not receive a skin 
graft, then the case was much less expensive and the average length of 
stay fell from over 30 days to 8 days. The first two proposed burn DRGs 
reflect these distinctions (DRGs 504 and 505).
    After classifying the most extensive burn cases, we found that the 
patients with 3rd degree burns that did not meet the criteria to be 
assigned to DRGs 504 and 505 were the most expensive of the remaining 
cases (that is, those patients whose burns did not meet the at least 20 
percent body area or at least 10 percent 3rd degree criteria). These 
burns are referred to clinically as ``full-thickness burns.'' A subset 
of these full-thickness burn cases, those with skin graft or an 
inhalation injury, were much more expensive than the other cases. After 
dividing these patients into two groups, with or without skin graft or 
inhalation injury, we examined whether other factors had an influence 
on resource use. We found that patients who had a CC (complication or 
comorbidity) or a concomitant significant trauma consumed more 
resources whether or not they had a skin graft or inhalation injury. 
Thus, the next four proposed DRGs were defined as full-thickness burns 
with skin graft or inhalation injury with or without CC or significant 
trauma, or full-thickness burns without skin graft or inhalation injury 
with or without CC or significant trauma (DRGs 506 through 509).
    Finally, the last two proposed DRGs (510 and 511) were for cases 
with nonextensive burns. These cases are also split on the basis of CCs 
or concomitant significant trauma.
    Consistent with the recommendations of several commenters on last 
year's proposed rule, the new burn DRGs would no longer include a 
separate DRG for cases in which burn patients were transferred to 
another acute care facility.
    The specific diagnosis and procedure codes that were included in 
each of the eight proposed DRGs and their titles are as follows.
    DRGs 504 and 505--Extensive 3rd Degree Burns with and without Skin 
Graft. DRGs 504 and 505 include all cases with burns involving at least 
20 percent of body surface area combined with a 3rd degree burn 
covering at least 10 percent of body surface area. Thus, these cases 
have diagnosis codes of 948.xx, with a fourth digit of 2 or higher 
(indicating that burn extends over 20 percent or more of body surface) 
and a fifth digit of 1 or higher (indicating a 3rd degree burn 
extending over 10 percent or more of body surface). Cases with the 
appropriate diagnosis codes are classified into DRG 504 if one of the 
following skin graft procedure codes is present:

85.82  Split-thickness graft to breast
85.83  Full-thickness graft to breast
85.84  Pedicle graft to breast
86.60  Free skin graft, NOS
86.61  Full-thickness skin graft to hand

[[Page 40958]]

86.62  Other skin graft to hand
86.63  Full-thickness skin graft to other sites
86.65  Heterograft to skin
86.66  Homograft to skin
86.67  Dermal regenerative graft (new code in FY 1999--see Table 6A 
in section VI. of the Addendum)
86.69  Other skin graft to other sites
86.70  Pedicle of flap graft, NOS
86.71  Cutting and preparation of pedicle grafts or flaps
86.72  Advancement of pedicle graft
86.73  Attachment of pedicle or flap graft to hand
86.74  Attachment of pedicle or flap graft to other sites
86.75  Revision of pedicle or flap graft
86.93  Insertion of tissue expander

    DRGs 506 and 507--Full Thickness Burn with Skin Graft or Inhalation 
Injury with or without CC or Significant Trauma. These DRGs include all 
other cases of 3rd degree burns that also have either a skin graft or 
an inhalation injury. Thus, these cases have diagnosis codes of 941.xx 
through 946.xx, and 949.xx, with a fourth digit of 3 or higher, as well 
as cases with codes of 948.xx that did not group into DRGs 504 or 505 
(that is, 948.00, 948.01, and 948.1x through 948.9x with a fifth digit 
of 0). In addition, cases classified into DRGs 506 and 507 must have 
either one of the skin graft procedure codes listed above or one of the 
following diagnosis codes for inhalation injuries:

518.5  Pulmonary insufficiency following trauma and surgery
518.81  Respiratory failure
518.84  Acute and chronic respiratory failure (new code in FY 1999--
see Table 6A in section VI. of the Addendum)
947.1  Burn of larynx, trachea, or lung
987.9  Toxic effect of gas, fume, or vapor, NOS

Cases that meet both of these coding criteria are assigned to DRG 506 
if there is a diagnosis code indicating either a CC (based on the 
standard DRG CC list) or concomitant significant trauma (based on the 
significant trauma diagnosis codes, listed by body site, used for 
classification in MDC 24).
    DRGs 508 and 509--Full Thickness Burn without Skin Graft or 
Inhalation Injury with or without CC or Significant Trauma. These DRGs 
include all other cases of 3rd degree burns. Thus, these DRGs include 
all cases without a skin graft or inhalation injury that have diagnosis 
codes of 941.xx through 946.xx, and 949.xx, with a fourth digit of 3 or 
higher, as well as cases with codes of 948.xx that did not group into 
DRGs 504 or 505. DRG 508 also requires a secondary diagnosis from the 
standard CC list or the trauma list based on the significant trauma 
diagnosis codes, listed by body site, used for classification in MDC 
24.
    DRGs 510 and 511--Nonextensive Burns with and without CC or 
Significant Trauma. The remaining burn cases would be classified into 
one of these two proposed DRGs, depending on whether or not the claim 
included a diagnosis code reflecting the presence of a CC or a 
significant trauma, as explained above.
    Comment: We received five comments on this proposed change. In 
general, the commenters, including the ABA, strongly supported the 
proposed restructuring of MDC 22. The commenters agreed that the new 
burn DRGs should bring about meaningful improvements to the clinical 
coherency and payment equity for the cases assigned to the MDC 22 DRGs. 
One commenter noted that under the new DRGs, diagnosis codes in the 
948.xx series (that is, the codes used to identify the extent of body 
surface involved in a burn and the percentage of the body surface with 
a 3rd degree burn) would take on added importance and emphasized the 
need for coder education in this area. Another commenter submitted 
several suggestions for additional procedure codes that should be added 
to the list of procedure codes that would result in assignment to DRG 
504 and to DRGs 506 and 507. These codes include both additional codes 
that the commenter believes should be considered as skin grafts (such 
as procedure codes 08.61 through 08.69, reconstruction of eyelid with 
flaps or grafts) as well as codes for other procedures (for example, 
limb reattachments or eyeball enucleations) that, as the commenter 
pointed out, are now considered a related operating room procedure 
under existing DRG 472, Extensive Burns with Operating Room Procedure. 
This commenter also suggested that DRGs 506 and 507 be identified as 
surgical DRGs in Table 5 of the addendum to the final rule.
    Response: We appreciate the positive responses generated by this 
proposal. We agree that our proposed changes will place greater 
emphasis on the need for accurate use of the series 948.xx diagnosis 
codes. We note that this issue has been addressed in the American 
Hospital Association's quarterly publication, ``Coding Clinic for ICD-
9-CM.'' In the 1994, 4th quarter issue, Coding Clinic stated ``It is 
advisable to use category 948 as additional coding when needed to 
provide data for evaluating burn mortality, such as that needed by burn 
units. It is also advisable to use category 948 as an additional code 
for reporting purposes when there is mention of a third-degree burn 
involving 20 percent or more of the body surface.'' We believe the vast 
majority of burn cases already include the 948.xx coding if 
appropriate, especially those treated in burn centers. However, we will 
be pleased to work with other hospital groups that are interested in 
developing educational materials related to the accurate coding of burn 
cases.
    In developing the coding classifications used to assign cases under 
the burn DRGs, we worked closely with the ABA and its medical 
consultants to identify the most significant distinguishing 
characteristics in terms of resource use in burn cases. This process 
involved both grouping cases that were clinically similar as well as 
conducting a series of test runs to maximize the amount of variation in 
resource use that could be explained using varying groups of diagnosis 
and procedure codes. As stated in the May 8 proposed rule (63 FR 
25579), we estimate that the proposed changes to the burn DRGs would 
increase by more than 25 percent the amount of variation in resource 
use explained by the DRGs in MDC 22, as well as improve the clinical 
coherence of the cases within each DRG. As recommended by the ABA, the 
procedure codes used to identify skin grafts coincide with the 
procedure codes now in use under existing DRG 458, Non-Extensive Burns 
with Skin Graft, and we believe that these codes represent the most 
resource-intensive skin grafts. Therefore, we are not adding the codes 
suggested by the commenter.
    We recognize that some procedures now listed under DRG 472 will no 
longer affect DRG assignment under the restructured burn DRGs. However, 
we believe that the substantially increased ability of the new DRGs to 
explain the variation in resource use among burn cases clearly 
indicates the appropriateness of narrowing the focus of the 
classification system to emphasize the extent and severity of the burn, 
in conjunction with skin grafts or inhalation injury. Our analysis 
indicated that the presence of skin grafts or inhalation injuries had a 
much more consistent effect on the consumption of hospital resources 
than the presence of one of the numerous operating room procedures now 
listed under DRG 472. We also note that, since the skin graft 
procedures now classified to DRG 504 were classified to former DRG 472, 
many DRG 472 cases will now be assigned to DRG 504, which has a higher 
weight than 472 did (14.1153 versus 10.2429). When the FY 1999 cases 
become available, we will review them to assess the revisions to MDC 22 
and the possible need for the type of changes suggested by the 
commenter.

[[Page 40959]]

    Finally, we note that we do not classify DRGs 506 and 507 as 
surgical DRGs because they include not only cases involving skin 
grafts, which are considered surgical procedures, but also cases 
involving inhalation injuries, which would not necessarily involve any 
surgical procedures. Thus, in this final rule, we are adopting the 
changes to the burn DRGs as proposed.
4. Legionnaires' Disease
    Effective with discharges occurring on or after October 1, 1997, a 
new diagnosis code was created for pneumonia due to Legionnaires' 
disease (code 482.84). In the August 29, 1997 final rule with comment 
period, we assigned this code to DRGs 79, 80, and 81 (Respiratory 
Infections and Inflammations) (62 FR 46090). However, we did not 
include this code as a human immunodeficiency virus (HIV) major related 
condition in MDC 25 (HIV Infections). Because pneumonia due to 
Legionnaires' disease is a serious respiratory condition that has a 
deleterious effect on patients with HIV, we proposed to assign 
diagnosis code 482.84 to DRG 489 (HIV with Major Related Condition) as 
a major related condition. In addition, we did not assign the code as a 
major problem in DRGs 387 (Prematurity with Major Problems) and 389 
(Full Term Neonate with Major Problems). These DRGs are assigned to MDC 
15 (Newborns and Other Neonates with Conditions Originating in the 
Perinatal Period). Again, as a part of the proposed rule, we assigned 
diagnosis code 482.84 as a major problem in DRGs 387 and 389 because of 
its effect on resource use in treating newborns.
    Commenters supported these proposed revisions, and we are 
incorporating them into the final DRGs.
5. Surgical Hierarchies
    Some inpatient stays entail multiple surgical procedures, each one 
of which, occurring by itself, could result in assignment of the case 
to a different DRG within the MDC to which the principal diagnosis is 
assigned. It is, therefore, necessary to have a decision rule by which 
these cases are assigned to a single DRG. The surgical hierarchy, an 
ordering of surgical classes from most to least resource intensive, 
performs that function. Its application ensures that cases involving 
multiple surgical procedures are assigned to the DRG associated with 
the most resource-intensive surgical class.
    Because the relative resource intensity of surgical classes can 
shift as a function of DRG reclassification and recalibration, we 
reviewed the surgical hierarchy of each MDC, as we have for previous 
reclassifications, to determine if the ordering of classes coincided 
with the intensity of resource utilization, as measured by the same 
billing data used to compute the DRG relative weights.
    A surgical class can be composed of one or more DRGs. For example, 
in MDC 5, the surgical class ``heart transplant'' consists of a single 
DRG (DRG 103) and the class ``major cardiovascular procedures'' 
consists of two DRGs (DRGs 110 and 111). Consequently, in many cases, 
the surgical hierarchy has an impact on more than one DRG. The 
methodology for determining the most resource-intensive surgical class 
involves weighing each DRG for frequency to determine the average 
resources for each surgical class. For example, assume surgical class A 
includes DRGs 1 and 2 and surgical class B includes DRGs 3, 4, and 5. 
Assume also that the average charge of DRG 1 is higher than that of DRG 
3, but the average charges of DRGs 4 and 5 are higher than the average 
charge of DRG 2. To determine whether surgical class A should be higher 
or lower than surgical class B in the surgical hierarchy, we would 
weigh the average charge of each DRG by frequency (that is, by the 
number of cases in the DRG) to determine average resource consumption 
for the surgical class. The surgical classes would then be ordered from 
the class with the highest average resource utilization to that with 
the lowest, with the exception of ``other OR procedures'' as discussed 
below.
    This methodology may occasionally result in a case involving 
multiple procedures being assigned to the lower-weighted DRG (in the 
highest, most resource-intensive surgical class) of the available 
alternatives. However, given that the logic underlying the surgical 
hierarchy provides that the GROUPER searches for the procedure in the 
most resource-intensive surgical class this result is unavoidable.
    We note that, notwithstanding the foregoing discussion, there are a 
few instances when a surgical class with a lower average relative 
weight is ordered above a surgical class with a higher average relative 
weight. For example, the ``other OR procedures'' surgical class is 
uniformly ordered last in the surgical hierarchy of each MDC in which 
it occurs, regardless of the fact that the relative weight for the DRG 
or DRGs in that surgical class may be higher than that for other 
surgical classes in the MDC. The ``other OR procedures'' class is a 
group of procedures that are least likely to be related to the 
diagnoses in the MDC but are occasionally performed on patients with 
these diagnoses. Therefore, these procedures should only be considered 
if no other procedure more closely related to the diagnoses in the MDC 
has been performed.
    A second example occurs when the difference between the average 
weights for two surgical classes is very small. We have found that 
small differences generally do not warrant reordering of the hierarchy 
since, by virtue of the hierarchy change, the relative weights are 
likely to shift such that the higher-ordered surgical class has a lower 
average weight than the class ordered below it.
    Based on the preliminary recalibration of the DRGs, we proposed to 
modify the surgical hierarchy as set forth below. However, in 
developing the proposed rule, we were unable to test the effects of the 
proposed revisions to the surgical hierarchy and to reflect these 
changes in the proposed relative weights due to the unavailability of 
revised GROUPER software at the time the proposed rule was prepared. 
Rather, we simulated most major classification changes to approximate 
the placement of cases under the proposed reclassification and then 
determined the average charge for each DRG. These average charges then 
serve as our best estimate of relative resource use for each surgical 
class. We test the proposed surgical hierarchy changes after the 
revised GROUPER is received and reflect the final changes in the DRG 
relative weights in the final rule.
    We proposed to revise the surgical hierarchy for MDC 3 (Diseases 
and Disorders of the Ear, Nose, Mouth and Throat) as follows:
    <bullet> We would reorder Sinus and Mastoid Procedures (DRGs 53-54) 
above Myringotomy with Tube Insertion (DRGs 61-62).
    <bullet> We would reorder Mouth Procedures (DRGs 168-169) above 
Tonsil and Adenoid Procedure Except Tonsillectomy and/or Adenoidectomy 
Only (DRGs 57-58).
    We received two comments in support of our surgical hierarchy 
proposals. However, for this final rule, we tested the proposed changes 
using the most recent MedPAR file and the revised GROUPER software, and 
we found that the proposal to move Sinus and Mastoid Procedures (DRGs 
53-54) above Myringotomy with Tube Insertion (DRGs 61-62) is not 
supported. Therefore, this change will not be made in this final rule. 
The proposed reordering of DRGs 53 and 54 above Cleft Lip and Palate 
Repair (DRG 52) (DRG 52 is currently ordered below DRGs 61 and 62 but 
above DRGs 53 and 54) is still supported and will be

[[Page 40960]]

incorporated in the final GROUPER, as will the proposed reordering of 
DRGs 168 and 169 above DRGs 57 and 58.
6. Refinement of Complications and Comorbidities List
    There is a standard list of diagnoses that are considered CCs. We 
developed this list using physician panels to include those diagnoses 
that, when present as a secondary condition, would be considered a 
substantial complication or comorbidity. In previous years, we have 
made changes to the standard list of CCs, either by adding new CCs or 
deleting CCs already on the list. We did not propose to delete any of 
the diagnosis codes on the CC list.
    In the September 1, 1987 final notice concerning changes to the DRG 
classification system (52 FR 33143), we modified the GROUPER logic so 
that certain diagnoses included on the standard list of CCs would not 
be considered a valid CC in combination with a particular principal 
diagnosis. Thus, we created the CC Exclusions List. We made these 
changes to preclude coding of CCs for closely related conditions, to 
preclude duplicative coding or inconsistent coding from being treated 
as CCs, and to ensure that cases are appropriately classified between 
the complicated and uncomplicated DRGs in a pair.
    In the May 19, 1987 proposed notice concerning changes to the DRG 
classification system (52 FR 18877), we explained that the excluded 
secondary diagnoses were established using the following five 
principles:
    <bullet> Chronic and acute manifestations of the same condition 
should not be considered CCs for one another (as subsequently corrected 
in the September 1, 1987 final notice (52 FR 33154)).
    <bullet> Specific and nonspecific (that is, not otherwise specified 
(NOS)) diagnosis codes for a condition should not be considered CCs for 
one another.
    <bullet> Conditions that may not co-exist, such as partial/total, 
unilateral/bilateral, obstructed/unobstructed, and benign/malignant, 
should not be considered CCs for one another.
    <bullet> The same condition in anatomically proximal sites should 
not be considered CCs for one another.
    <bullet> Closely related conditions should not be considered CCs 
for one another.
    The creation of the CC Exclusions List was a major project 
involving hundreds of codes. The FY 1988 revisions were intended to be 
only a first step toward refinement of the CC list in that the criteria 
used for eliminating certain diagnoses from consideration as CCs were 
intended to identify only the most obvious diagnoses that should not be 
considered complications or comorbidities of another diagnosis. For 
that reason, and in light of comments and questions on the CC list, we 
have continued to review the remaining CCs to identify additional 
exclusions and to remove diagnoses from the master list that have been 
shown not to meet the definition of a CC. (See the September 30, 1988 
final rule for the revision made for the discharges occurring in FY 
1989 (53 FR 38485); the September 1, 1989 final rule for the FY 1990 
revision (54 FR 36552); the September 4, 1990 final rule for the FY 
1991 revision (55 FR 36126); the August 30, 1991 final rule for the FY 
1992 revision (56 FR 43209); the September 1, 1992 final rule for the 
FY 1993 revision (57 FR 39753); the September 1, 1993 final rule for 
the FY 1994 revisions (58 FR 46278); the September 1, 1994 final rule 
for the FY 1995 revisions (59 FR 45334); the September 1, 1995 final 
rule for the FY 1996 revisions (60 FR 45782); the August 30, 1996 final 
rule for the FY 1997 revisions (61 FR 46171); and the August 29, 1997 
final rule for the FY 1998 revisions (62 FR 45966)).
    We proposed a limited revision of the CC Exclusions List to take 
into account the changes that will be made in the ICD-9-CM diagnosis 
coding system effective October 1, 1998. (See section II.B.8, below, 
for a discussion of ICD-9-CM changes.) These proposed changes were made 
in accordance with the principles established when we created the CC 
Exclusions List in 1987. We received no comments on these proposed 
changes and we are incorporating them as final changes.
    Tables 6F and 6G in section VI of the Addendum to this final rule 
contain the revisions to the CC Exclusions List that would be effective 
for discharges occurring on or after October 1, 1998. Each table shows 
the principal diagnoses with changes to the excluded CCs. Each of these 
principal diagnoses is shown with an asterisk and the additions or 
deletions to the CC Exclusions List are provided in an indented column 
immediately following the affected principal diagnosis.
    CCs that are added to the list are in Table 6F--Additions to the CC 
Exclusions List. Beginning with discharges on or after October 1, 1998, 
the indented diagnoses will not be recognized by the GROUPER as valid 
CCs for the asterisked principal diagnosis.
    CCs that are deleted from the list are in Table 6G--Deletions from 
the CC Exclusions List. Beginning with discharges on or after October 
1, 1998 the indented diagnoses will be recognized by the GROUPER as 
valid CCs for the asterisked principal diagnosis.
    Copies of the original CC Exclusions List applicable to FY 1988 can 
be obtained from the National Technical Information Service (NTIS) of 
the Department of Commerce. It is available in hard copy for $92.00 
plus $6.00 shipping and handling and on microfiche for $20.50, plus 
$4.00 for shipping and handling. A request for the FY 1988 CC 
Exclusions List (which should include the identification accession 
number, (PB) 88-133970) should be made to the following address: 
National Technical Information Service; United States Department of 
Commerce; 5285 Port Royal Road; Springfield, Virginia 22161; or by 
calling (703) 487-4650.
    Users should be aware of the fact that all revisions to the CC 
Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996, 
1997, and 1998) and those in Tables 6F and 6G of this document must be 
incorporated into the list purchased from NTIS in order to obtain the 
CC Exclusions List applicable for discharges occurring on or after 
October 1, 1998.
    Alternatively, the complete documentation of the GROUPER logic, 
including the current CC Exclusions List, is available from 3M/Health 
Information Systems (HIS), which, under contract with HCFA, is 
responsible for updating and maintaining the GROUPER program. Version 
16.0 of this manual, which will include the final FY 1999 DRG changes, 
will be available in October 1998 for $225.00, which includes $15.00 
for shipping and handling. This manual may be obtained by writing 3M/
HIS at the following address: 100 Barnes Road; Wallingford, Connecticut 
06492; or by calling (203) 949-0303.
7. Review of Procedure Codes in DRGs 468, 476, and 477
    Each year, we review cases assigned to DRG 468 (Extensive OR 
Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic OR 
Procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive 
OR Procedure Unrelated to Principal Diagnosis) in order to determine 
whether it would be appropriate to change the procedures assigned among 
these DRGs.
    DRGs 468, 476, and 477 are reserved for those cases in which none 
of the OR procedures performed is related to the principal diagnosis. 
These DRGs are intended to capture atypical cases, that is, those cases 
not occurring with sufficient frequency to represent a

[[Page 40961]]

distinct, recognizable clinical group. DRG 476 is assigned to those 
discharges in which one or more of the following prostatic procedures 
are performed and are unrelated to the principal diagnosis.

60.0  Incision of prostate
60.12  Open biopsy of prostate
60.15  Biopsy of periprostatic tissue
60.18  Other diagnostic procedures on prostate and periprostatic 
tissue
60.21  Transurethral prostatectomy
60.29  Other transurethral prostatectomy
60.61  Local excision of lesion of prostate
60.69  Prostatectomy NEC
60.81  Incision of periprostatic tissue
60.82  Excision of periprostatic tissue
60.93  Repair of prostate
60.94  Control of (postoperative) hemorrhage of prostate
60.95  Transurethral balloon dilation of the prostatic urethra
60.99  Other operations on prostate

    All remaining OR procedures are assigned to DRGs 468 and 477, with 
DRG 477 assigned to those discharges in which the only procedures 
performed are nonextensive procedures that are unrelated to the 
principal diagnosis. The original list of the ICD-9-CM procedure codes 
for the procedures we consider nonextensive procedures, if performed 
with an unrelated principal diagnosis, was published in Table 6C in 
section IV. of the Addendum to the September 30, 1988 final rule (53 FR 
38591). As part of the final rules published on September 4, 1990, 
August 30, 1991, September 1, 1992, September 1, 1993, September 1, 
1994, September 1, 1995, August 30, 1996, and August 29, 1997, we moved 
several other procedures from DRG 468 to 477, as well as moving some 
procedures from DRG 477 to 468. (See 55 FR 36135, 56 FR 43212, 57 FR 
23625, 58 FR 46279, 59 FR 45336, 60 FR 45783, 61 FR 46173, and 62 FR 
45981, respectively.)
    a. Adding procedure codes to MDCs. We annually conduct a review of 
procedures producing DRG 468 or 477 assignments on the basis of volume 
of cases in these DRGs with each procedure. Our medical consultants 
then identify those procedures occurring in conjunction with certain 
principal diagnoses with sufficient frequency to justify adding them to 
one of the surgical DRGs for the MDC in which the diagnosis falls. 
Based on this year's review, we did not identify any necessary changes; 
therefore, we did not propose to move any procedures from DRGs 468 and 
477 to one of the surgical DRGs.
    b. Reassignment of procedures among DRGs 468, 476, and 477. We also 
reviewed the list of procedures that produce assignments to DRGs 468, 
476, and 477 to ascertain if any of those procedures should be moved 
from one of these DRGs to another based on average charges and length 
of stay. Generally, we move only those procedures for which we have an 
adequate number of discharges to analyze the data. Based on our review 
this year, we did not propose to move any procedures from DRG 468 to 
DRGs 476 or 477, from DRG 476 to DRGs 468 or 477, or from DRG 477 to 
DRGS 468 or 476.
8. Changes to the ICD-9-CM Coding System
    As discussed above in section II.B.1 of this preamble, the ICD-9-CM 
is a coding system that is used for the reporting of diagnoses and 
procedures performed on a patient. In September 1985, the ICD-9-CM 
Coordination and Maintenance Committee was formed. This is a Federal 
interdepartmental committee charged with the mission of maintaining and 
updating the ICD-9-CM. That mission includes approving coding changes, 
and developing errata, addenda, and other modifications to the ICD-9-CM 
to reflect newly developed procedures and technologies and newly 
identified diseases. The Committee is also responsible for promoting 
the use of Federal and non-Federal educational programs and other 
communication techniques with a view toward standardizing coding 
applications and upgrading the quality of the classification system.
    The Committee is co-chaired by the National Center for Health 
Statistics (NCHS) and HCFA. The NCHS has lead responsibility for the 
ICD-9-CM diagnosis codes included in the Tabular List and Alphabetic 
Index for Diseases while HCFA has lead responsibility for the ICD-9-CM 
procedure codes included in the Tabular List and Alphabetic Index for 
Procedures.
    The Committee encourages participation in the above process by 
health-related organizations. In this regard, the Committee holds 
public meetings for discussion of educational issues and proposed 
coding changes. These meetings provide an opportunity for 
representatives of recognized organizations in the coding fields, such 
as the American Health Information Management Association (AHIMA) 
(formerly American Medical Record Association (AMRA)), the American 
Hospital Association (AHA), and various physician specialty groups as 
well as physicians, medical record administrators, health information 
management professionals, and other members of the public to contribute 
ideas on coding matters. After considering the opinions expressed at 
the public meetings and in writing, the Committee formulates 
recommendations, which then must be approved by the agencies.
    The Committee presented proposals for coding changes at public 
meetings held on June 5 and December 4 and 5, 1997, and finalized the 
coding changes after consideration of comments received at the meetings 
and in writing within 30 days following the December 1997 meeting. The 
initial meeting for consideration of coding issues for implementation 
in FY 2000 was held on June 4, 1998. Copies of the minutes of the 1997 
meetings can be obtained from the HCFA Home Page @ <a href="http://www.hcfa.gov/
pubaffr.htm">http://www.hcfa.gov/
pubaffr.htm</a>, under the ``What's New'' listing. Paper copies of these 
minutes are no longer available and the mailing list has been 
discontinued. We encourage commenters to address suggestions on coding 
issues involving diagnosis codes to: Donna Pickett, Co-Chairperson; 
ICD-9-CM Coordination and Maintenance Committee; NCHS; Room 1100; 6525 
Belcrest Road; Hyattsville, Maryland 20782. Comments may be sent by E-
mail to: <a href="/cdn-cgi/l/email-protection#f6929086c2b6959295d8919980"><span class="__cf_email__" data-cfemail="3551534501755651561b525a43">[email protected]</span></a>.
    Questions and comments concerning the procedure codes should be 
addressed to: Patricia E. Brooks, Co-Chairperson; ICD-9-CM Coordination 
and Maintenance Committee; HCFA, Center for Health Plans and Providers, 
Plan and Provider Purchasing Policy Group, Division of Acute Care; C4-
05-27; 7500 Security Boulevard; Baltimore, Maryland 21244-1850. 
Comments may be sent by E-mail to: <a href="/cdn-cgi/l/email-protection#255547574a4a4e56654d4643440b424a53"><span class="__cf_email__" data-cfemail="5f2f3d2d3030342c1f373c393e71383029">[email protected]</span></a>.
    The ICD-9-CM code changes that have been approved will become 
effective October 1, 1998. The new ICD-9-CM codes are listed, along 
with their proposed DRG classifications, in Tables 6A and 6B (New 
Diagnosis Codes and New Procedure Codes, respectively) in section VI. 
of the Addendum to this proposed rule. As we stated above, the code 
numbers and their titles were presented for public comment in the ICD-
9-CM Coordination and Maintenance Committee meetings. Both oral and 
written comments were considered before the codes were approved. 
Therefore, we solicited comments only on the proposed DRG 
classifications.
    Further, the Committee has approved the expansion of certain ICD-9-
CM codes to require an additional digit for valid code assignment. 
Diagnosis codes that have been replaced by expanded codes, other codes, 
or have been deleted are in Table 6C (Invalid Diagnosis Codes). These 
invalid diagnosis codes will not be recognized by the GROUPER beginning 
with discharges occurring on or after October 1, 1998. The

[[Page 40962]]

corresponding new or expanded diagnosis codes are included in Table 6A. 
Procedure codes that have been replaced by expanded codes, other codes, 
or have been deleted are in Table 6D (Invalid Procedure Codes). 
Revisions to diagnosis code titles are in Table 6E (Revised Diagnosis 
Code Titles), which also include the proposed DRG assignments for these 
revised codes. For FY 1999, there are no revisions to procedure code 
titles.
    We received several comments about our proposed DRG assignments of 
new and revised codes.
    Comment: One commenter believes that revised diagnosis code 518.81 
(acute respiratory failure) should be assigned as a ``major 
complication'' in DRG 121 since it was classified in this manner prior 
to the code revision. In addition, new diagnosis codes 518.83 (chronic 
respiratory failure) and 518.84 (acute and chronic respiratory failure) 
each should also be classified as a ``major complication'' in DRG 121. 
Several commenters stated that new procedure code 37.67 (implantation 
of cardiomyostimulation system) should not be classified to DRGs 442, 
443, and 486 since the procedure is not performed for either injuries 
or trauma. Commenters also noted that the DRG assignments as set forth 
in Tables 6A through 6E in the May 8, 1998 proposed rule (63 FR 22576) 
were not always aligned properly with the appropriate MDC number.
    Response: We agree with the commenter that diagnosis codes 518.81, 
518.83, and 518.84 should be included on the ``major complication'' 
list for DRG 121. As noted in the comment, code 518.81 is currently 
designated as a major complication and the assignment remains valid. In 
addition, the expanded codes 518.83 and 518.84 should be assigned to 
the major complication list because these conditions were formerly 
assigned to code 518.81. We also agree that procedure code 37.67 should 
not have been assigned to DRGs 442, 443, and 486 for the reasons cited 
by the commenter. We have revised Tables 6A, 6C, and 6E to reflect 
these changes. In addition, we have reformatted the tables to correct 
any alignment problems. Finally, we note that in Table 6B, the DRG 
assignment of procedure code 86.67 should list only DRGs 504, 506, and 
507 under MDC 22. DRGs 458 and 472, which were listed in the proposed 
rule, have been deleted as a result of our restructuring of the burn 
DRGs (see section II.B.3 of this preamble).
9. Other Issues
    a. Palliative care. Effective October 1, 1996 (FY 1997), we 
introduced a diagnosis code to allow the identification of those cases 
in which palliative care was delivered to a hospital inpatient. This 
code, V66.7 (Encounter for palliative care), was unusual in that there 
had been no previous code assignment that included the concept of 
palliative care. Since this was a new concept, instructional materials 
were developed and distributed by the AHA as well as specialty groups 
on the use of this new code. With new codes, it sometimes takes several 
years for physician documentation to improve and for coders to become 
accustomed to looking for this type of information in order to assign a 
code. There is an inclusion note listed under V66.7 which indicates 
that this code should be used as a secondary diagnosis only; the 
patient's medical problem would always be listed first. Currently, use 
of diagnosis code V66.7 does not have an impact on DRG assignment. 
Consistent with prior practice, we have waited until the FY 1997 data 
became available for analysis before considering any possible 
modifications to the DRGs.
    As discussed in the proposed rule, in analyzing the FY 1997 bills 
received through September 1997, we found that 4,769 discharges 
included V66.7 as a secondary diagnosis. These cases were widely 
distributed throughout 199 DRGs. The vast majority of these DRGs 
included five or fewer discharges with use of palliative care. Only 12 
DRGs included more than 100 cases. These were the following:

------------------------------------------------------------------------
                                                              Number of 
               DRG                           Title              cases   
------------------------------------------------------------------------
10...............................  Nervous System Neoplasms          144
                                    with CC.                            
14...............................  Specific Cerebrovascular          272
                                    Disorders Except TIA.               
79...............................  Respiratory Infections            139
                                    and Inflammations Age               
                                    >17 with CC.                        
82...............................  Respiratory Neoplasms...          526
89...............................  Simple Pneumonia and              200
                                    Pleurisy Age >17 with               
                                    CC.                                 
127..............................  Heart Failure and Shock.          184
172..............................  Digestive Malignancy              226
                                    with CC.                            
203..............................  Malignancy of                     285
                                    Hepatobiliary System or             
                                    Pancreas.                           
239..............................  Pathological Fractures            218
                                    and Musculosketal and               
                                    Connective Tissue                   
                                    Malignancy.                         
296..............................  Nutritional and                   173
                                    Miscellaneous Metabolic             
                                    Disorders Age >17 with              
                                    CC.                                 
403..............................  Lymphoma and Non-Acute            178
                                    Leukemia with CC.                   
416..............................  Septicemia Age >17......          147
------------------------------------------------------------------------

    Six of these DRGs are cancer-related; however, the other DRGs are 
quite diverse. Upon further analysis, we found that, for the most part, 
discharges with code V66.7 do not significantly differ in length of 
stay from the discharges in the same DRG without code V66.7. The length 
of stay for discharges with code V66.7 are sometimes longer and 
sometimes shorter and the comparative length of stay for a given DRG 
tends to vary by only one day. In general, the average charges for a 
palliative care case discharge with a secondary code of V66.7 were 
lower than the charges for other discharges within the DRG. However, 
these differences were relatively small and were well within the 
standard variation of charges for cases in the DRG.
    One approach we could take to revise the DRGs would be to divide 
those DRGs with a large number of cases coded with V66.7 into two 
different DRGs, with and without palliative care. However, the 
relatively small proportion of cases in each DRG argues against this 
approach; no DRG has more than 1 percent of its cases coded with 
palliative care and, in most cases, the percentage is well under 1 
percent. An alternative approach would be to group all palliative care 
cases, regardless of the underlying disease or condition, into one new 
DRG. However, the charges of these cases are so varied that this is not 
a logical choice. In addition, there is a lack of clinical coherence in 
such an approach. The underlying diagnoses of these cases range from 
respiratory conditions to heart failure to septicemia.

[[Page 40963]]

Because there are so few cases in the FY 1997 data and they are so 
widely dispersed among different DRGs, we did not propose any DRG 
modification. We will make a more detailed analysis of these cases over 
the next year based on a more complete FY 1997 data file as well as 
review of the FY 1998 cases that will be available later this year. As 
time goes by, hospital coders and physicians should become more aware 
of this code and we hope that more complete data will assist our 
decision-making process.
    We received a few comments supporting our decision to make no DRG 
changes at this time for palliative care cases. One commenter agreed 
with our statement that it may take several years for use of this code 
to spread through the medical community.
    b. PTCA. Effective with discharges occurring on or after October 1, 
1997, we reassigned cases of PTCA with coronary artery stent implant 
from DRG 112 (Percutaneous Cardiovascular Procedures) to DRG 116 (Other 
Permanent Cardiac Pacemaker Implant or PTCA with Coronary Artery Stent 
Implant). In the August 29, 1997 final rule with comment period, we 
responded to several commenters who contended that PTCA cases treated 
with platelet inhibitors were as resource intensive as the PTCA with 
stent implant cases and that these cases should also be moved to DRG 
116. However, there is currently no code that describes the infusion of 
platelet inhibitors. Therefore, we were unable to make any changes in 
the DRGs for FY 1998.
    As set forth in Table 6B, New Procedure Codes in section VI. of the 
addendum to this final rule, a new procedure code for injection or 
infusion of platelet inhibitors (code 99.20) will be effective with 
discharges occurring on or after October 1, 1998. Our usual policy on 
new codes is to assign them to the same DRG or DRGs as their 
predecessor code. Because infusion of platelet inhibitors is currently 
assigned to a non-OR procedure code, we followed our usual practice and 
designated code 99.20 as a non-OR code that does not affect DRG 
assignment.
    We will not have any data on this new code until we receive bills 
for FY 1999. Thus, we would be unable to make any changes in DRG 
assignment until FY 2001. We note, however, that the Conference Report 
that accompanied the Balanced Budget Act of 1997 contained language 
stating that ``* * * in order to ensure that Medicare beneficiaries 
have access to innovative new drug therapies, the Conferees believe 
that HCFA should consider, to the extent feasible, reliable, validated 
data other than MedPAR data in annually recalibrating and reclassifying 
the DRGs.'' (H.R. Rep. No. 105-217 at 734 (1997)). At the time the 
proposed rule was published, we had received no data that would have 
allowed us to make an appropriate modification of DRG 112 for PTCA 
cases with platelet infusion therapy. In that rule, we stated that we 
would review and analyze any data we received during the comment period 
about the use of platelet inhibitors for Medicare beneficiaries.
    Since publication of the proposed rule, we received some data 
concerning the use of GPIIb/IIIa platelet inhibitor drug therapy as 
well as some comments on the issue. A discussion of the data and the 
comments and our responses are set forth below.
    Comment: The data we received were provided by the pharmaceutical 
company that manufactures a GPIIb/IIIa platelet inhibitor. In its 
comment accompanying the data, the company states its belief that the 
data conclusively demonstrate that procedure code 99.20 should be 
assigned to DRG 116 effective for discharges occurring on or after 
October 1, 1998. We received two other comments from hospitals 
supporting this reassignment in order to improve payment for a 
beneficial drug therapy. Another hospital urged HCFA not to make the 
reassignment because the commenter believes that there is no evidence 
that use of the drug decreases mortality or the risk of need for 
emergency coronary bypass in patients undergoing stent implantation. In 
addition, this commenter believes that the price charged for platelet 
inhibitor is exorbitant and that HCFA should not directly subsidize a 
pharmaceutical company through a DRG change. Finally, two commenters, a 
drug company and a pharmaceutical association, were encouraged by 
HCFA's willingness to consider data other than MedPAR data for 
analyzing possible DRG changes.
    The data we received comprise two different sets of Medicare 
beneficiaries who received PTCA, PTCA with implant of a coronary stent, 
PTCA with platelet inhibitor therapy, or PTCA with both implant of a 
stent and platelet inhibitor therapy. One set of data consists of just 
under 500 patients who received treatment in seven hospitals during a 
clinical trial conducted between January 1, 1996 and June 15, 1997. The 
other set consists of just over 6,200 patients treated in 83 hospitals 
between October 1, 1995 and December 31, 1996 (this is data from a 
health care information company that, among other products and 
services, performs clinical and financial analysis of data under 
contract with hospitals). For the first set of data, the hospitals are 
identified; however, for the second set of data, the hospital 
identifying information is confidential and was not released to HCFA. 
In order to provide HCFA with standardized charges, the information 
company obtained the HCFA provider-specific file and standardized the 
charges before providing them to HCFA.
    According to the commenter, based on the data provided the 
approximate average standardized charges for the different classes of 
patients are as follows:

    <bullet> PTCA alone--$17,000.
    <bullet> PTCA and stent--$22,000.
    <bullet> PTCA and platelet inhibitor--$24,000.
    <bullet> PTCA and both stent and platelet inhibitor--$29,000.

Based on these data, the drug's manufacturer urges us to reassign 
procedure code 99.20 to DRG 116. The commenter also argues that failure 
to improve the payment for these cases may result in Medicare 
beneficiaries being denied equal access to potentially life-saving 
treatment.
    Response: We have reviewed the data submitted as well as considered 
the comments we have received. Based on the data provided, it appears 
that the cost of a PTCA case with platelet inhibitor drug therapy is at 
least as expensive as a PTCA case with stent implant. However, the vast 
majority of the cases (over 90 percent) cannot be linked to a hospital. 
In addition, although the large data set does constitute a sample of 
cases, as claimed by the commenter, it is not a random sample, but 
rather a sample of those hospitals that contract with the health 
information company. The pharmaceutical company states that the 83 
hospitals are representative of all hospitals in the country, but we 
have no way to verify that claim. Because the data cannot be verified, 
and do not reflect a complete data set or a random sample, HCFA cannot 
use the data to make a change in the DRG assignment.
    The language that Congress included in the Conference Report that 
accompanied the Balanced Budget Act of 1997 stated that HCFA should ``* 
* * consider, to the extent feasible, reliable, validated data other 
than MedPAR data in annually recalibrating and reclassifying the 
DRGs.'' The data we have been given does not meet these requirements. 
We cannot validate whether the data are Medicare beneficiaries nor can 
we verify which hospitals provided the treatment or the amount of 
charges reported to Medicare. In addition, we do not believe that we

[[Page 40964]]

should base any DRG reclassification decisions that will increase 
payment for a set of cases on data that would not meet HCFA's strict 
requirements for making a DRG change that would lower the relative 
weight for a set of cases (see discussion below concerning radiosurgery 
procedures).
    As we have stated in several proposed and final rules (most 
recently in the August 30, 1996 final rule in a discussion of the 
coronary artery stent implant (61 FR 46170) and the August 29, 1997 
final rule in response to a comment on the DRG assignment for new 
diagnosis code 686.01) (62 FR 45982), our longstanding practice is to 
assign a new code to the same DRG or DRGs as its predecessor code. Our 
compelling reason for this practice is our inability to move the cases 
associated with the new code to a new DRG assignment as part of the DRG 
reclassification and recalibration process. Consequently, our policy is 
to wait until we have a full year of Medicare data upon which to base 
an analysis of what the most appropriate DRG assignment would be. We 
can then move any cases that we would reassign so we can revise the DRG 
relative weights accordingly. If we were to assign procedure code 99.20 
to DRG 116 at this time, we would be unable to move the cases 
associated with that code from DRG 112 into DRG 116 based on the data 
provided. Thus, the relative weight of DRG 112 would still reflect the 
cases with procedure code 99.20. Since these cases presumably have much 
higher charges than the other PTCA cases, the relative weight for DRG 
112 would be overstated, which means the payments to those cases would 
be overstated. In addition, the charges for PTCA cases with platelet 
inhibitor drug therapy would not be reflected in the DRG 116 relative 
weight.
    Our practice of waiting until we have identifiable MedPAR data 
applies to all DRG changes, that is, both those changes that would 
enhance payment for a particular diagnosis or procedure, as well as, 
those that would decrease payment for a particular diagnosis or 
procedure. We note that, in FY 1996, when we created a new procedure 
code for stereotactic radiosurgery (92.3), we assigned the code to DRGs 
1, 2, and 3, because that is where the predecessor procedure code was 
assigned. However, since code 92.3 is a nonoperating room procedure, we 
were relatively sure that the code would not remain assigned to DRG 1, 
2, and 3 (which are the highest weighted surgical DRGs in MDC 1) once 
we had the actual charge data. As discussed in the August 29, 1997 
final rule (62 FR 45971), procedure code 92.3 was reassigned to DRGs 7 
and 8 once we had the FY 1996 data to analyze. Therefore, we 
``overpaid'' those cases for 2 years; that is, their charges were much 
less than the average charges for DRGs 1, 2, and 3.
    We believe that any data we use to reclassify and recalibrate DRGs 
must be comprehensive and valid, as well as verifiable by HCFA.
    Concerning the commenter's argument that failure to change the DRG 
assignment for infusion of platelet inhibitor will compromise the 
availability of this treatment for Medicare beneficiaries, we note, as 
we have in several previous documents, that it is a violation of a 
hospital's Medicare provider agreement to place restrictions on the 
number of Medicare beneficiaries it accepts for treatment unless it 
places the same restrictions on all other patients.
c. Implantation of Muscle Stimulator
    Comment: We received one comment arguing that the current DRG 
assignment for the implantation of a muscle stimulator and the 
associated tendon transfer for quadriplegics is inappropriate. The 
specific muscle stimulator device (an implanted neuroprosthesis that 
restores functional hand motion in people with quadriplegia who are 24 
months post-injury) was approved by the Food and Drug Administration in 
August 1996. The device is designed to provide neuromuscular 
stimulation for certain patients with quadriplegia so that they can 
grasp with their hand and perform tasks such as holding eating utensils 
and pens and brushing their teeth. In many cases, the patient also 
undergoes a tendon transfer to the hand during the same admission or 
during a prior admission. The commenter notes that when the tendon 
transfer (procedure code 82.56 (other hand tendon transfer or 
transplantation)) and the insertion of the muscle stimulator (procedure 
code 83.92 (insertion or replacement of skeletal muscle stimulator)) 
are performed during the same admission, the case is assigned to DRG 7 
or 8 (Peripheral and Cranial Nerve and Other Nerve System Procedures). 
However, when the procedures are performed during two separate 
admissions, the tendon transfer is assigned to DRGs 7 and 8 and the 
insertion of the muscle stimulator is assigned to DRG 468 (Extensive OR 
Procedure Unrelated to Principal Diagnosis). The commenter stated that 
although payment for DRGs 7, 8, and 468 are all significantly less than 
the cost of the hospital stay and the device, DRG 468 pays more and 
results in the hospital losing less money. The commenter noted that the 
device alone costs $24,500 and hospitals report losses of $11,000 to 
$26,000 when the device is inserted and a tendon transfer is performed 
during the same admission (resulting in assignment to DRGs 7 and 8). 
However, when the insertion of the device is performed in a separate 
admission, the cases are assigned to DRG 468 and hospitals' losses are 
limited to $4,000 to $18,000.
    The commenter believes that hospitals will refuse to perform this 
very useful surgery unless the DRG assignment is revised. If the 
insertion of the muscle stimulator were assigned to a surgical DRG in 
MDC 1 where the diagnosis codes for quadriplegia are assigned, the 
highest paying DRG assignment would be DRGs 1, 2, and 3 (Craniotomy). 
Besides being clinically inappropriate, the commenter believes the 
weights for these DRGs are too low to adequately pay for this 
procedure.
    The commenter recommended both a short and a long-term solution for 
this problem. For now, all cases with insertion of muscle stimulators 
performed in conjunction with tendon transfer should be assigned to DRG 
468. In the long term, HCFA should establish a new DRG for the 
implantation of muscle stimulation devices and other stimulation 
devices as they become available.
    Response: In examining the latest FY 1997 MedPAR file (bills 
received through March 1998), we found only three cases for 
implantation of muscle stimulators for quadriplegics. One case was 
assigned to DRG 7 and the other two to DRG 8. The standardized charge 
and length of stay for each case is set forth below.

------------------------------------------------------------------------
                                                               Length of
                      DRG                        Standardized     stay  
                                                    charge       (days) 
------------------------------------------------------------------------
7..............................................       $25,227          7
8..............................................         8,849          2
8..............................................        42,183          2
------------------------------------------------------------------------

The average charge for all cases assigned to DRG 7 is approximately 
$21,000 and the average charge for DRG 8 cases is about $11,500.
    With so few cases, we would prefer to review the data in the FY 
1998 MedPAR file before making any reclassification. Therefore, we will 
add these cases to our FY 2000 DRG reclassification analysis agenda. We 
note that the charges reported for two of the three cases are 
significantly less than the costs that the commenter believes would be 
incurred for this surgery (approximately $35,000).
    It would be inappropriate to assign the muscle stimulator 
insertions solely

[[Page 40965]]

to DRG 468. This DRG was created to capture a set of clinically 
unrelated cases where the only operating room procedures performed are 
unrelated to the patient's principal diagnosis. To permanently assign a 
procedure code only to DRG 468 would be contrary to the basic design 
and precepts of the DRG system.

C. Recalibration of DRG Weights

    We proposed to use the same basic methodology for the FY 1999 
recalibration as we did for FY 1998. (See the August 29, 1997 final 
rule with comment (62 FR 45982).) That is, we recalibrated the weights 
based on charge data for Medicare discharges. However, we used the most 
current charge information available, the FY 1997 MedPAR file, rather 
than the FY 1996 MedPAR file. The MedPAR file is based on fully-coded 
diagnostic and surgical procedure data for all Medicare inpatient 
hospital bills.
    The final recalibrated DRG relative weights are constructed from FY 
1997 MedPAR data, based on bills received by HCFA through March 1998, 
from all hospitals subject to the prospective payment system and short-
term acute care hospitals in waiver States. The FY 1997 MedPAR file 
includes data for approximately 11.3 million Medicare discharges.
    The methodology used to calculate the DRG relative weights from the 
FY 1997 MedPAR file is as follows:
    <bullet> All the claims were regrouped using the DRG classification 
revisions discussed above in section II.B of this preamble.
    <bullet> Charges were standardized to remove the effects of 
differences in area wage levels, indirect medical education costs, 
disproportionate share payments, and, for hospitals in Alaska and 
Hawaii, the applicable cost-of-living adjustment.
    <bullet> The average standardized charge per DRG was calculated by 
summing the standardized charges for all cases in the DRG and dividing 
that amount by the number of cases classified in the DRG.
    <bullet> We then eliminated statistical outliers, using the same 
criteria as was used in computing the current weights. That is, all 
cases that are outside of 3.0 standard deviations from the mean of the 
log distribution of both the charges per case and the charges per day 
for each DRG.
    <bullet> The average charge for each DRG was then recomputed 
(excluding the statistical outliers) and divided by the national 
average standardized charge per case to determine the relative weight. 
A transfer case (including a postacute care transfer case as discussed 
in section IV.A of this preamble) is counted as a fraction of a case 
based on the ratio of its length of stay (plus one day to account for 
the double per diem payment for the first day) to the geometric mean 
length of stay of the cases assigned to the DRG. That is, a 5-day 
length of stay transfer case assigned to a DRG with a geometric mean 
length of stay of 10 days is counted as 0.6 of a total case. Transfers 
from DRGs 209, 210, or 211 to postacute care are counted as a fraction 
of a discharge based on the ratio determined by dividing the geometric 
mean length of stay for the DRG by the sum of half the geometric mean 
and half the length of stay for the case, plus one.
    <bullet> We established the relative weight for heart and heart-
lung, liver, and lung transplants (DRGs 103, 480, and 495) in a manner 
consistent with the methodology for all other DRGs except that the 
transplant cases that were used to establish the weights were limited 
to those Medicare-approved heart, heart-lung, liver, and lung 
transplant centers that have cases in the FY 1995 MedPAR file. 
(Medicare coverage for heart, heart-lung, liver, and lung transplants 
is limited to those facilities that have received approval from HCFA as 
transplant centers.)
    <bullet> Acquisition costs for kidney, heart, heart-lung, liver, 
and lung transplants continue to be paid on a reasonable cost basis. 
Unlike other excluded costs, the acquisition costs are concentrated in 
specific DRGs (DRG 302 (Kidney Transplant); DRG 103 (Heart Transplant 
for heart and heart-lung transplants); DRG 480 (Liver Transplant); and 
DRG 495 (Lung Transplant)). Because these costs are paid separately 
from the prospective payment rate, it is necessary to make an 
adjustment to prevent the relative weights for these DRGs from 
including the effect of the acquisition costs. Therefore, we subtracted 
the acquisition charges from the total charges on each transplant bill 
that showed acquisition charges before computing the average charge for 
the DRG and before eliminating statistical outliers.
    When we recalibrated the DRG weights for previous years, we set a 
threshold of 10 cases as the minimum number of cases required to 
compute a reasonable weight. We proposed to use that same case 
threshold in recalibrating the DRG weights for FY 1999. Using the FY 
1997 MedPAR data set, there are 37 DRGs that contain fewer than 10 
cases. We computed the weights for the 37 low-volume DRGs by adjusting 
the FY 1998 weights of these DRGs by the percentage change in the 
average weight of the cases in the other DRGs.
    The weights developed according to the methodology described above, 
using the final DRG classification changes, result in an average case 
weight that is different from the average case weight before 
recalibration. Therefore, the new weights are normalized by an 
adjustment factor, so that the average case weight after recalibration 
is equal to the average case weight before recalibration. This 
adjustment is intended to ensure that recalibration by itself neither 
increases nor decreases total payments under the prospective payment 
system.
    Comment: One commenter was concerned about the general trend in the 
relative weights. This commenter calculated average relative weights 
for each MDC as well as the overall average DRG weight. Based upon this 
calculation, the commenter noted that the average weight for the pre-
MDC DRGs and MDCs 8 (Diseases and Disorders of the Musculoskeletal 
system and Connective Tissue) and 24 (Multiple Significant Trauma) are 
decreasing. Concerning MDC 8, the commenter believes the average weight 
is decreasing because of the use of postacute care for these DRGs, 
noting that 4 of them are included in the list of 10 DRGs affected by 
the transfer to postacute care provision (see section IV.A of this 
preamble for a discussion of this provision). The commenter suggested 
that we leave the FY 1998 weights intact for MDC 8 until we can assess 
the effect of postacute care transfers on average standardized amounts. 
For the pre-MDCs and MDC 24, the commenter believes that the cases 
assigned to these categories are extremely resource-intensive and that 
the average weights should not be decreasing. Finally, the commenter 
noted that, although the total weight increased for MDC 22 (Burns), the 
average weight decreased. The commenter believes this is inconsistent 
with the statement in the proposed rule that the changes being made to 
MDC 22 would improve the explanation of variation in resource use in 
those DRGs (63 FR 25579).
    Response: We reviewed the table of average DRG weights presented in 
the comment, both overall and within MDCs, and we found that the 
commenter has mistakenly used a simple averaging methodology to 
determine the mean weight rather than a weighted averaging methodology, 
which is how the DRG relative weights are calculated. For example, 
suppose an MDC has three DRGs and there are 3 cases assigned to DRG 1, 
6 cases assigned to DRG 2, and 7 cases assigned to DRG 3. The weights 
for the DRGs are

[[Page 40966]]

1.000, 2.000, and 3.000, respectively. The simple average weight for 
the three DRGs would be calculated by adding the weights and dividing 
by the number of DRGs as follows:
[GRAPHIC] [TIFF OMITTED] TR31JY98.051

However, the weighted average would be calculated by first multiplying 
the weights of each DRG by the number of cases in that DRG and dividing 
by the number of cases as follows:
[GRAPHIC] [TIFF OMITTED] TR31JY98.052

    Because of this mistake in average weight calculation, the 
commenter has made some incorrect conclusions. For example, the 
commenter states that the average DRG weight for FY 1998 is 1.3681 and 
the average of the proposed FY 1999 weights is 1.3895. In reality, the 
average FY 1998 weight is 1.4606 and the average of the proposed FY 
1999 weights is 1.4673.

    (Note: These average weights are based on the MedPAR cases used 
to recalibrate the weights; that is, the FY 1998 weights are based 
on FY 1996 cases reclassified into the FY 1998 DRGs and the proposed 
FY 1999 weights are based on FY 1997 cases reclassified into the FY 
1999 DRGS).
    The average weight of the final FY 1999 weights is 1.4679.

    Contrary to the commenter's assertion, the average weight of the 
proposed FY 1999 MDC 22 DRGs did not decrease compared to the FY 1998 
MDC 22 weights (4.6663 and 4.5234, respectively). In addition, although 
all of the FY 1999 proposed pre-MDC DRG weights except DRG 483 
decreased relative to FY 1998, the increase in DRG 483 was large enough 
(coupled with an increase in cases) to result in an overall higher 
average weight for the pre-MDC DRGs. We note that the weights for DRGs 
481, 482, and 483 have increased between the proposed and final FY 1999 
recalibrations. As we have noted in the past, the weights for the 
transplant DRGs (481, 482, and 495) have gradually decreased over the 
years. In addition, the transplant DRGs have a relatively small number 
of cases with a large range of reported charges. A few very low or high 
charge cases can make a relatively dramatic difference in the weights 
from year to year (August 29, 1997; 62 FR 45983).
    Finally, with regard to the commenter's request that we set the FY 
1999 MDC 8 weights equal to the FY 1998 weights, we could refer the 
commenter to the discussion above concerning the steps we take in 
recalibrating the weights. Each year, when we recalibrate the DRG 
weights, we use charge data from the most recent Medicare cases 
available. That is, we use the charges reported by hospitals to 
establish the weights. In this way, we ensure that we are using the 
most recent hospital charging practices and patterns to set the new 
relative weights. Because each DRG weight is ``relative'' to all other 
DRG weights, we cannot arbitrarily freeze a set of those DRGs at the 
previous year's weights. In a relative system such as this, if some 
weights increase, others must decrease. Finally, as discussed above, 
when we recalibrate the weights, a transfer case is counted as a 
fraction of a case rather than a whole case.
    Section 1886(d)(4)(C)(iii) of the Act requires that beginning with 
FY 1991, reclassification and recalibration changes be made in a manner 
that assures that the aggregate payments are neither greater than nor 
less than the aggregate payments that would have been made without the 
changes. Although normalization is intended to achieve this effect, 
equating the average case weight after recalibration to the average 
case weight before recalibration does not necessarily achieve budget 
neutrality with respect to aggregate payments to hospitals because 
payment to hospitals is affected by factors other than average case 
weight. Therefore, as we have done in past years and as discussed in 
section II.A.4.b of the Addendum to this final rule, we make a budget 
neutrality adjustment to assure that the requirement of section 
1886(d)(4)(C)(iii) of the Act is met.

III. Changes to the Hospital Wage Index

A. Background

    Section 1886(d)(3)(E) of the Act requires that, as part of the 
methodology for determining prospective payments to hospitals, the 
Secretary must adjust the standardized amounts ``for area differences 
in hospital wage levels by a factor (established by the Secretary) 
reflecting the relative hospital wage level in the geographic area of 
the hospital compared to the national average hospital wage level.'' In 
accordance with the broad discretion conferred under the Act, we 
currently define hospital labor market areas based on the definitions 
of Metropolitan Statistical Areas (MSAs), Primary MSAs (PMSAs), and New 
England County Metropolitan Areas (NECMAs) issued by the Office of 
Management and Budget (OMB). OMB also designates Consolidated MSAs 
(CMSAs). A CMSA is a metropolitan area with a population of one million 
or more, comprised of two or more PMSAs (identified by their separate 
economic and social character). For purposes of the hospital wage 
index, we use the PMSAs rather than CMSAs since they allow a more 
precise breakdown of labor costs. If a metropolitan area is not 
designated as part of a PMSA, we use the applicable MSA. Rural areas 
are areas outside a designated MSA, PMSA, or NECMA.
    Effective April 1, 1990, the term Metropolitan Area (MA) replaced 
the term Metropolitan Statistical Area (MSA) (which had been used since 
June 30, 1983) to describe the set of metropolitan areas comprised of 
MSAs, PMSAs, and CMSAs. The terminology was changed by OMB in the March 
30, 1990 Federal Register to distinguish between the individual 
metropolitan areas known as MSAs and the set of all metropolitan areas 
(MSAs, PMSAs, and CMSAs) (55 FR 12154). For purposes of the prospective 
payment system, we will continue to refer to these areas as MSAs.
    Section 1886(d)(3)(E) of the Act also requires that the wage index 
be updated annually beginning October 1, 1993. Furthermore, this 
section provides that the Secretary base the update on a survey of 
wages and wage-related costs of short-term, acute care hospitals. The 
survey should measure, to the extent feasible, the earnings and paid 
hours of employment by occupational category, and must exclude the 
wages and wage-related costs incurred in furnishing skilled nursing 
services. We also adjust the wage index, as discussed below in section 
III.F, to take into account the geographic reclassification of 
hospitals in accordance with sections 1886(d)(8)(B) and 1886(d)(10) of 
the Act.

B. FY 1999 Wage Index Update

    The final FY 1999 wage index (effective for hospital discharges 
occurring on or after October 1, 1998 and before October 1, 1999) is 
based on the data collected from the Medicare cost reports submitted by 
hospitals for cost reporting periods beginning in FY 1995 (the FY 1998 
wage index was

[[Page 40967]]

based on FY 1994 wage data). The FY 1999 wage index includes the 
following categories of data, which were also included in the FY 1998 
wage index:
    <bullet> Total salaries and hours from short-term, acute care 
hospitals.
    <bullet> Home office costs and hours.
    <bullet> Direct patient care contract labor costs and hours.
The wage index also continues to exclude the direct salaries and hours 
for nonhospital services such as skilled nursing facility services, 
home health services, or other subprovider components that are not 
subject to the prospective payment system. Finally, as discussed in 
detail in the August 29, 1997 final rule with comment period, we 
calculate a separate Puerto Rico-specific wage index and apply it to 
the Puerto Rico standardized amount. (See 62 FR 45984 and 46041) This 
wage index is based solely on Puerto Rico's data.
    For FY 1999 we proposed two changes to the categories of data 
included in the wage index: adding contract labor costs and hours for 
top management positions and replacing the fringe benefit category with 
the wage-related costs associated with hospital and home office 
salaries category. These two changes reflect changes to the Medicare 
cost report that were discussed in the September 1, 1994 final rule 
with comment period (59 FR 45355). The changes were made to the cost 
report for cost reporting periods beginning during FY 1995. Because we 
are using wage data from the FY 1995 cost report for the FY 1999 wage 
index, these two changes will be reflected in the wage index for the 
first time in FY 1999.
    As discussed in detail in the September 1, 1994 final rule with 
comment period (59 FR 45355), we expanded the definition of contract 
services reported on the Worksheet S-3 to include the labor-related 
costs associated with contract personnel in a hospital's top four 
management positions: Chief Executive Officer/Hospital Administrator, 
Chief Operating Officer, Chief Financial Officer, and Nursing 
Administrator. We also revised the cost report to reflect a change in 
terminology from ``fringe benefits'' to ``wage-related costs,'' to 
promote the consistent reporting of these costs. (See September 1, 1994 
final rule with comment period (59 FR 45356-45359).) We made this 
change in terminology because we believed it would eliminate confusion 
regarding those wage-related costs that are incorporated in the wage 
index versus the broader definition of fringe benefits recognized under 
the Medicare cost reimbursement principles. Wage-related costs, which 
include core and other wage-related costs, are reported on the Form 
HCFA-339, the Provider Cost Report Reimbursement Questionnaire.
    Finally, we analyzed the wage data for the following costs, which 
were separately reported for the first time on the FY 1995 cost 
reports:
    <bullet> Physician Part A costs.
    <bullet> Resident and Certified Registered Nurse Anesthetist (CRNA) 
Part A costs.
    <bullet> Overhead cost and hours by cost center.
Our analyses and proposals concerning these data are set forth below in 
section III.C.
    Comment: MedPAC submitted a general comment on the wage index. 
First, the Commission stated that several of the issues raised in the 
proposed rule stem from the failure of the wage index to account for 
the mix of occupational categories employed by each hospital and that 
if the wage index reflected this mix it would be more accurate. In 
addition, MedPAC, noted that new measures are needed to implement each 
new prospective system as well as for Medicare+Choice plans and 
suggested that attention should be given to alternative strategies for 
obtaining labor prices that could eliminate the need to collect data 
separately for each type of provider affected. MedPac intends to 
examine this issue during the upcoming year.
    Response: We have addressed the issue of occupational mix in the 
past. In the May 27, 1994 Federal Register, we indicated we were not 
proposing to collect occupational mix data due to a lack of support 
from the hospital industry for an additional reporting burden with 
uncertain impact (59 FR 27724). However, certain segments of the 
industry continue to insist that an occupational mix would make the 
wage index fairer. We will continue to evaluate all the data and 
evidence that we receive on this issue. With respect to MedPAC's 
interest in examining alternative data collection strategies, we look 
forward to the results of its examination, and will provide whatever 
assistance we can.

C. Issues Relating to the FY 1999 Wage Index

1. Physician Part A Costs
    Currently, if a hospital directly employs a physician, the Part A 
portion of the physician's salary and wage-related costs (that is, 
administrative and teaching services) is included in the calculation of 
the wage index. However, the costs for contract physician Part A 
services are not included. Our policy has been that, to be included in 
the wage index calculation, a contracted service must be direct patient 
care, or, beginning with the FY 1999 wage index, top level management 
(see discussion above). Because some States have laws that prohibit 
hospitals from directly hiring physicians, the hospitals in those 
States have claimed that they are disadvantaged by the wage index's 
exclusion of contract physician Part A costs. We began collecting 
separate wage data for both direct and contract physician Part A 
services on the FY 1995 cost report in order to analyze this issue. As 
we discussed in the September 1, 1994 final rule with comment period 
(59 FR 45354), our original purpose in collecting these data was to 
exclude all physician Part A costs from the wage index.
    When we made the change to the cost report, there were five States 
in which hospitals were prohibited from directly employing physicians. 
We understand that only two States currently maintain this prohibition: 
Texas and California. Thus, the number of hospitals affected by our 
current policy has decreased. Nevertheless, the fact that hospitals in 
these two States are still prohibited from directly employing 
physicians for Part A services and, therefore, must enter into 
contractual agreements with physicians for these services, perpetuates 
the perceived inequity.
    The main reason we planned to exclude all Part A physician costs 
rather than include the contract costs was our concern that it would be 
difficult to accurately attribute the Part A costs and hours of these 
contract physicians. In addition, we were concerned that including 
these costs could inappropriately inflate the hospitals' average hourly 
wages. That is, we anticipated that average costs for contract 
physicians would be significantly higher than the costs for those 
physicians directly employed by the hospital. However, our analysis of 
the data shows that the average hourly wages for contract physician 
Part A costs are very similar to, and, in fact slightly lower than, the 
costs for salaried physician Part A services.
    Based on this result, we believe that continuing to include the 
directly employed physician Part A costs and adding the costs for 
contract physicians is the better policy. Thus, we proposed to 
calculate the FY 1999 wage index including both direct and contract 
physician Part A costs.
    Of the 5,070 hospitals included in the FY 1995 wage data file, 
approximately 32 percent reported contract physician Part A costs. 
Including these costs would raise the wage index values for

[[Page 40968]]

2 MSAs (4 hospitals) by more than 5 percent and 7 MSAs (43 hospitals) 
by between 2 and 5 percent. Two MSAs and one Statewide rural area (74 
hospitals) would experience a decrease between 2 and 5 percent. The 
wage index values for the remaining 365 areas (4,949 hospitals) would 
be relatively unaffected, experiencing changes of between -2 and 2 
percent.
    We received several comments regarding the inclusion of contract 
physician costs, and physician Part A costs generally. The specific 
comments and our responses are set forth below.
    Comment: A national hospital association noted its concern about 
the inclusion of teaching-related costs in the wage index because 
Medicare pays separately for the salaries of teaching physicians 
through direct graduate medical education (GME) payments. Nevertheless, 
the commenter supports the inclusion of contract physician costs in the 
FY 1999 wage index. The commenter indicated that it would work to 
develop a consensus among hospital and health system representatives on 
which physician salaries, if any, should be included in future wage 
indexes. Another commenter supported the inclusion of contract 
physician costs but recommended that HCFA take swift action to remove 
teaching physician costs ``to achieve geographic equity in payments.''
    Several commenters believe that all physician Part A costs, 
including teaching physician costs, should be recognized in calculating 
the wage index. The commenters asserted that these are costs of doing 
business, and including them in the wage index appropriately measures 
the geographic variations in what hospitals pay for labor. However, 
numerous commenters argued that it is inappropriate to include teaching 
physician costs in the wage index because, in effect, it results in 
double payment to teaching hospitals for these costs. Recognizing that 
HCFA does not have the data available to separately identify the 
portion of physician costs attributable to teaching physicians, these 
commenters believe it would be preferable to remove all Part A 
physician costs from the wage index calculation.
    Response: As a conceptual matter, we believe that physician Part A 
costs other than teaching physician costs should be included in the 
wage index because these costs are paid under the prospective payment 
system. Further, in light of the data now available, we believe 
including contract physician Part A costs improves equity in the wage 
index by allowing hospitals that are prohibited by State law from 
directly employing physicians to include their costs of contracted 
physicians.
    With regard to teaching physician costs, the 1995 cost report does 
not separate teaching physician costs from other physician Part A 
costs. Consequently, we are unable to exclude teaching physician costs 
from the FY 1999 wage index. We believe the optimal approach is to 
consider this issue directly in developing the FY 2000 wage index. To 
facilitate evaluation of this issue, we will instruct the fiscal 
intermediaries to separate teaching physician costs from hospitals' FY 
1996 wage data. We will carefully analyze those data, and any changes 
we propose to make based on that analysis will be included in the FY 
2000 proposed rule.
    We do not agree with the commenters' suggestion that, in lieu of 
collecting data that would allow us to separately identify teaching 
physician costs, we should remove all physician salaries from the wage 
index. These physician Part A costs are incurred by the hospital for 
services related to such positions as medical director and clinical 
department heads. As such, they are legitimate labor costs included 
under the prospective payment system. Based on our analysis of the FY 
1995 cost reports, we believe that the data reported for physician Part 
A costs are sufficiently reliable and complete that inclusion of 
physician Part A costs (direct as well as contract costs) for FY 1999 
results in a wage index that better reflects relative hospital labor 
costs than a wage index that excludes all physician Part A costs. 
Moreover, as stated above, we believe the addition of contract 
physician Part A costs in the FY 1999 wage index improves the fairness 
and accuracy of the wage index relative to the FY 1998 wage index 
(which included direct physician Part A costs (salaries) but not 
contract physician Part A costs). Thus, rather than excluding all 
physician Part A costs, we believe the more responsible approach is to 
collect the necessary data as expeditiously as possible in order to 
analyze whether it is feasible to separate teaching physician costs 
from other physician Part A costs.
    Comment: Several commenters favored not only including physician 
salaries in the wage index, but also continuing to include teaching 
physician salaries. Commenters believe that if Congress had known about 
the payment redistributions that would result from eliminating teaching 
physician salaries from the wage index before it had enacted the 
reductions applicable to teaching hospitals in the Balanced Budget Act 
of 1997, it may not have enacted such deep cuts. One commenter also 
suggested that if we excluded physician salaries, we would need to 
restandardize the large urban standardized amount to reflect the new 
wage index.
    Another commenter stated that the costs of teaching physicians and 
residents should be included in the wage index because Medicare 
payments for GME are not sufficient to compensate hospitals for their 
GME costs. This commenter compared hospitals' direct GME costs on the 
Medicare cost report with the payments they receive and estimated a 
shortfall of $900 million. The commenter further noted that reductions 
in Medicare disproportionate share payments as a result of the Balanced 
Budget Act would have the effect of increasing the empirical estimate 
for the indirect graduate medical education adjustment, leading to a 
further shortfall in payments for GME.
    Response: We cannot know what Congress would or would not have done 
if it had known about the impacts of future changes to wage index 
policy. Rather, refinements to the wage data should be evaluated on 
their individual merits in terms of whether they contribute to or 
detract from the fairness and accuracy of the wage index. We disagree 
that changes to the wage index may require restandardization of the 
large urban standardized amount. The large urban standardized amount 
was not created by a separate standardization of the costs of hospitals 
in large urban areas, but by applying differential update factors 
established by Congress.
    We also disagree with the comment that the wage index should 
continue to include costs related to teaching physicians and residents 
because current and future GME payments are not fully compensating 
hospitals for their GME costs. The adequacy of direct GME payments is a 
separate issue by virtue of the fact that these costs are recognized 
separately and paid for through Medicare outside the prospective 
payment system. The amount Medicare pays for direct GME is based on 
policy considerations related to the nature of GME, and reflects 
Medicare's fair share of those costs. Similarly, indirect GME costs are 
distinct from hospitals' labor costs, and the level of IME payments is 
not relevant to the wage index.
    Comment: Many commenters referred to an analysis done by one 
commenter showing the projected payment impacts by State of our 
proposed policy of including physician (both direct and contract), 
resident, and CRNA costs in the wage index. These commenters

[[Page 40969]]

referred to the large losses that, according to this analysis, certain 
States will allegedly suffer because of this policy (California: $79 
million; Florida: $36 million; Texas: $10 million). Corresponding gains 
were cited among northeast hospitals. The suggestion of these comments 
was that we should revise our proposed policy and exclude all of these 
costs to redistribute these losses and gains.
    Response: We disagree with the characterization of this analysis. 
With the exception of contract physician costs, all of these costs have 
been included in prior wage indexes. Therefore, the commenter's 
analysis does not reflect the impact of the proposed wage index 
relative to the current wage index. With respect to the losses in 
certain States cited by the commenter, our analysis indicates that, the 
projected payment impacts of including contract physician costs 
relative to a wage index without these costs are, respectively: a $13 
million decrease, a $15 million decrease, and an $18 million increase. 
We note that these figures do not reflect the impact of changes to the 
wage indexes in these areas resulting from updating from the 1994 wage 
data to 1995 wage data, or the exclusion of allocated overhead. They 
do, however, present a clearer picture of the impacts in these States 
of including contract physician costs relative to current policy.
    Comment: One commenter vigorously opposes the inclusion of contract 
physician Part A costs, arguing we should instead exclude all physician 
Part A costs. The commenter, a national association of health systems, 
argued that this proposal contradicts the objectives we identified in 
the May 27, 1994 proposed rule (59 FR 27720) and the September 1, 1994 
final rule (59 FR 45354), where we discussed the need to separately 
collect physician Part A costs. The commenter raises the following 
points and ultimately recommends excluding all physician Part A costs 
from the calculation of the wage index.
    First, the commenter contends that, by choosing to include 
physician Part A contract costs rather than exclude all physician Part 
A costs, we ``have expanded the unfair and unjustifiable policy tilt 
enjoyed by teaching hospitals.'' To emphasize this point, the commenter 
notes that over 70 percent of all contract physician costs stem from 
teaching hospitals (90 percent of salaried physician costs are also 
from teaching hospitals).
    Second, the commenter states that our rationale for proposing to 
include contract physician costs focused narrowly on whether these 
costs would inappropriately inflate the wage data. This narrow focus, 
according to the commenter, left out any explanation of why it is 
better to include contract physician costs rather than to exclude all 
Part A physician costs.
    Third, the commenter quotes liberally from our discussion in the 
proposed and final rules published in 1994, particularly our rationale 
for providing for separate reporting of physician Part A costs on the 
cost report. Referenced specifically are the three reasons why HCFA 
believed at that time that eliminating physician Part A costs would be 
preferable to including contracted physician costs. These reasons were: 
(1) Physician costs are not driven by normal labor market situations; 
(2) many hospitals indicated difficulties in accurately determining 
hours for these physicians' services; and (3) some hospitals have 
difficulty separating costs related to Part A from those related to 
Part B. The commenter specifically asks HCFA why it has changed its 
beliefs.
    Finally, the commenter surmises that one reason we proposed to 
include contract physician costs is that few areas would experience a 
significant change in their wage index values. To refute this, the 
commenter describes the results of analysis of the impacts of the 
proposed policy. The analysis found ``a dramatic and damaging impact on 
California, the largest state in the nation in terms of hospitals and 
number of Medicare discharges.'' The commenter believes that ``HCFA's 
wage index policy should be based not on whether the outcome will 
result in little change, but on whether it is the right policy in the 
first place.''
    Response: We appreciate the considered arguments and detailed 
analysis presented by the commenter and understand the importance of 
this issue to the hospitals represented by the association. We agree 
with the commenter that the primary consideration in developing and 
refining the hospital wage index should be the ``right policy.'' In the 
context of the hospital wage index, we believe we should promote the 
fair and accurate measurement of relative hospital wage levels across 
geographic areas. At the same time, we believe it is appropriate to 
consider the potential impact of possible courses of action, though we 
agree with the commenter that the potential impact should not be the 
driving force in policy decisions.
    In the context of the hospital wage index, it is also critical to 
keep in mind that developing the ``right policy'' is a function not 
only of conceptual issues but also of data issues. If, for example, we 
believe as a conceptual matter that a certain type of cost should be 
included in the wage index, but the data on those costs are incomplete 
and unreliable, then including the costs in the wage index (which are 
conceptually right) could (because of the data problems) distort the 
measure of relative wage levels across geographic areas, and thus 
detract from the fairness and accuracy of the wage index; similarly, if 
we believe as a conceptual matter that a certain type of cost should be 
excluded from the wage index, but there is incomplete and unreliable 
data to separate those costs from other costs, then excluding the costs 
based on bad data could detract from the equity of the wage index. 
Thus, our ability to implement a ``conceptually right'' policy depends 
on the availability of reliable and complete data.
    As indicated above in the response to another comment, we believe 
there is good reason to include all physician Part A costs, rather than 
exclude all physician Part A costs as the commenter recommends. Among 
other things, with the exception of teaching physician costs, physician 
Part A costs are Part A costs that are paid under the prospective 
payment system. In addition, physician Part A costs represent above-
average costs, although only a small percentage of the total for most 
hospitals; therefore, excluding all physician Part A costs might 
understate the relative wages of some hospitals. Based on our analysis 
of the FY 1995 cost reports, we believe that data reported for 
physician Part A costs are sufficiently reliable and complete that 
inclusion of the costs results in a wage index that is more fair and 
accurate, relative to a wage index which would exclude all physician 
Part A costs, even if the data are not perfect.
    As discussed above, although we have decided to adopt our proposal 
to include contract physician Part A costs in the wage index, we intend 
to direct the fiscal intermediaries to separately identify physician 
Part A costs (salaried and contracted) related to teaching for cost 
reports beginning during FY 1996. Although this information will not be 
reported separately on the Worksheet S, Part III until FY 1997 cost 
reports, we believe this issue merits undertaking a special auditing 
effort of the FY 1996 cost reports.
    With regard to the high proportion of physician costs attributable 
to teaching hospitals, although the distribution of costs seems 
disproportionate (and this is a large part of the reason we are 
expediting our efforts to separate teaching physician costs from other 
physician costs), our analysis of these

[[Page 40970]]

data indicates that, among hospitals reporting these costs, there is 
little difference between teaching and nonteaching hospitals in terms 
of the relative impact of these costs on hospitals' average hourly 
wages. That is, among both teaching and nonteaching hospitals reporting 
physician Part A costs, these costs make up between 3 and 4 percent of 
their total wage costs. Therefore, although more teaching hospitals 
report these costs than nonteaching hospitals (47 percent of teaching 
hospitals versus 30 percent of nonteaching hospitals), the average 
hourly wages of teaching hospitals are not more heavily weighted by 
these costs than they are for nonteaching hospitals.
    In fact, two of the MSAs that would be most negatively affected by 
excluding all physician costs from the wage data, Pittsburgh, PA and 
Rochester, NY, both have more nonteaching hospitals reporting physician 
costs than teaching hospitals. We believe the commenter's perception 
that we are tilting the wage index policy toward teaching hospitals is 
misguided and reflects an oversimplification of the issue. Based on our 
analysis of this issue, we are convinced the most prudent course is to 
focus on specifically developing data to further improve the fairness 
and accuracy of the wage index.
    In describing the perceived problems from our discussion of the 
physician cost data in the May 27, 1994 proposed rule, the commenter 
fails to acknowledge that the discussion was in relation to a proposed 
change. In fact, it was in response to public comments on this proposed 
change where we agreed to revise the cost report to collect data on 
contract physician costs. In addition, the September 1, 1994 final rule 
clearly stated that HCFA intended to evaluate the physician cost data 
prior to proposing any changes for the FY 1999 wage index.
    Regarding the problems associated with contract labor discussed in 
the FY 1995 proposed and final rules, we note that the separate 
physician cost data were not available at that time, and therefore the 
discussion was based on information provided from fiscal intermediaries 
and industry sources. Based on our analysis of the data available now, 
we believe that the problems are not as widespread as initially feared. 
Rather, these costs are similar to those reported for contracted 
medical providers that we do include, such as therapists and nursing 
staff. The commenter did not allege that there were widespread problems 
reporting these data.
    The commenter's characterization of the impact of this change on 
California's hospitals is inaccurate. No California MSA experiences a 
decrease in their wage index of more than 0.6 percent as a result of 
this change. The dramatic impacts referenced by the commenter occur 
only under the assumption that the comparative baseline excludes all 
physician Part A costs, the course recommended by the commenter. While 
excluding all physician Part A costs would result in a significant 
redistribution of payments to certain States such as California, other 
areas would experience dramatic payment decreases relative to last 
year.
    Comment: One commenter believes that, because the hospital wage 
index is used to adjust payments for various other types of providers, 
the wage data should be expanded to be as comprehensive as possible. 
Specifically, the commenter recommended that wage data related to 
excluded distinct part units, as well as all physician data, be 
included.
    Response: We have convened workgroups, both internally and 
externally, to focus on future wage index policies, and we anticipate 
that we will continue to focus on the appropriate scope of the wage 
data in those workgroups. In addition, any significant changes in the 
types of data to be included in the wage index will be implemented 
through the annual rulemaking process with opportunity for public 
comment, as has been our policy in the past. For the record, we believe 
that the hospital wage index should reflect, to the greatest degree 
possible, the wage costs associated with the prospective payment areas 
of the hospital.
    Comment: One commenter believes that there are ``evident problems 
with the quality and consistency of the physician contract labor 
data,'' which is evidenced by California's ranking as the 7th lowest 
State in terms of contract physician average hourly wage. This 
commenter also recommended that we begin a more rigorous audit 
mechanism of the wage data, stating that data reliability is still a 
problem.
    Response: We do not include hospitals' data (other than wage-
related costs) if either the salaries or hours reported for contract 
labor are zero. Applying this edit to the wage data, California ranks 
as the 12th highest State in terms of contract physician average hourly 
wages. The analysis provided by the commenters did not include such an 
edit; therefore, their results are different. We disagree with the 
general point of this comment that there are quality problems with 
these data. These data have been subjected to the same review and edit 
process as are all wage data. We will continue to monitor the process 
for collecting wage data in the future, and make improvements as 
necessary. We also encourage hospitals and their associations to feel 
free to provide specific recommendations for potential improvements.
    Comment: One commenter noted that hospitals that acquire their 
physician Part A services through related organizations do not have an 
appropriate line on Worksheet S-3 to record these wage costs. 
Therefore, these hospitals are disadvantaged by the inclusion of costs 
only for directly employed and contract physician Part A services in 
the wage index calculation. The commenter recommended that we adjust 
the FY 1999 wage index to include related organization physician Part A 
costs for hospitals that were unable to include the costs on their 
Worksheet S-3s.
    Response: The commenter's statements about Worksheet S-3 are 
incorrect. The cost report instructions at section 2806.3 of the 
Provider Reimbursement Manual, Part II, allow hospitals to include the 
costs for physician Part A services from related organizations on line 
33 of Worksheet S-3. These costs are also included on the trial 
balance, Worksheet A, in column 2 (with any adjustments in column 6). 
Regarding the commenter's recommendation, we cannot adjust the final FY 
1999 wage index to include costs that hospitals did not properly report 
on their cost reports.
2. Resident and CRNA Part A Costs
    The wage index presently includes salaries and wage-related costs 
for residents in approved medical education programs and for CRNAs 
employed by hospitals under the rural pass-through provision. However, 
Medicare pays for these costs outside the prospective payment system. 
Removing these costs from the wage index calculation would be 
consistent with our general policy to exclude costs that are not paid 
through the prospective payment system, but, because they were not 
separately reported, we could not remove them.
    In the September 1, 1994 final rule with comment period (59 FR 
45355), we stated that we would begin collecting the resident and CRNA 
wage data separately and would evaluate the data before proposing a 
change in computing the wage index. However, there were data reporting 
problems associated with these costs on the FY 1995 cost report. The 
original instructions for reporting

[[Page 40971]]

resident costs on Line 6 of Worksheet   S-3, Part III, erroneously 
included teaching physician salaries and other teaching program costs 
from Worksheet A of the cost report. Although we issued revised 
instructions to correct this error, we understand these revisions may 
not have been uniformly instituted. Another issue relating to 
residents' salaries stems from apparent underreporting of these costs 
by hospitals and inconsistent treatment of the associated wage-related 
costs.
    In addition, the original Worksheet   S-3 and reporting 
instructions did not provide for the separate reporting of CRNA wage-
related costs. We believe that much of the CRNA Part A costs are 
reported under contract labor, rather than under salaried employee 
costs, due to the heavy use of contract labor by rural hospitals. We do 
not believe that it would be feasible at this time to try to remove 
these CRNA Part A costs from the contract labor costs in the FY 1995 
cost report data. We improved the reporting instructions for CRNA costs 
on the FY 1996 cost report.
    Our analysis of the CRNA and resident wage data submitted on the FY 
1995 cost report convinces us that these data are inaccurately and 
incompletely reported by hospitals. For example, although there are 
over 900 teaching hospitals receiving graduate medical education 
payments, only about 800 hospitals reported resident cost data. Because 
we do not want to make a relatively significant change in the wage 
index data calculation without complete and accurate data upon which to 
base our decision, we proposed to delay any decision regarding 
excluding resident and CRNA costs from the wage index until at least 
next year. In the May 8 proposed rule, we announced our intention to 
review the FY 1996 data when it becomes available later this year and 
present our analysis and any proposals in next year's proposed rule.
    Comment: Several commenters believe that HCFA should immediately 
exclude intern and resident and CRNA wage costs for the same reasons 
the commenters cited for excluding the teaching physician costs. One 
commenter objected to our statement that problems with the reporting of 
these data (stemming from inconsistent instructions) warranted a one-
year delay. The commenter stated that ``it is better to exclude all 
clearly identified costs now rather than waiting some indeterminate 
time for all costs to be identified before excluding any of it.'' 
Analysis purporting to show a negative impact of $24 million on 
California due to including these data in the wage index was cited.
    Response: As we stated above, the instructions to the FY 1995 cost 
report Worksheet S-3 for reporting resident costs did not specifically 
separate teaching physician salaries and other GME program costs from 
residents' costs. This may have inappropriately inflated resident costs 
on Line 6 of Worksheet S-3. As a result, removing the costs reported on 
Line 6 from the FY 1999 wage index calculation would distort the wage 
index. Our reasoning with respect to retaining the CRNA costs is 
similar; that is, if Line 2 was removed, it would result in distortions 
since these costs were reported inconsistently. Therefore, because the 
data for these costs are not sufficiently reliable and complete, we 
maintain our position that the more responsible approach is to delay 
removing these costs until more accurate data are available for the FY 
2000 wage index. With regard to the negative impact on California, any 
analysis based on this data will be skewed by the reporting flaws 
noted. The FY 1999 wage index calculation will continue to include 
intern and resident and CRNA wage costs.
    We also believe that several of the commenters are confused about 
the issue of CRNA costs. Currently, only the Part A portion of these 
costs are included in the wage index, and the only hospitals paid for 
these costs are small rural hospitals who employ the equivalent of no 
more than one full-time CRNA and are paid on the basis of reasonable 
costs. Therefore, they do not contribute to the concentration of 
physician costs in teaching hospitals.
    Comment: One commenter noted that the hourly wage rates for 
residents are lower than the overall average hourly wage of the 
hospitals that pay their salaries, and that the inclusion of residents' 
salaries and wage-related costs actually results in a decrease in 
teaching hospitals' average hourly wages rather than an increase, as 
suggested by most other commenters. The commenter suggested that 
removing residents from the data used to calculate the wage index would 
increase the wage index values in areas with a high concentration of 
teaching hospitals.
    Response: The FY 1995 data do not permit us to evaluate the 
accuracy of this comment because residents' salaries are commingled 
with teaching physicians' salaries for many hospitals. As with all 
changes to the wage data, the impacts cannot be evaluated properly 
until accurate data are available for all hospitals nationally.
3. Overhead Allocation
    In the proposed rule, we discussed in detail our proposal to remove 
from the calculation of the FY 1999 wage index the overhead costs 
associated with certain subprovider components that are excluded from 
the prospective payment system (63 FR 25586). Although the overall 
impact on hospitals of this change is relatively small, we believe it 
is an appropriate step toward improving the overall consistency of the 
wage index. In addition, we believe this change will significantly 
increase the accuracy of the wage data for individual hospitals, 
especially hospitals that have a relatively small portion of their 
facility devoted to acute inpatient care.
    We received several comments supporting this change, and none 
expressing opposition to it. One commenter referred to it as a step 
toward improving uniformity and overall consistency in the wage index 
process. We have, therefore, incorporated our proposal in the final 
wage index.

D. Verification of Wage Data From the Medicare Cost Report

    The data for the FY 1999 wage index were obtained from Worksheet S-
3, Parts III and IV of the FY 1995 Medicare cost reports. The data file 
used to construct the final wage index includes FY 1995 data submitted 
to the Health Care Provider Cost Report Information System (HCRIS). As 
in past years, we performed an intensive review of the wage data, 
mostly through the use of edits designed to identify aberrant data.
    As a part of the August 29, 1997 final rule with comment period, we 
implemented a new timetable for requesting wage data corrections (62 FR 
45990). We notified hospitals again of these changes through a February 
1998 memorandum to the fiscal intermediaries and in the proposed rule. 
As noted in the proposed rule, beginning this year with the FY 1999 
wage index, the wage index published in the final rule incorporates all 
corrections, including those to correct data entry or tabulation errors 
of the final wage data by the intermediary or HCFA.
    To allow hospitals an opportunity to evaluate the wage data to be 
used to construct the proposed and the final FY 1999 hospital wage 
index, we made available to the public data files containing the FY 
1995 hospital wage data. In memoranda dated February 2 and April 21, 
1998, we instructed all Medicare intermediaries to inform the 
prospective payment hospitals they serve of the availability of the 
wage data files and the process and timeframe for requesting revisions. 
The proposed and the final wage data files were made available February 
6 and May 14, 1998,

[[Page 40972]]

through the Internet at HCFA's home page (http://www.hcfa.gov). The 
intermediaries were also instructed to advise hospitals of the 
alternative availability of these data through their representative 
hospital organizations or directly from HCFA.
    Table 3C in the Addendum to this final rule, as in the proposed 
rule, contains each hospital's adjusted average hourly wage used to 
construct the wage index values. A hospital can verify its adjusted 
average hourly wage, as calculated from Steps 4 and 5 of the 
computation of the wage index (see section III.E of this preamble) 
based on the wage data on the hospital's cost report (after taking into 
account any adjustments made by the intermediary), by dividing the 
adjusted average hourly wage in Table 3C by the applicable wage 
adjustment factors as set forth in Step 5 of the computation of the 
wage index. However, a hospital's average hourly wage using this 
calculation will vary from the average hourly wage shown on Line 32 of 
Worksheet S-3, Part III. (See Step 5 for a complete explanation.)
    We created the correction process, as detailed in the proposed 
rule, to resolve all substantive wage data correction disputes before 
finalizing the wage data for the FY 1999 payment rates. Hospitals had 
until June 5, 1998, to submit requests to correct errors in the final 
wage data (released May 14, 1998) due to data entry or tabulation 
errors by the intermediary or HCFA. The correction requests considered 
were limited to errors in the final wage data that the hospital could 
not have known about prior to the availability of the final wage data 
public use file. If hospitals availed themselves of these opportunities 
to timely identify and bring errors in their wage data to their 
intermediaries' attention, the wage index implemented on October 1 
should be free of such errors. Nevertheless, in the unlikely event that 
errors should arise after that date, we retain the right to make 
midyear changes to the wage index under very limited circumstances.
    Specifically, in accordance with Sec. 412.63(w)(2), we may make 
midyear corrections to the wage index only in those limited 
circumstances where a hospital can show: (1) That the intermediary or 
HCFA made an error in tabulating its data; and (2) that the hospital 
could not have known about the error, or did not have an opportunity to 
correct the error, before the beginning of FY 1999 (that is, by the 
June 5, 1998 deadline). As indicated earlier, since a hospital will 
have had the opportunity to verify its data, and the intermediary will 
notify the hospital of any changes, we do not foresee any specific 
circumstances under which midyear corrections would be made. However, 
should a midyear correction be necessary, the wage index change for the 
affected area will be effective prospectively from the date the 
correction is made.

E. Computation of the Wage Index

    The method used to compute the final wage index is as follows:
    Step 1--As noted above, we based the FY 1999 wage index on wage 
data reported on the FY 1995 Medicare cost reports. We gathered data 
from each of the non-Federal, short-term, acute care hospitals for 
which data were reported on the Worksheet S-3, Parts III and IV of the 
Medicare cost report for the hospital's cost reporting period beginning 
on or after October 1, 1994 and before October 1, 1995. In addition, we 
included data from a few hospitals that had cost reporting periods 
beginning in September 1994 and reported a cost reporting period 
exceeding 52 weeks. These data were included because no other data from 
these hospitals would be available for the cost reporting period 
described above, and particular labor market areas might be affected 
due to the omission of these hospitals. However, we generally describe 
these wage data as FY 1995 data.
    Step 2--For each hospital, we subtracted the excluded salaries 
(that is, direct salaries attributable to skilled nursing facility 
services, home health services, and other subprovider components not 
subject to the prospective payment system) from gross hospital salaries 
to determine net hospital salaries. To determine total salaries plus 
wage-related costs, we added the costs of contract labor for direct 
patient care, certain top management, and physician Part A services; 
hospital wage-related costs, and any home office salaries and wage-
related costs reported by the hospital, to the net hospital salaries. 
The actual calculation is the sum of lines 2, 4, 6, 32, and 33 of 
Worksheet S-3, Part III. This calculation differs from the one computed 
on line 32 of Worksheet S-3, Part III. Therefore, a hospital's average 
hourly wage calculated under this step will be different from the 
average hourly wage shown on line 32, column 5.
    Step 3--For each hospital, we subtracted the reported excluded 
hours from the gross hospital hours to determine net hospital hours. To 
determine total hours, we increased the net hours by the addition of 
home office hours and hours for contract labor attributable to direct 
patient care, certain top management, and physician Part A salaries.
    Step 4--For each hospital reporting both total overhead salaries 
and total overhead hours greater than zero, we then allocated overhead 
costs. First, we determined the ratio of excluded area hours (Line 24 
of Worksheet S-3, Part III) to revised total hours (Line 9 of Worksheet 
S-3, Part III, adding back CRNA Part A, physician Part A, and resident 
hours). Second, we computed the amounts of overhead salaries and hours 
to be allocated to excluded areas by multiplying the above ratio by the 
total overhead salaries and hours reported on Line 16 of Worksheet S-3, 
Part IV. Finally, we subtracted the computed overhead salaries and 
hours associated with excluded areas from the total salaries and hours 
derived in Steps 2 and 3.
    Step 5--For each hospital, we adjusted the total salaries plus 
wage-related costs to a common period to determine total adjusted 
salaries plus wage-related costs. To make the wage inflation 
adjustment, we estimated the percentage change in the employment cost 
index (ECI) for compensation for each 30-day increment from October 14, 
1994 through April 15, 1996, for private industry hospital workers from 
the Bureau of Labor Statistics Compensation and Working Conditions. For 
previous wage indexes, we used the percentage change in average hourly 
earnings for hospital industry workers to make the wage inflation 
adjustment. For FY 1999 we used the ECI for compensation for private 
industry hospital workers because it reflects the price increase 
associated with total compensation (salaries plus fringes) rather than 
just the increase in salaries, which is what the average hourly 
earnings category reflected. In addition, the ECI includes managers as 
well as other hospital workers. We changed the methodology used to 
compute the monthly update factors. This new methodology uses actual 
quarterly ECI data to determine the monthly update factors. The 
methodology assures that the update factors match the actual quarterly 
and annual percent changes. The inflation factors used to inflate the 
hospital's data were based on the midpoint of the cost reporting period 
as indicated below.

                    Midpoint of Cost Reporting Period                   
------------------------------------------------------------------------
                                                              Adjustment
                     After                         Before       factor  
------------------------------------------------------------------------
10/14/94......................................     11/15/94     1.032882
11/14/94......................................     12/15/94     1.030771
12/14/94......................................     01/15/95     1.028721

[[Page 40973]]

                                                                        
01/14/95......................................     02/15/95     1.026731
02/14/95......................................     03/15/95     1.024776
03/14/95......................................     04/15/95     1.022827
04/14/95......................................     05/15/95     1.020886
05/14/95......................................     06/15/95     1.018901
06/14/95......................................     07/15/95     1.016822
07/14/95......................................     08/15/95     1.014649
08/14/95......................................     09/15/95     1.012446
09/14/95......................................     10/15/95     1.010279
10/14/95......................................     11/15/95     1.008146
11/14/95......................................     12/15/95     1.006047
12/14/95......................................     01/15/96     1.003981
01/14/96......................................     02/15/96     1.001950
02/14/96......................................     03/15/96     1.000000
03/14/96......................................     04/15/96     0.998181
------------------------------------------------------------------------

For example, the midpoint of a cost reporting period beginning January 
1, 1995 and ending December 31, 1995 is June 30, 1995. An inflation 
adjustment factor of 1.016822 would be applied to the wages of a 
hospital with such a cost reporting period. In addition, for the data 
for any cost reporting period that began in FY 1995 and covers a period 
of less than 360 days or greater than 370 days, we annualized the data 
to reflect a 1-year cost report. Annualization is accomplished by 
dividing the data by the number of days in the cost report and then 
multiplying the results by 365.
    Step 6--Each hospital was assigned to its appropriate urban or 
rural labor market area prior to any reclassifications under sections 
1886(d)(8)(B) or 1886(d)(10) of the Act. Within each urban or rural 
labor market area, we added the total adjusted salaries plus wage-
related costs obtained in Step 5 for all hospitals in that area to 
determine the total adjusted salaries plus wage-related costs for the 
labor market area.
    Step 7--We divided the total adjusted salaries plus wage-related 
costs obtained in Step 6 by the sum of the total hours (from Step 4) 
for all hospitals in each labor market area to determine an average 
hourly wage for the area.
    Step 8--We added the total adjusted salaries plus wage-related 
costs obtained in Step 5 for all hospitals in the Nation and then 
divided the sum by the national sum of total hours from Step 4 to 
arrive at a national average hourly wage. Using the data as described 
above, the national average hourly wage is $20.7325.
    Step 9--For each urban or rural labor market area, we calculated 
the hospital wage index value by dividing the area average hourly wage 
obtained in Step 7 by the national average hourly wage computed in Step 
8. We note that in June, 1998, OMB announced the designation of the 
Missoula, Montana MSA comprising Missoula, Montana.
    Step 10--Following the process set forth above, we developed a 
separate Puerto Rico-specific wage index for purposes of adjusting the 
Puerto Rico standardized amounts. We added the total adjusted salaries 
plus wage-related costs (as calculated in Step 5) for all hospitals in 
Puerto Rico and divided the sum by the total hours for Puerto Rico (as 
calculated in Step 4) to arrive at an overall average hourly wage of 
$9.5025 for Puerto Rico. For each labor market area in Puerto Rico, we 
calculated the hospital wage index value by dividing the area average 
hourly wage (as calculated in Step 7) by the overall Puerto Rico 
average hourly wage.
    Step 11--Section 4410 of Public Law 105-33 provides that, for 
discharges on or after October 1, 1997, the area wage index applicable 
to any hospital that is not located in a rural area may not be less 
than the area wage index applicable to hospitals located in rural areas 
in that State. Furthermore, this wage index floor is to be implemented 
in such a manner as to assure that aggregate prospective payments are 
not greater or less than those which would have been made in the year 
if this section did not apply. For FY 1999, this change affects 118 
hospitals in 32 MSAs. The MSAs affected by this provision are 
identified in Table 4A by a footnote.

F. Revisions to the Wage Index Based on Hospital Redesignation

    Under section 1886(d)(8)(B) of the Act, hospitals in certain rural 
counties adjacent to one or more MSAs are considered to be located in 
one of the adjacent MSAs if certain standards are met. Under section 
1886(d)(10) of the Act, the Medicare Geographic Classification Review 
Board (MGCRB) considers applications by hospitals for geographic 
reclassification for purposes of payment under the prospective payment 
system.
    The methodology for determining the wage index values for 
redesignated hospitals is applied jointly to the hospitals located in 
those rural counties that were deemed urban under section 1886(d)(8)(B) 
of the Act and those hospitals that were reclassified as a result of 
the MGCRB decisions under section 1886(d)(10) of the Act. Section 
1886(d)(8)(C) of the Act provides that the application of the wage 
index to redesignated hospitals is dependent on the hypothetical impact 
that the wage data from these hospitals would have on the wage index 
value for the area to which they have been redesignated. Therefore, as 
provided in section 1886(d)(8)(C) of the Act, the wage index values 
were determined by considering the following:
    <bullet> If including the wage data for the redesignated hospitals 
would reduce the wage index value for the area to which the hospitals 
are redesignated by 1 percentage point or less, the area wage index 
value determined exclusive of the wage data for the redesignated 
hospitals applies to the redesignated hospitals.
    <bullet> If including the wage data for the redesignated hospitals 
reduces the wage index value for the area to which the hospitals are 
redesignated by more than 1 percentage point, the hospitals that are 
redesignated are subject to that combined wage index value.
    <bullet> If including the wage data for the redesignated hospitals 
increases the wage index value for the area to which the hospitals are 
redesignated, both the area and the redesignated hospitals receive the 
combined wage index value.
    <bullet> The wage index value for a redesignated urban or rural 
hospital cannot be reduced below the wage index value for the rural 
areas of the State in which the hospital is located.
    <bullet> Rural areas whose wage index values would be reduced by 
excluding the wage data for hospitals that have been redesignated to 
another area continue to have their wage index values calculated as if 
no redesignation had occurred.
    <bullet> Rural areas whose wage index values increase as a result 
of excluding the wage data for the hospitals that have been 
redesignated to another area have their wage index values calculated 
exclusive of the wage data of the redesignated hospitals.
    <bullet> The wage index value for an urban area is calculated 
exclusive of the wage data for hospitals that have been reclassified to 
another area. However, geographic reclassification may not reduce the 
wage index value for an urban area below the statewide rural wage index 
value.
    We note that, except for those rural areas where redesignation 
would reduce the rural wage index value, the wage index value for each 
area is computed exclusive of the wage data for hospitals that have 
been redesignated from the area for purposes of their wage index. As a 
result, several urban areas listed in Table 4a have no hospitals 
remaining in the area. This is because all the hospitals originally in 
these urban areas have been reclassified to another area by the MGCRB. 
These areas with no remaining hospitals receive the prereclassified 
wage index value. The prereclassified wage index value will apply as 
long as the area remains empty.
    The final wage index values for FY 1999 are shown in Tables 4A, 4B, 
4C,

[[Page 40974]]

and 4F in the Addendum to this final rule. Hospitals that are 
redesignated should use the wage index values shown in Table 4C. Areas 
in Table 4C may have more than one wage index value because the wage 
index value for a redesignated urban or rural hospital cannot be 
reduced below the wage index value for the rural areas of the State in 
which the hospital is located. When the wage index value of the area to 
which a hospital is redesignated is lower than the wage index value for 
the rural areas of the State in which the hospital is located, the 
redesignated hospital receives the higher wage index value, that is, 
the wage index value for the rural areas of the State in which it is 
located, rather than the wage index value otherwise applicable to the 
redesignated hospitals.
    Tables 4D and 4E list the average hourly wage for each labor market 
area, prior to the redesignation of hospitals, based on the FY 1995 
wage data. In addition, Table 3C in the Addendum to this final rule 
includes the adjusted average hourly wage for each hospital based on 
the FY 1995 data (as calculated from Steps 4 and 5, above). The MGCRB 
will use the average hourly wage published in the final rule to 
evaluate a hospital's application for reclassification for FY 2000, 
unless that average hourly wage is later revised in accordance with the 
wage data correction policy described in Sec. 412.63(w)(2). In such 
cases, the MGCRB will use the most recent revised data used for 
purposes of the hospital wage index.
    Although we did not propose any changes to the reclassification 
guidelines, we received two comments on that issue.
    Comment: One commenter was concerned that the number of hospitals 
participating in countywide reclassifications has declined over the 
years. The commenter believes that this is an indication that the 
criteria for hospitals in an urban county seeking reclassification to 
another urban county should be adjusted.
    Response: When we implemented the MGCRB process, we anticipated 
that, over the years, the number of hospitals that would continue to 
qualify for reclassification would decrease due to better data 
reporting and efforts by hospitals to constrain costs. The 
reclassification process is an annual process in which a hospital or 
group of hospitals must meet the defined criteria on an annual basis in 
order to remain reclassified to an alternative area for either the wage 
index, the standardized amount, or both. We note that hospitals that do 
not meet the countywide criteria under Sec. 412.234 may apply on an 
individual basis.
    Comment: One commenter supports the policy that allows rural 
hospitals to reclassify to another area for purposes of the 
disproportionate share adjustment even if the standardized amount is 
the same for both areas. However, this commenter is also concerned that 
separate criteria have not been developed for this type of 
reclassification and that we continue to rely on the criteria set forth 
in Sec. 412.230(d), which is the criteria for reclassification to 
another area for purposes of the standardized amount.
    Response: Section 4203(a) of the Balanced Budget Act of 1997 
provided that, for a limited period of time, a rural hospital may apply 
for reclassification to another area for purposes of receiving 
disproportionate share payments whether or not the standardized amount 
is the same for both areas. Section 4203(b) provides that the MGCRB 
will apply the guidelines for reclassification for purposes of the 
standardized amount until the Secretary establishes other guidelines.
    We believe that the criteria in place for standardized amount 
reclassification are appropriate for determining whether hospitals 
should be reclassified for purposes of the disproportionate share 
payment. The criteria address the extent to which a hospital warrants 
reclassification by comparing the hospital's costs to its payments with 
and without reclassification. Nevertheless, we welcome specific 
suggestions for revising the DSH reclassification criteria.

IV. Other Decisions and Changes to the Prospective Payment System 
for Inpatient Operating Costs

A. Definition of Transfers (Sec. 412.4)

    Pursuant to section 1886(d)(5)(I) of the Act, the prospective 
payment system distinguishes between ``discharges,'' situations in 
which a patient leaves an acute care (prospective payment) hospital 
after receiving complete acute care treatment, and ``transfers,'' 
situations in which the patient is transferred to another acute care 
hospital for related care. If a full DRG payment were made to each 
hospital involved in a transfer situation, irrespective of the length 
of time the patient spent in the ``sending'' hospital prior to 
transfer, a strong incentive to increase transfers would be created, 
thereby unnecessarily endangering patients' health. Therefore, our 
policy, which is set forth in the regulations at Sec. 412.4, provides 
that, in a transfer situation, full payment is made to the final 
discharging hospital and each transferring hospital is paid a per diem 
rate for each day of the stay, not to exceed the full DRG payment that 
would have been made if the patient had been discharged without being 
transferred.
    Currently, the per diem rate paid to a transferring hospital is 
determined by dividing the full DRG payment that would have been paid 
in a nontransfer situation by the geometric mean length of stay for the 
DRG into which the case falls. Hospitals receive twice the per diem for 
the first day of the stay and the per diem for every following day up 
to the full DRG amount. Transferring hospitals are also eligible for 
outlier payments. Two exceptions to the current transfer payment policy 
are transfer cases classified into DRG 385 (Neonates, Died or 
Transferred to Another Acute Care Facility) and DRG 456 (Burns, 
Transferred to Another Acute Care Facility), which receive the full DRG 
payment instead of being paid on a per diem basis.
    Under section 1886(d)(5)(J) of the Act, which was added by section 
4407 of the Balanced Budget Act of 1997, a ``qualified discharge'' from 
one of 10 DRGs selected by the Secretary to a postacute care provider 
will be treated as a transfer case beginning with discharges on or 
after October 1, 1998. Section 1886(d)(5)(J)(iii) confers broad 
authority on the Secretary to select 10 DRGs ``based upon a high volume 
of discharges classified within such group and a disproportionate use 
of'' certain postdischarge services. Section 1886(d)(5)(J)(ii) defines 
a ``qualified discharge'' as a discharge from a prospective payment 
hospital of an individual whose hospital stay is classified in one of 
the 10 selected DRGs if, upon such discharge, the individual--
    <bullet> Is admitted to a hospital or hospital unit that is not a 
prospective payment system hospital;
    <bullet> Is admitted to a skilled nursing facility; or
    <bullet> Is provided home health services by a home health agency 
if the services relate to the condition or diagnosis for which the 
individual received inpatient hospital services and if these services 
are provided within an appropriate period as determined by the 
Secretary.
    The Conference Agreement that accompanied the law noted that 
``(t)he Conferees are concerned that Medicare may in some cases be 
overpaying hospitals for patients who are transferred to a post acute 
care setting after a very short acute care hospital stay. The Conferees 
believe that Medicare's payment system should

[[Page 40975]]

continue to provide hospitals with strong incentives to treat patients 
in the most effective and efficient manner, while at the same time, 
adjust PPS [prospective payment system] payments in a manner that 
accounts for reduced hospital lengths of stay because of a discharge to 
another setting.'' (H.R. Rep. No. 105-217, 740.) In its March 1, 1997 
report, ProPAC expressed similar concerns: ``* * * length of stay 
declines have been greater in DRGs associated with substantial 
postacute care use, suggesting a shift in care from hospital inpatient 
to postacute settings' (pp. 21-22).
    In fact, based on the latest available data, overall Medicare 
hospital costs per case have decreased during FYs 1994 and 1995. This 
unprecedented real decline in costs per case has led to historically 
high Medicare operating margins (over 10 percent on average). Along 
with these declining lengths of stay and costs per case, there has been 
an increase in the utilization of postacute care. In 1990, the rate of 
skilled nursing facility services per 1,000 Medicare enrollees was 19. 
By 1995, it had grown to 33. Corresponding numbers for home health 
agency services are 58 per 1,000 Medicare enrollees during 1990 and 93 
per 1,000 enrollees during 1995. Although home health services are not 
always directly related to a hospitalization episode, there does appear 
to be a trend toward increased use of home health for the provision of 
postacute care rehabilitation services. Previous analysis of the 
percentage of hospital discharges that receive postacute home health 
care showed a 10.3 percent increase in 1994 compared to 1992.
    In the May 8, 1998 proposed rule, we discussed our proposals to 
implement section 1886(d)(5)(J) of the Act. These proposals are set 
forth below.
1. Selection of 10 DRGs
    Section 1886(d)(5)(J)(iii)(I) of the Act provides that the 
Secretary select 10 DRGs based on a high volume of discharges to 
postacute care and a disproportionate use of postacute care services. 
Therefore, in order to select the DRGs to be paid as transfers, we 
first identified those DRGs with the highest percentage of postacute 
care.
    We used the FY 1996 MedPAR file because the complete FY 1997 MedPAR 
file was not available at the time we conducted our analysis. To 
identify postacute care utilization, we merged hospital inpatient bill 
files with postacute care bill files matching beneficiary 
identification numbers and discharge and admission dates. We created 
this file rather than depend on information concerning discharge 
destination on the inpatient bill because we have found that the 
discharge destination codes included on the hospital bills are often 
inaccurate in identifying discharges to a facility other than another 
prospective payment hospital.
    Section 1886(d)(5)(J)(ii)(III) of the Act requires the Secretary to 
choose an appropriate window of days in which the home health services 
start in order for the discharge to meet the definition of a transfer. 
In order to include postdischarge home health utilization in our 
analysis, we identified all hospital discharges for patients who 
received any home health care within 7 days after the date of 
discharge. (As described below in section IV.A.2., we ultimately 
decided to propose 3 days as the window for home health services.)
    Starting with the DRG with the highest percentage of postacute care 
discharges and continuing in descending order, we selected the first 20 
DRG's that had a relatively large number of discharges to postacute 
care (our lower limit was 14,000 cases). In order to select 10 DRG's 
from the 20 DRG's on our list, for each of the DRG's we considered the 
volume and percentage of discharges to postacute care that occurred 
before the mean length of stay and whether the discharges occurring 
early in the stay were more likely to receive postacute care. The 
following table lists the 10 DRG's we proposed to include under our 
expanded transfer definition, their percentage of postacute utilization 
compared to total cases, and the total number of cases identified as 
going to postacute care.

------------------------------------------------------------------------
                                                 Percent of   Number of 
        DRG            Title and type of DRG     postacute    postacute 
                       (surgical or medical)    utilization     cases   
------------------------------------------------------------------------
14................  Specific Cerebrovascular           49.5      186,845
                     Disorders Except                                   
                     Transient Ischemic Attack                          
                     (Medical).                                         
113...............  Amputation for Circulatory         59.0       28,402
                     System Disorders                                   
                     Excluding Upper Limb and                           
                     Toe (Surgical).                                    
209...............  Major Joint Limb                   71.9      257,875
                     Reattachment Procedures                            
                     of Lower Extremity                                 
                     (Surgical).                                        
210...............  Hip and Femur Procedures           77.8      111,799
                     Except Major Joint Age                             
                     >17 With CC (Surgical).                            
211...............  Hip and Femur Procedures           74.2       19,548
                     Except Major Joint Age                             
                     >17 Without CC (Surgical).                         
236...............  Fractures of Hip and               61.2       24,498
                     Pelvis (Medical).                                  
263...............  Skin Graft and/or                  49.4       14,499
                     Debridement for Skin                               
                     Ulcer or Cellulitis With                           
                     CC (Surgical).                                     
264...............  Skin Graft and/or                  39.3        1,328
                     Debridement for Skin                               
                     Ulcer or Cellulitis W/O                            
                     CC (Surgical).                                     
429...............  Organic Disturbances and           45.4       19,314
                     Mental Retardation                                 
                     (Medical).                                         
483...............  Tracheostomy Except for            45.3       18,254
                     Face, Mouth and Neck                               
                     Diagnoses (Surgical).                              
------------------------------------------------------------------------

    We included DRG 263 on the list because of its ranking in the top 
20 DRG's in terms of postacute utilization and volume of discharges to 
postacute care. DRG's 263 and 264 are paired DRG's; that is, the only 
difference in the cases assigned to DRG 263 as opposed to DRG 264 is 
that the patient has a complicating or comorbid condition. If we 
included only DRG 263 in the list, it would be possible for a transfer 
case with a relatively short length of stay that should be assigned to 
DRG 263 and receive a relatively small transfer payment to be assigned 
instead to DRG 264, and receive the full DRG payment, simply by failing 
to include the CC diagnosis code on the bill. Therefore, our choice was 
to either delete DRG 263 from the list or add DRG 264. We decided to 
include DRG 264 in the proposed list because DRG 263 fully meets all 
the conditions for inclusion on the list of 10 DRG's.
2. Postacute Care Settings
    Section 1886(d)(5)(J)(ii) of the Act requires the Secretary to 
define and pay as transfers cases from one of 10 DRG's selected by the 
Secretary if the individual is discharged to one of the following 
settings:
    <bullet> A hospital or hospital unit that is not a subsection 
[1886](d) hospital, that is, a hospital or unit excluded from the 
inpatient prospective payment system.
    <bullet> A skilled nursing facility, that is, a facility that meets 
the definition of a skilled nursing facility set forth at section 1819 
of the Act.
    <bullet> Home health services provided by a home health agency, if 
the services are

[[Page 40976]]

related to the condition or diagnosis for which the individual received 
inpatient hospital services, and if the home health services are 
provided within an appropriate period (as determined by the Secretary).
    Section 1886(d)(1)(B) of the Act defines the hospitals and hospital 
units that are excluded from the prospective payment system as the 
following: psychiatric, rehabilitation, childrens', long-term care, and 
cancer hospitals and psychiatric and rehabilitation distinct part units 
of a hospital. Therefore, any discharge from a prospective payment 
hospital from one of the 10 proposed DRG's that is admitted to one of 
these types of facilities on the date of discharge from the acute 
hospital, on or after October 1, 1998, would be considered a transfer 
and paid accordingly under the prospective payment systems (operating 
and capital) for inpatient hospital services.
    We proposed that a discharge from a prospective payment hospital to 
a skilled nursing facility would include cases discharged from one of 
the 10 DRG's from an inpatient bed in the hospital to a bed in the same 
hospital that has been designated for the provision of skilled nursing 
care (a ``swing'' bed). The swing bed provision allows certain small 
rural hospitals to furnish services in inpatient beds which, if 
furnished by a skilled nursing facility, would constitute extended care 
services. In addition, any patient who receives swing-bed services is 
deemed to have received extended care services as if furnished by a 
skilled nursing facility. Thus, if swing beds were not included in the 
transfer policy, those hospitals with swing bed agreements could move 
patients assigned to one of the 10 selected DRG's from an inpatient bed 
to a swing bed and receive payment and receive the full DRG payment. In 
the proposed rule, we stated that we did not believe that this would be 
a fair policy in that it would create a payment advantage for swing bed 
hospitals. Therefore, we proposed that a discharge to a swing bed would 
be paid as a transfer when the patient is classified to one of the 10 
selected DRG's.
    Section 1886(d)(5)(J)(ii)(III) of the Act states that the discharge 
of an individual who receives home health services upon discharge will 
be treated as a transfer if ``such services are provided within an 
appropriate period (as determined by the Secretary) * * *.'' As 
discussed above in section IV.A.1, we began our analysis using 7 days 
(one week) as the time period we would consider. However, after 
conducting further analysis, we proposed that 3 days after the date of 
discharge would be a more appropriate timeframe. Based on our analysis 
of the FY 1996 bills, approximately 90 percent of patients began 
receiving home health care within 3 days.
    With regard to an appropriate definition of ``home health services 
* * * relate[d] to the condition or diagnosis for which the individual 
received inpatient hospital services * * *'', we considered several 
possible approaches. Under one approach we could compare the principal 
diagnosis of the inpatient stay to the diagnosis code indicated on the 
home health bill, similar to our policy on the 3-day payment window for 
preadmission services. However, we believe that such a policy is far 
too restrictive in terms of qualifying discharges for transfer payment. 
In addition, a hospital would not know when it discharges a patient to 
home health what diagnosis code the home health agency will put on the 
bill. Therefore, the hospital would not be able to correctly code the 
inpatient bill as a transfer or discharge.
    We also considered proposing that any home health care that begins 
within the designated timeframe be included ``as related'' in our 
definition. However, this definition might be too broad and the 
hospital would not be able to predict which cases should be coded as 
transfers because the hospital often may not know about home health 
services that are provided upon discharge but were not ordered or 
planned for as part of the hospital discharge plan.
    We proposed that home health services would be considered related 
to the hospital discharge if the patient is discharged from the 
hospital with a written plan of care for the provision of home health 
care services from a home health agency. In this way, the hospital 
would be fully aware of the status of the patient when discharged and 
could be held responsible for correctly coding the discharge as a 
transfer on the inpatient bill. In general, this would mean that the 
home health service would qualify as a Part A home health benefit under 
section 1861(tt) of the Act as added by section 4611(b) of the BBA.
    In the proposed rule, we noted that we plan to compare inpatient 
bills with home health service bills for care provided within 3 days 
after discharge. If we find that home health services were provided 
within the postdischarge window, the hospital will be notified and the 
hospital payment adjusted unless the hospital can submit documentation 
verifying the discharge status of the patient. This will alert 
hospitals if there are problems with their discharge/transfer billing 
and allow them to adjust their discharge planning process and billing 
practices. If we find a continued pattern of a hospital billing for 
cases from the 10 DRG's as discharges and our records indicate that the 
patients are receiving postacute care services from an excluded 
hospital, a skilled nursing facility, or within the 3-day home health 
service window, the hospitals may be investigated for fraudulent or 
abusive billing practices.
3. Payment Methodology
    The statute does not dictate the payment methodology we must use 
for these transfer cases. However, section 1886(d)(5)(J)(i) of the Act 
provides that the payment amount for a case may not exceed the sum of 
half the full DRG payment amount and half of the payment amount under 
the current per diem payment methodology.
    Based on our analysis comparing the costs per case for the 
transfers in the 10 DRG's with payments under our current transfer 
payment methodology, we found that most of the 10 DRG's are 
appropriately paid using our current methodology (that is, twice the 
per diem for the first day and the per diem for each subsequent day). 
In fact, this payment would, on average, slightly exceed costs. 
However, this is not true of DRG's 209, 210, and 211. For those three 
DRG's, a disproportionate percentage (about 50 percent) of the costs of 
the case are incurred on the first day of the stay. Therefore, we 
stated in the proposed rule that we would pay DRG's 209, 210, and 211 
based on 50 percent of the DRG payment for the first day of the stay 
and 50 percent of the per diem for the remaining days of the stay. The 
other seven DRG's would be paid under the current transfer payment 
methodology.
    We proposed to revise Sec. 412.4 to reflect these policies. In 
addition, we proposed to delete the reference in Sec. 412.4(d)(2) to 
DRG 456 (Burns, Transferred to Another Acute Care Facility) because we 
proposed to replace that DRG and there would no longer be any burn DRG 
with a transfer designation. As discussed in section II.B.3 of this 
preamble, we have adopted that DRG change effective for FY 1999.
    We received a large number of comments concerning this proposal. In 
general, commenters were opposed to the implementation of any postacute 
care transfer policy. Acknowledging that the policy is required by 
statute, most commenters also disagreed with the manner in which we 
proposed to implement the policy. However, one association representing 
postacute care providers was supportive of the proposed policy, in 
general, and our

[[Page 40977]]

various policy proposals. As discussed in the specific comments and 
responses that follow, we are implementing the discharge to postacute 
care provision as set forth in the proposed rule except that we are not 
including swing beds in the definition of a postacute care setting and 
we are clarifying the payment methodology for DRGs 209, 210, and 211.
    Comment: Commenters believed that the postacute care transfer 
provision penalizes hospitals for providing effective care and creates 
a perverse incentive for hospitals to keep patients longer. Some 
commenters suggested that this provision interferes with the practice 
of medicine by overriding the clinical decision-making process by 
physicians in determining the most appropriate level of care to provide 
to their patients. Many commenters stated that the postacute care 
transfer policy is contrary to the original intent of the prospective 
payment system. Several commenters urged us either to repeal the entire 
provision or to support efforts to have it repealed.
    Response: We disagree that this provision penalizes hospitals for 
effective care. As noted in the May 8 proposed rule, the Conference 
Agreement accompanying Public Law 105-33 states that ``Medicare's 
payment system should continue to provide hospitals with strong 
incentives to treat patients in the most effective and efficient 
manner, while at the same time, adjust PPS payments in a manner that 
accounts for reduced hospital lengths of stay because of a discharge to 
another setting.'' The transfer provision adjusts payments to hospitals 
to reflect the reduced lengths of stay arising from the shift of 
patient care from the acute care setting to the postacute care setting. 
In addition, because Medicare also often pays for the postacute care 
portion of beneficiaries' care, the transfer provision appropriately 
adjusts hospitals' payments to avoid duplicate payments for the care 
provided during a patient's episode of care.
    With respect to the payment incentives created by this provision, 
we would refer the reader to the tables set forth at Appendix D of this 
final rule. These tables graphically demonstrate payments compared to 
costs for transfer cases in each of the 10 selected DRGs. These tables 
show that, across virtually all lengths of stay for each of the DRGs, 
Medicare will pay in excess of costs even after the implementation of 
this provision. Thus, the argument that this provision creates perverse 
incentives and interferes with the appropriate practice of medicine is 
not persuasive. This policy does not require a change in physician 
clinical decision-making nor in the manner in which physicians and 
hospitals practice medicine; it simply addresses the appropriate level 
of payments once those decisions have been made.
    We believe a stronger argument can be made that the incentives of 
the current policy, where hospitals receive the full DRG payment for 
these DRGs regardless of how long patients remain in the acute care 
hospital prior to being transferred for postacute care, potentially 
have a greater impact on clinical decision-making. Simply put, as costs 
rise with each additional acute care day and payments are fixed, 
hospitals have a financial incentive to discharge patients as soon as 
possible. The incentive is less clear, and can be argued to be neutral, 
to the extent that the marginal payments for an additional acute 
inpatient care day increase in proportion to the marginal costs of that 
day. Thus, the postacute care transfer policy does not create perverse 
incentives for hospitals to keep patients longer; instead, it addresses 
current incentives to discharge patients as soon as possible.
    With respect to whether the provision is contrary to the original 
intent of the prospective payment system, we believe it is entirely 
consistent with the following statement made in the Federal Register 
during the first year of the prospective payment system in response to 
a comment concerning the hospital-to-hospital transfer policy: ``(t)he 
rationale for per diem payments as part of our transfer policy is that 
the transferring hospital generally provides only a limited amount of 
treatment. Therefore, payment of the full prospective payment rate 
would be unwarranted'' (49 FR 244). We also note that in its earliest 
update recommendations, the Prospective Payment Assessment Commission 
(MedPAC's predecessor organization) included what it called a site-of-
service substitution adjustment to account for the shifting of portions 
of inpatient care to other settings. We believe this provision is an 
appropriate and consistent response to the changing treatment practice 
of the hospital industry.
    Comment: A commenter observed that our estimate of the impact of 
this transfer provision on hospitals' payments per case (a 0.6 percent 
decrease in payments) results in an overall payment reduction of $600 
million for FY 1999. The commenter stated that the Congressional Budget 
Office (CBO) estimated the impact at $100 million for FY 1999. The 
commenter believed that this disparity in estimates substantiates 
claims that the new provision will have undesirable and unintended 
consequences.
    Response: We believe the commenter's estimate of the impacts of 
this provision are overstated. Based on the 0.6 percent decrease in 
payment per case estimated in our impact analysis, the projected impact 
of this transfer provision is approximately a $480 million decrease in 
overall payments. Although this savings estimate is higher than CBO's 
estimate, we would note that CBO assumed hospitals would change their 
behavior by keeping patients longer. As we describe in our impact 
analysis, we do not make any assumptions regarding changes in 
hospitals' behavior. We would also note that the precision with which 
one can estimate the savings associated with a provision such as this 
is highly dependent on the specifications of the provision and the data 
available to generate an estimate. Unlike the CBO estimate, our 
estimate reflects the 10 actual DRGs to be included and the latest 
discharge data to identify which cases would qualify as transfers.
    Comment: A large number of commenters objected to the inclusion of 
swing beds as a postacute care setting. Many of these commenters stated 
that they believed that Congress did not intend that discharges to 
swing beds be included in the postacute transfer provision. In 
addition, the commenters were concerned about the negative impact of 
this policy on rural hospitals and rural health care in general. Two 
commenters, including MedPAC, supported our proposal concerning swing 
bed discharges.
    Response: We proposed to include discharges to swing beds because 
the services provided in swing beds are exactly the same as the 
services provided in skilled nursing facilities. That is, a swing-bed 
hospital is equivalent to a skilled nursing facility when it provides a 
swing-bed service. Thus, the policy rationale for including discharges 
to skilled nursing facilities in the postacute care provision would 
apply equally to discharges to swing beds.
    Although we are not persuaded by the commenters that, from a 
payment policy perspective, our proposal to include swing beds in the 
transfer provision was inappropriate, we understand the commenter's 
concern that this policy could have an adverse impact on small rural 
hospitals. Although our analysis shows that the impact on these 
hospitals is negligible in the aggregate, the impact on individual 
hospitals may be more significant. We have decided not to include 
discharges to a swing bed in the expanded transfer definition at this

[[Page 40978]]

time. We will monitor these discharges closely and may reconsider this 
decision in the future. We note that section 1886(d)(5)(J)(iv) of the 
Act requires the Secretary to include a description of the effect of 
the postacute care transfer policy in the FY 2001 hospital inpatient 
prospective payment system proposed rule.
    Comment: Commenters requested clarification of our policy 
concerning transfers to skilled nursing facilities. First, the 
commenters questioned the Secretary's authority to include as transfers 
those discharges to nursing homes that are not certified by Medicare. 
In addition, the commenters believed that patients discharged to a 
Medicare-certified skilled nursing facility for custodial care should 
not be included. The commenters also urged us to limit application of 
the transfer policy to discharges to skilled nursing facilities in 
cases where the patient receives Medicare-covered postacute care.
    Response: Section 1886(d)(5)(J)(ii) of the Act defines a 
``qualified discharge'' in part as a discharge of an individual from a 
prospective payment system hospital, if upon such discharge, the 
individual is ``* * * admitted to a skilled nursing facility. * * *'' 
There is no language in the statute that further defines skilled 
nursing facility. In the proposed rule, we stated that a discharge to a 
facility that meets the definition of a skilled nursing facility set 
forth at section 1819 of the Act would be considered a transfer. 
Discharges to nursing homes that are not certified by Medicare as 
skilled nursing facilities, or distinct parts of nursing homes that are 
not certified as skilled nursing facilities, would not be considered 
transfers.
    However, we do not believe it would be appropriate from either a 
legal or policy perspective to limit the transfer definition to 
situations where a patient is transferred to a skilled nursing facility 
for noncovered services. The statute does not limit application of the 
transfer definition to ``covered'' skilled nursing facility services. 
Moreover, there are several policy reasons why we would not adopt such 
a policy. First, it would place an added administrative burden upon the 
hospital to evaluate the patient's eligibility for covered skilled 
nursing services. Second, it would create incentives for providing 
noncovered postacute care that could potentially place beneficiaries at 
medical and financial risk. Third, it would be inconsistent with 
existing transfer policy (from one acute care hospital to another acute 
care hospital), which does not limit the definition of a transfer to 
those cases in which a patient receives Medicare-covered services at 
the receiving hospital. Finally, the basic rationale for the transfer 
policy (that is, adjusting hospital payments to reflect reduced 
hospital costs due to discharge to a postacute care facility) applies 
regardless of whether the postacute care is covered by Medicare. 
Therefore, our final regulations provide that all discharges from the 
10 specified DRGs admitted to a skilled nursing facility will be 
defined as transfers, regardless of the coverage status of that 
admission.
    Comment: One commenter believes that patients who were admitted to 
a skilled nursing facility any time within 30 days after the date of 
discharge (the so-called 30-day skilled nursing facility eligibility 
window) and who received care related to the inpatient stay will be 
considered a transfer under this policy. The commenter is concerned 
that hospitals will be expected to track patients for this period of 
time and be held accountable for their actions in such situations.
    Response: In order to be considered a transfer, the patient must be 
admitted directly from the hospital to the skilled nursing facility. If 
the patient is not admitted directly to a skilled nursing facility, it 
would not constitute a transfer situation, even if care begins within 
the 30-day eligibility window and is related to the acute care hospital 
stay.
    Comment: One commenter suggested that the expanded transfer 
definition should apply only in cases where the patient is transferred 
within a hospital system, that is, the patient is discharged to an 
entity that is related to or owned by the hospital. A transfer to an 
independent postacute care entity would be defined as a discharge.
    Response: Section 1886(d)(5)(J)(ii) of the Act defines a qualified 
discharge from a prospective payment hospital as one in which the 
individual, upon discharge, ``* * * is admitted as an inpatient of a 
hospital or hospital unit excluded that is not a subsection (d) 
hospital * * * is admitted to a skilled nursing facility * * * is 
provided home health services from a home health agency. * * *'' The 
statute or the conference report does not limit the applicability of 
this provision to postacute care providers that are owned by or related 
to the discharging hospital. In addition, we do not believe that 
ownership of or affiliation with the postacute care providers is the 
overriding concern that led to the enactment of this provision. 
Although a hospital that owns or is related to the postacute care 
provider has an even greater financial incentive to transfer a patient 
early in the hospital stay to that facility, the current incentive to 
the hospital itself to discharge the patient as soon as possible is the 
same whether or not it owns or is related to the postacute care 
provider. Finally, if the transfer definition were based on a 
hospital's affiliation with the postacute provider, it would create a 
strong incentive to reconfigure the hospital's corporate structure to 
avoid being included under the provision.
    Comment: One commenter suggested that psychiatric hospitals and 
units be excluded from the provision because the postacute care 
services furnished by these facilities are unrelated to a medical 
hospitalization.
    Response: As a legal matter, section 1886(d)(5)(J)(ii)(I) of the 
Act includes all hospitals and hospital units excluded from the 
prospective payment system. This definition covers psychiatric 
hospitals and units. As a policy matter, we also strongly believe that 
transfers to psychiatric hospitals and units should be included under 
this provision. Inpatient care furnished by hospitals is not limited to 
diseases and disorders of the body, but is also furnished to patients 
with mental diseases and disorders as evidenced by the nine DRGs 
devoted solely to these conditions. Furthermore, exempting psychiatric 
hospitals and units from the provision could create an incentive to 
temporarily transfer patients who need postacute care to a psychiatric 
hospital or unit setting as a way of avoiding the transfer payment, 
thus delaying the appropriate medical care for the patient.
    Comment: Several commenters disagreed with our proposal to include 
as transfers all discharges from the 10 specified DRGs to home health 
care that begins within 3 days after the date of discharge. The 
commenters argued that postacute care that begins 3 days after 
discharge should not be considered a substitute for inpatient hospital 
care. Although MedPAC agreed with these commenters that home health 
services furnished after a delay of more than one day may not 
necessarily be regarded as substituting for inpatient acute care, they 
also noted that a 3-day window allows for the fact that most home 
health patients do not receive care every day as well as those 
occasions in which there may be a delay in arranging for the provision 
of planned care. The Commission also stated that a shorter period may 
create a stronger incentive to delay the provision of necessary 
treatment beyond the window so the hospital can receive the full DRG 
payment. Another commenter

[[Page 40979]]

supported 3 days as an appropriate period of time.
    Those commenters who recommended an alternative number of days for 
the home health window universally stated that a discharge to home 
health care should be considered a transfer only if the patients begin 
to receive home health care on the day of discharge. One commenter 
argued that a 3-day window would lead to either needlessly prolonged 
hospital stays or delayed home health care. Another commenter 
questioned why we would not want patients transferred to home health 
care as soon as possible.
    Response: The statute defines ``qualified discharge'' to include 
discharges where the individual is provided home health care ``within 
an appropriate period (as determined by the Secretary).'' We continue 
to believe a 3-day window for home health services is appropriate. Home 
health care is a less-structured and more flexible means of providing 
postacute care because it is provided not in an institutional setting 
but rather in the patient's home. We believe that a 3-day window 
provides flexibility in situations where home care may not be available 
or medically appropriate immediately upon discharge. It is also of 
sufficient length to discourage hospitals and physicians from delaying 
the initiation of necessary postacute care, while being short enough to 
avoid placing an undue burden upon hospitals that may want to delay 
submitting the inpatient hospital claim until they verify whether or 
not home health care has begun within the 3 days.
    We do not believe that it is appropriate to limit the transfer 
definition to situations where home care begins on the same day as the 
patient is discharged from the hospital. Our analysis indicates that 
currently less than 8 percent of discharged patients who receive home 
health services begin receiving those services on the date of 
discharge. It is unreasonable to expect that patients who are 
discharged in the late afternoon or evening would receive a home health 
visit that same day. Furthermore, we believe the financial incentive to 
delay needed home care for only a matter of hours would be overwhelming 
if we limited the definition to the same day. As we noted in the 
proposed rule, approximately 90 percent of patients who receive home 
health services after an inpatient hospital stay began their treatment 
within 3 days after the date of discharge. We believe 3 days 
accommodates current practices, while also being sufficiently narrow to 
allow hospitals to determine whether the care was actually delivered 
prior to submitting the bill. We intend to monitor this aspect of the 
policy through case review in order to track any changes in hospital 
practices that may indicate that we need to revise our window 
definition.
    Comment: One commenter argued that the best method to determine 
whether postacute home health services are related to the inpatient 
stay would be to match the principal diagnosis codes on the inpatient 
and home health bills. The commenter believed this would alleviate 
situations where the patient is discharged from the hospital with a 
written plan for the provision of home health services, but the 
services are related to a medical condition other than the condition 
responsible for the inpatient stay. In addition, the commenter noted 
that matching principal diagnosis codes would be consistent with 
current policy for the 3-day window for preadmission services.
    Response: We disagree that the determination of whether home health 
care is related to the acute hospitalization should be based on the 
presence of identical diagnosis codes on the inpatient and home health 
bills. This approach would rely on the coding practices of the 
providers involved. Providers, especially postacute care providers, 
frequently have the discretion to select from several possible 
diagnosis codes. A common practice of postacute care providers is to 
use the V57 diagnosis code category (care involving use of 
rehabilitation procedures) as principal because those codes best 
describe the reason for the postacute care. However, this code is 
seldom used by hospitals for acute care discharges because they are 
instructed by coding rules to code as principal the condition that 
required the hospital admission as determined at the time of discharge. 
In fact, if the hospitals coded discharges with the rehabilitation 
codes as principal, the discharges would never be included in the 
postacute care policy because those discharges would never be 
classified to one of the 10 selected DRGs.
    We believe our proposed policy on this issue is preferable. We note 
that hospitals that code a discharge to home health will be permitted 
to indicate through a condition code on the inpatient bill that the 
hospital's discharge plan does not call for home care related to the 
hospitalization, but that other nonrelated home care is appropriate. 
This way, the hospital will make a conscious selection that the home 
care the patient is to receive is not related to the hospitalization, 
and would be expected to have documentation in the patient's records to 
that effect.
    Comment: In the context of discussing the home health window, 
MedPAC questioned whether the same day requirement for admission to an 
excluded hospital or unit or a skilled nursing facility was too 
limited. The Commission suggested expanding the definition to account 
for a 24-hour period following discharge.
    Response: In describing which discharges to excluded hospitals and 
units or skilled nursing facilities should be treated as a transfer, 
the statute states that the patient is admitted to the facility upon 
discharge from the hospital. We believe that Congress intended that the 
policy apply to situations when the patient moves from the hospital 
directly to the excluded facility or the skilled nursing facility. 
Therefore, unless a patient is being transported from the hospital to 
the other facility in the middle of the night, the discharge and 
admission should occur on the same calendar day. We note that a direct 
transfer that spans midnight and results in a one-day difference in the 
discharge and admission dates will be considered a transfer for 
purposes of this policy.
    Comment: Many commenters indicated the discharge to postacute care 
provision will be an administrative burden for hospitals. Because 
Medicare beneficiaries are free to obtain services without a hospital 
referral, hospitals are concerned that they will be subject to 
allegations of fraud and abuse if they discharge a beneficiary to home 
with no plan of care for home health services and the beneficiary 
subsequently receives postacute care without the hospital's knowledge. 
These hospitals believe that they may be forced to hold bills for the 
10 DRGS when they discharge a patient to self-care at home so they can 
follow-up and ensure that the patient did not receive postacute care.
    Another commenter is disturbed by our discussion in the proposed 
rule concerning future actions we may take if we find continued 
patterns of a hospital billing postacute transfer cases as discharges, 
including the possibility that hospitals may be investigated for 
fraudulent or abusive billing practices. The commenter believes that 
our language was too strong and that we are not allowing a period of 
transition in which hospitals may make honest billing errors as they 
adjust to this new policy.
    Finally, commenters suggested that we clarify when hospitals are 
responsible for knowing that a case is transferred for postacute care.

[[Page 40980]]

    Response: We recognize there may occasionally be cases where a 
hospital believes it is discharging a patient to home or another 
setting not included in the postacute transfer definition, and a 
physician orders postacute care for the patient without notifying the 
hospital. Although these cases would be considered transfers under this 
provision, we do not believe that such instances, where they occur 
truly without knowledge of the hospital, constitute fraudulent actions. 
As we indicated in the proposed rule, we intend to monitor postacute 
care cases to evaluate whether such situations occur with unlikely 
frequency at specific hospitals and we will investigate the 
circumstances in those instances.
    Although we recognize honest mistakes will occur, we do not believe 
it is inappropriate to put hospitals on notice that we reserve the 
right to investigate those with aberrant patterns of inaccurate billing 
on these cases. While it is reasonable to assume there will be a 
learning curve in terms of hospitals' billing practices as these 
changes are implemented, we also take seriously our responsibility to 
protect the Medicare trust fund. Our intention in including a 
discussion of this issue in the proposed rule was an attempt to avoid 
any misunderstanding in terms of our commitment to ensure the correct 
implementation of this provision.
    In response to the request for clarification about the hospital's 
responsibility for knowing when a transfer occurs, the hospital is 
responsible for coding the bill based on its discharge plan for the 
patient, or if it finds out subsequently that postacute care occurred, 
it is responsible for either coding the original bill as a transfer or 
submitting an adjustment bill. We have consulted with the National 
Uniform Billing Committee (NUBC) to ensure that the appropriate changes 
are made on the claims form to enable hospitals to accurately code 
these cases and to submit corrections to them when additional 
information affecting the patient's discharge status code becomes 
available after the bill is submitted.
    Comment: One commenter recommended that we establish a hierarchical 
decision process for determining whether a discharge to home health 
services qualifies as a transfer. This commenter believed that the 
overriding consideration should be whether the services are related to 
the hospital stay. This commenter suggested that any home care ordered 
in the discharge plan should constitute related home health care, 
regardless of when it is provided.
    Response: Congress directed the Secretary to determine the 
appropriate time period within which the provision of home health 
services would trigger a transfer payment. Services provided outside 
that window, even if related to the hospital stay, would not result in 
the discharge being considered a transfer. In addition, we believe that 
a time limit is consistent with the concern that these transfer cases 
are predominantly situations where care is being shifted from the acute 
setting to a postacute care setting. If a patient is discharged to home 
and does not need home health care for several days, there may be 
little, if any, shift of acute care services to the postacute care 
setting.
    Comment: One commenter stated that we should specify that the 
written plan of care for home health services should be defined clearly 
as ``a specific order by the patient's physician in the hospital 
medical record that directs the hospital to arrange for home health 
services upon discharge.''
    Response: We do not believe that it is necessary to specify the 
precise definition of what a written plan of care for home health 
services must entail. We note that we would deem a case to be a 
transfer if care related to the discharge was provided within 3 days 
after the date of discharge even if the hospital had no written plan of 
care.
    Comment: A representative of physical therapists expressed concern 
that the 3-day window for home health services may influence hospitals 
to wait until after the 3 days to initiate home health services. This 
commenter is also concerned that our proposal to identify related home 
health services based on the written plan of care by the hospital at 
the time of discharge may discourage hospitals from planning for home 
health, resulting in uncoordinated and delayed postacute care following 
discharge.
    Response: We believe there are sufficient protections against 
hospitals inappropriately delaying home health care. First, the 
provision of home health care is ordered by the patient's physician 
orders. We believe physicians will be reluctant to compromise their 
patients' treatment by inappropriately delaying home health care. In 
addition, we will monitor hospitals' discharge patterns to home health 
for evidence that care is being routinely delayed until the fourth day 
after discharge and intend to aggressively pursue situations where 
abuse is evident. If evidence of a pattern of abuse is found, we will 
address it through appropriate policy changes in the FY 2001 proposed 
rule.
    With respect to the commenter's concern that identifying related 
home health services based on the hospital's written plan of care may 
create a disincentive to plan home care, we will also be able to 
identify those cases where home health services were received within 3 
days of discharge and the hospital indicated that the patient was 
discharged home with no plan for home health services. As we noted 
above, we recognize there will be a certain percentage of cases where 
home care is arranged after release from the hospital; however, we 
would expect such situations to be relatively rare.
    Comment: One commenter, representing medical rehabilitation 
providers, expressed concern that this provision may change hospitals' 
referral patterns, delaying the initiation of rehabilitation services. 
The commenter suggested that we collect the following information from 
prospective payment hospitals to monitor their referral patterns:
    <bullet> Site of referral for cases in the 10 DRGs, including 
discharge to home without postacute care.
    <bullet> Date from onset and length of stay prior to referral, by 
DRG.
    <bullet> General medical condition and functional status of the 
patient if the hospital normally collects functional information.
    In addition, HCFA should collect the following information from 
postacute care providers:
    <bullet> The DRG assigned to the acute care hospitalization.
    <bullet> The date from onset and date of referral to the postacute 
care provider.
    <bullet> For patients referred for rehabilitation services to a 
rehabilitation hospital or unit, the functional status of the patient 
on admission to and at discharge from the rehabilitation provider.
    The commenter noted that over 90 percent of rehabilitation 
providers already use functional assessment tools, therefore, this data 
collection would not be excessively burdensome.
    Response: We appreciate this commenter's concerns regarding any 
potentially adverse effects of this provision with respect to 
beneficiaries' health. We already collect most of the hospital data 
suggested by the commenter (with the exception of patients' functional 
status and medical condition, though even this could be accessed on a 
limited basis). Similarly, for postacute providers, the first two items 
of data are already readily available in our system. As we have 
described above, we intend to use these data to monitor providers' 
behavior after implementation of this policy.
    Comment: Commenters requested that we require the fiscal 
intermediaries to

[[Page 40981]]

automatically adjust the payments received by the hospital when the 
hospital codes a case as a discharge and no bill is ever received for 
postacute care services. In making this request, the commenters 
referred to the process we described in the proposed rule in which we 
would compare the discharge status coded on the hospital bills with 
postacute care bills received to determine whether qualifying postacute 
care was provided when the hospital billed the case as a discharge.
    Response: As noted above, hospitals will be able to submit 
corrections to their discharge status codes when they determine that 
previously submitted bills are incorrect. It would be impractical to 
require the fiscal intermediaries to adjust payments for cases coded as 
transfers when no matching postacute care bill is identified. Such a 
requirement raises a potential scenario where a case may be 
inappropriately adjusted upward because the matching postacute bill has 
not entered the claims system at the time the bill comparison is made. 
The prescribed period of time within which a provider may submit a bill 
for Medicare payment is relatively long and we believe it would be 
impractical for each intermediary to reprocess already paid bills based 
solely on the absence of a matching postacute care bill. In addition, 
we note that there may be occasions when no postacute care bill is 
submitted even though the patient was discharged to that care. For 
example, as we discussed above, if a patient is transferred to a 
skilled nursing facility and receives noncovered care, there will be no 
bill in the Medicare claims files. We believe it is preferable to 
require hospitals to submit bill adjustments.
    Comment: One commenter was unclear about how postacute care 
transfers will be identified in the billing process. Specifically, the 
commenter questioned whether the hospital will indicate a transfer by 
the discharge status code or whether the identification will occur by 
matching the acute hospitalization bill against a postacute bill at the 
fiscal intermediary.
    Response: Transfer cases will be identified based on the discharge 
status code listed on the hospital claim form (the HCFA-1490, also 
known as the UB-92). As noted above, we have consulted with the NUBC to 
ensure that the appropriate changes are made on the claims form to 
enable hospitals to accurately code these cases. The language in the 
proposed rule concerning a process of matching the date of discharge 
from the acute hospital stay with the date that postacute care services 
begin was a description of the process that HCFA will use as a check to 
verify the accuracy of the discharge codes.
    Comment: One commenter asked whether the discharge destination code 
``08,'' which is described as ``Discharged/transferred to home under 
care of a Home IV (intravenous) provider,'' would be used to identify a 
transfer. This commenter was also concerned about whether code ``05,'' 
which is described as ``Discharged/transferred to another type of 
institution for inpatient care or referred for outpatient services to 
another institution'' would be sufficient to identify transfers to 
excluded hospitals or units.
    Response: Discharge code ``08'' will not trigger a transfer payment 
because it should not be used in situations where a patient is 
receiving IV services under the Medicare home health benefit. Rather, 
code ``06'' should be used to signify all care provided by a home 
health agency under the Medicare home health benefit.
    With respect to discharge code ``05,'' the NUBC is discussing what 
additional codes need to be added or what current codes may be revised 
to allow for more specific coding to distinguish transfer situations 
from nontransfers. Instructions on the discharge codes will be provided 
to the fiscal intermediaries and, thereafter, to the hospitals before 
the effective date of the postacute transfer provision (that is, 
October 1, 1998).
    Comment: Several commenters suggested that DRG 483 should not be 
included as one of the 10 DRGs under this provision. The commenters 
believed that this DRG is not clinically homogeneous and includes many 
different conditions with different expected lengths of stay. They also 
stated that our analysis showed that transfers from this DRG would be 
paid below costs for almost every day below the mean length of stay. 
One commenter indicated it appeared this DRG was singled out for 
specific treatment.
    MedPAC commented that the criteria we used to select the 10 DRGs 
was reasonable, although it indicated that the list is fairly narrow in 
the types of conditions or procedures represented. Therefore, when we 
consider an expansion of this list, MedPAC recommended that we include 
coronary surgery DRGs, such as the coronary bypass DRGs (106, 107, and 
109), and the pneumonia DRGs (89, 90, or 91).
    Response: As described in the proposed rule and above in this 
section of the preamble, the 10 DRGs were selected based on the 
criteria specified in the statute, that is, the DRGs exhibit a high 
volume and disproportionate percentage of postacute cases. None of the 
10 DRGs were predetermined. With respect to DRG 483, a significant 
percentage of discharges (over 45 percent are transferred to postacute 
care. This places it in the top 25 DRGs in terms of postacute care 
utilization. Of those 25 DRGs, it is ranked 9th in terms of the volume 
of cases receiving postacute care. We believe these factors justify its 
inclusion.
    In addition, contrary to the commenter's statement, our analysis of 
payments and costs for transfers in this DRG shows that average 
payments exceed average costs for all but those cases transferred very 
early in the stay (before the 6th day in a DRG with an average length 
of stay of 34 days). (See the table for DRG 483 in Appendix D of this 
final rule.) The marginal costs per day for this DRG are consistent 
with and are accommodated almost perfectly by the transfer per diem 
payment methodology.
    We appreciate MedPAC's support regarding our selection criteria and 
will take its recommendations regarding additional DRGs into 
consideration in our future analysis.
    Comment: Some commenters believe that the process we used to select 
the 10 DRGs did not reflect the intent of Congress. They suggested 
that, in selecting the 10 DRGs, we should include an evaluation of 
whether a DRG was prone to inappropriate use of postacute care.
    Response: Section 1886(d)(5)(J)(iii)(I) of the Act provides that 
the affected DRGs are ``* * *10 diagnosis-related groups selected by 
the Secretary based on a high-volume of discharges classified within 
such groups and a disproportionate use of post discharge [sic] services 
* * *.'' This language does not direct the Secretary to select the 10 
DRGs based upon their vulnerability to inappropriate use of postacute 
care. As stated earlier, the postacure care transfer provision adjusts 
hospital payments to reflect the reduced lengths of stay arising from 
the shift of care to the postacute care setting.
    Comment: One commenter was offended by the rationale stated in the 
proposed rule for including DRG 264 (Skin Graft and/or Debridement for 
Skin Ulcer or Cellulitis without complication or comorbidity (CC)) in 
the list of 10 DRGs. The commenter argued that no medical record coder 
would intentionally fail to list a CC in order to avoid the transfer 
payment for a case that groups to DRG 263 (Skin Graft and/or 
Debridement for Skin Ulcer or Cellulitis With CC). The commenter noted 
that this would be an illegal,

[[Page 40982]]

fraudulent act on the part of the coder and should not be used as a 
deciding factor in the methodology for selecting the 10 DRGs.
    Response: In making our selection of the 10 DRGs, we decided to 
include paired DRGs if one of them met our criteria. While we do not 
believe that medical record coders will exclude a CC code in their list 
of diagnosis codes, the hospital claim is not generally submitted to 
HCFA by the coder, but rather by a billing office where information 
included on the claim is frequently subject to additional review. By 
including DRG 264, we hope to avoid any questions or issues concerning 
the accurate coding of a particular case involving skin graft and 
debridement.
    Comment: Several commenters stated that the alternative payment 
methodology for DRGs 209, 210, and 211 described in the proposed rule 
would not pay the full DRG amount until one day after the geometric 
mean length of stay for the DRG. This result is contrary to the usual 
per diem payment methodology where the full DRG payment is received one 
day before the geometric mean length of stay.
    Response: The alternative payment methodology in the proposed rule 
was described as ``50 percent of the DRG payment for the first day of 
the stay, and 50 percent of the per diem for the remaining days of the 
stay.'' This wording imprecisely described our proposed policy. The 
alternative payment methodology proposed for DRGs 209, 210, and 211 is 
equal to 50 percent of the DRG payment plus 50 percent of the amount 
which would be paid under our per diem methodology. Under this formula, 
on day one of a postacute care transfer, hospitals would receive one-
half the DRG payment amount plus the per diem payment for the DRG (one-
half the usual transfer payment of double the per diem for day one). 
For each subsequent day prior to transfer, hospitals receive one-half 
the per diem up to the full DRG payment, which is reached one day prior 
to the geometric mean length of stay for the DRG. We note that, 
although we inaccurately described the methodology, we used the correct 
formula in calculating the budget neutrality factors and outlier 
thresholds in the proposed rule.
    Comment: One commenter believed that the alternative payment 
methodology used for DRGs 209, 210, and 211 should be used for all 10 
of the DRGs selected under the postacute care transfer provision. The 
commenter argued that for postacute care transfers, unlike transfers 
under our current transfer policy, the hospital provides all necessary 
acute care services to the patient, regardless of length of stay, 
before transferring the patient to postacute care.
    Response: As noted above, we believe care previously provided in 
the acute care setting increasingly has been shifted to the postacute 
setting. Therefore, we do not agree with the commenter's belief that 
these cases are significantly different from those considered transfers 
under our current definition of transfers; in both situations, the 
length of stay is reduced and presumably a hospital furnished fewer 
services and incurs lower costs relative to a typical discharge. 
Furthermore, as demonstrated in the tables comparing average payments 
and costs for these DRGs in Appendix D, the seven DRGs that will be 
paid under the current per diem methodology have a gradual increase in 
costs as length of stay rises, consistent with the gradual increase in 
payments under our current per diem methodology. Therefore, we are not 
expanding the application of the alternative payment methodology beyond 
the three DRGs identified in the proposed rule.
    Comment: MedPAC suggested we may wish to evaluate whether the 
alternative payment methodology for postacute transfers in DRGs 209, 
210, and 211 should be expanded to our policy for transfers between two 
acute care hospitals.
    Response: We have evaluated our transfer payment formula for our 
current transfer policy in the past and revised it to pay double the 
per diem amount for the first day of a transfer stay. Because the 
majority of cases that are transferred from one acute care hospital to 
another result in the case being assigned to a medical DRG, our 
analysis indicated that the current per diem payment (with a double 
payment on the first day) accurately reflects the costs of these cases, 
as it does for the seven DRGs paid under the per diem methodology under 
the postacute transfer provision. Although we do not plan further 
changes in the payment methodology for transfers to another acute care 
hospital, we will continue to evaluate the potential for further 
refinements in this policy, particularly in light of the changes 
introduced in this final rule.
    Comment: One commenter requested clarification of how the indirect 
medical education (IME) and disproportionate share hospital (DSH) 
adjustments are treated under the transfer payment methodology. This 
commenter also requested clarification regarding the outlier payment 
calculation for transfer cases and recommended that the transfer 
payment rather than the DRG payment serve as the comparative basis for 
determining whether a transfer case qualifies as an outlier.
    Commenters also indicated some confusion as to when full payment 
would be made under the transfer methodology in situations where the 
geometric mean length of stay for a DRG is not a whole number, for 
example, 9.8 days.
    Response: The IME and DSH payments are determined in accordance 
with Secs. 412.105(e) and 412.106(a)(2), respectively, by applying the 
IME and DSH adjustment factors calculated under those sections to the 
DRG revenue. In the case of a transfer occurring before the average 
length of stay, the applicable IME or DSH factor would be applied to 
the DRG revenue determined under the applicable transfer payment 
methodology.
    With respect to outliers for transfer cases, the methodology 
suggested by the commenter is actually the methodology we use to 
determine outliers for these cases. In the September 1, 1995 Federal 
Register, we described how the cost outlier threshold is calculated for 
transfers (60 FR 45804). The outlier threshold for transfer cases 
reflects the fact that transfer cases receive a reduced payment amount. 
Specifically, the threshold for transfers paid under the current per 
diem methodology is equal to the fixed loss outlier threshold for all 
cases ($11,100 for FY 1999) divided by the geometric mean length of 
stay for the DRG, multiplied by the length of stay prior to transfer, 
plus one day. For postacute transfers in DRGs 209, 210, and 211, the 
outlier threshold is determined by dividing the fixed loss outlier 
threshold for all cases by the geometric mean length of stay for the 
DRG, multiplied by the sum of half the geometric mean and half the 
length of stay for the case, plus one. We note that we are making a 
conforming change in Sec. 412.80(b), which describes outlier payments 
for transfers, to incorporate the revisions we are making in the 
transfer policy.
    Finally, in the case of a DRG with a geometric mean length of stay 
of 9.8 days, full payment would be received on day 9. The following 
table illustrates this point, using DRGs 209 and 236 with geometric 
mean lengths of stay of 4.9 and 4.1 days, respectively.

[[Page 40983]]



------------------------------------------------------------------------
                   DRG                          209             236     
------------------------------------------------------------------------
Full DRG Payment Amount \1\.............       $8,400.32       $2,790.60
Per Diem Amount.........................        2,048.86          680.63
Payment for Transfer on Day 1 \2\.......        6,249.02        1,361.26
Payment for Transfer on Day 2...........        7,273.45        2,041.89
Payment for Transfer on Day 3...........        8,297.88        2,722.52
Payment for Transfer on Day 4 \3\.......        8,400.32       2,790.60 
------------------------------------------------------------------------
\1\ This amount is determined using the other areas national            
  standardized amount from Table 1A in Section VI of the addendum to    
  this final rule. The respective relative DRG weights are taken from   
  Table 5. For DRG 209, the relative weight is 2.1803, and for DRG 236  
  it is 0.7243. It assumes a wage index of 1.0, and no IME or DSH       
  payments. Any IME or DSH payments would be factored into the transfer 
  amount as described above.                                            
\2\ For DRG 209, the payment amount is equal to one-half of the full DRG
  payment amount ($4,200.16) plus the per diem amount ($2,048.86). For  
  DRG 236, the payment amount is equal to double the per diem amount.   
\3\ Total payment is limited to the full DRG amount (with the exception 
  of outlier cases), rather the result of an additional per diem amount 
  (or half the per diem).                                               

    Comment: A few commenters stated that because average lengths of 
stay vary by geographic region, the transfer policy punishes those 
regions with average lengths of stay less than the mean. They 
recommended that an adjustment factor be developed to recognize this 
disparity or that regional averages should be used to compute the per 
diem amount.
    Response: We recognize that lengths of stay vary by region and are 
generally lower in the west, particularly compared to the northeast. In 
addition, regions with shorter lengths of stay tend to also have lower 
average costs due to the fewer number of days that patients spend in 
the hospital. One of the reasons for this variation is the greater 
reliance on postacute care earlier in the stay in those areas with 
lower average lengths of stay.
    We do not believe it would be appropriate to base the transfer 
payment methodology on regional average lengths of stay. The national 
standardized amounts, which apply across all regions, reflect costs and 
lengths of stay across all regions. If a hospital in one region has a 
case with certain patient characteristics and a hospital in another 
region has a case with identical patient characteristics (including the 
same length of stay), we see no reason to have a rule under which one 
hospital would receive the full DRG payment but the other hospital 
would receive a transfer payment.
    Comment: One commenter believed that, in lieu of expanding the 
transfer definition, it would make more sense to recalibrate the 10 
DRGs to better reflect the recent reductions in lengths of stay and 
costs for these categories.
    Response: All of the DRGs are recalibrated annually, using the 
latest available charge data for Medicare beneficiaries. Because of the 
recalibration process, a reduction in the relative weights of certain 
DRGs results in an increase in the weights of other DRGs. Therefore, 
there are no overall reductions in Medicare payments to hospitals. That 
is, although the hospital will receive a reduced payment through lower 
weights for the DRGs affected by the shift toward greater utilization 
of postacute care early in a stay, it will receive greater payment for 
the DRGs in which the weight is increased because there is no reduction 
in overall costs. In addition, any reduction in payment for the 
selected DRGs is shared by all hospitals including those that have not 
reduced their average length of stay and costs through the increased 
use of postacute care. We believe that any change in Medicare payment 
because of the early transfer of acute care patients to postacute care 
should be targeted at those hospitals that have actually incorporated 
this practice into their patient care.
    Comment: Another commenter noted that, if these cases are to be 
treated as transfers for payment, they should be treated that way for 
recalibration as well.
    Response: We agree. In the proposed rule, we did not revise the 
discussion of the recalibration process to specifically mention the 
postacute transfers, but we did treat these cases as transfers during 
the recalibration process that resulted in the DRG weights set forth in 
that rule. For purposes of the DRG recalibration, transfer cases, 
including the postacute transfer cases, are counted as a fraction of a 
discharge based on the length of stay, thereby reducing proportionately 
the contribution of the charges for the case toward the average charges 
for the DRG. This process effectively inflates the charges of a 
transfer case to what they would have been had the patient's length of 
stay been equal to the geometric mean length of stay. If we do not 
perform this calculation, these cases would receive reduced payment 
because they are transfers, but be treated as discharges in 
recalibration, lowering the relative weights for affected DRGs.
    Comment: One commenter questioned whether the postacute care 
transfer provision will have any effect on the payments made by 
Medicare to the postacute providers.
    Response: The only payment implication of this provision is to 
affect the prospective payment for the acute inpatient hospitalization. 
Medicare payment to any postacute providers involved in the stay are 
not affected by this policy.

B. Rural Referral Centers (Sec. 412.96)

    Under the authority of section 1886(d)(5)(C)(I) of the Act, 
Sec. 412.96 sets forth the criteria a hospital must meet in order to 
receive special treatment under the prospective payment system as a 
rural referral center. For discharges occurring before October 1, 1994, 
rural referral centers received the benefit of payment based on the 
other urban rather than the rural standardized amount. As of that date, 
the other urban and rural standardized amounts were the same. However, 
rural referral centers continue to receive special treatment under both 
the disproportionate share hospital payment adjustment and the criteria 
for geographic reclassification.
    One of the criteria under which a rural hospital may qualify as a 
rural referral center is to have 275 or more beds available for use. A 
rural hospital that does not meet the bed size criterion can qualify as 
a rural referral center if the hospital meets two mandatory criteria 
(specifying a minimum case-mix index and a minimum number of 
discharges) and at least one of the three optional criteria (relating 
to specialty composition of medical staff, source of inpatients, or 
volume of referrals). With respect to the two mandatory criteria, a 
hospital may be classified as a rural referral center if its--
    <bullet> Case-mix index is at least equal to the lower of the 
median case-mix index for urban hospitals in its census region, 
excluding hospitals with approved teaching programs, or the median 
case-mix index for all urban hospitals nationally; and

[[Page 40984]]

    <bullet> Number of discharges is at least 5,000 discharges per year 
or, if fewer, the median number of discharges for urban hospitals in 
the census region in which the hospital is located. (The number of 
discharges criterion for an osteopathic hospital is at least 3,000 
discharges per year.)
1. Case-Mix Index
    Section 412.96(c)(1) provides that HCFA will establish updated 
national and regional case-mix index values in each year's annual 
notice of prospective payment rates for purposes of determining rural 
referral center status. The methodology we use to determine the 
proposed national and regional case-mix index values, is set forth in 
regulations at Sec. 412.96(c)(1)(ii). The proposed national case-mix 
index value included all urban hospitals nationwide, and the proposed 
regional values were the median values of urban hospitals within each 
census region, excluding those with approved teaching programs (that 
is, those hospitals receiving indirect medical education payments as 
provided in Sec. 412.105).
    These values were based on discharges occurring during FY 1997 
(October 1, 1996 through September 30, 1997) and include bills posted 
to HCFA's records through December 1997. Therefore, in addition to 
meeting other criteria, for hospitals with fewer than 275 beds, we 
proposed that to qualify for initial rural referral center status for 
cost reporting periods beginning on or after October 1, 1998, a 
hospital's case-mix index value for FY 1997 would have to be at least--
    <bullet> 1.3578; or
    <bullet> Equal to the median case-mix index value for urban 
hospitals (excluding hospitals with approved teaching programs as 
identified in Sec. 412.105) calculated by HCFA for the census region in 
which the hospital is located. (See the table set forth in the May 8, 
1998 proposed rule at 63 FR 25593.)
    Based on the latest data available (FY 1997 bills received through 
March 31, 1998), the final national case-mix value is 1.3590 and the 
median case-mix values by region are set forth in the table below:

------------------------------------------------------------------------
                                                                Case-mix
                            Region                               index  
                                                                 value  
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)......................     1.2490
2. Middle Atlantic (PA, NJ, NY)..............................     1.2519
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV).......     1.3474
4. East North Central (IL, IN, MI, OH, WI)...................     1.2711
5. East South Central (AL, KY, MS, TN).......................     1.3042
6. West North Central (IA, KS, MN, MO, NE, ND, SD)...........     1.2325
7. West South Central (AR, LA, OK, TX).......................     1.3326
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY).................     1.3726
9. Pacific (AK, CA, HI, OR, WA)..............................     1.3427
------------------------------------------------------------------------

    For the benefit of hospitals seeking to qualify as referral centers 
or those wishing to know how their case-mix index value compares to the 
criteria, we are publishing each hospital's FY 1997 case-mix index 
value in Table 3C in section VI. of the Addendum to this final rule. In 
keeping with our policy on discharges, these case-mix index values are 
computed based on all Medicare patient discharges subject to DRG-based 
payment.
2. Discharges
    Section 412.96(c)(2)(I) provides that HCFA will set forth the 
national and regional numbers of discharges in each year's annual 
notice of prospective payment rates for purposes of determining 
referral center status. As specified in section 1886(d)(5)(C)(ii) of 
the Act, the national standard is set at 5,000 discharges. However, we 
proposed to update the regional standards. The proposed regional 
standards were based on discharges for urban hospitals' cost reporting 
periods that began during FY 1996 (that is, October 1, 1995 through 
September 30, 1996). That is the latest year for which we have complete 
discharge data available.
    Therefore, in addition to meeting other criteria, we proposed that 
to qualify for initial rural referral center status for cost reporting 
periods beginning on or after October 1, 1998, the number of discharges 
a hospital must have for its cost reporting period that began during FY 
1997 would have to be at least--
    <bullet> 5,000; or
    <bullet> Equal to the median number of discharges for urban 
hospitals in the census region in which the hospital is located. (See 
the table set forth in the May 8, 1998 proposed rule at 63 FR 65594.)
    Based on the latest discharge data available for FY 1996, the final 
median numbers of discharges for urban hospitals by census region areas 
are as follows:

------------------------------------------------------------------------
                                                               Number of
                           Region                             discharges
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT).....................       6,672
2. Middle Atlantic (PA, NJ, NY).............................       8,676
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)......       7,753
4. East North Central (IL, IN, MI, OH, WI)..................       7,346
5. East South Central (AL, KY, MS, TN)......................       6,741
6. West North Central (IA, KS, MN, MO, NE, ND, SD)..........       5,346
7. West South Central (AR, LA, OK, TX)......................       5,251
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)................       7,992
9. Pacific (AK, CA, HI, OR, WA).............................       5,993
------------------------------------------------------------------------

    We note that the number of discharges for hospitals in each census 
region is greater than the national standard of 5,000 discharges. 
Therefore, 5,000 discharges is the minimum criterion for all hospitals.
    We reiterate that, to qualify for rural referral center status for 
cost reporting periods beginning on or after October 1, 1998, an 
osteopathic hospital's number of discharges for its cost reporting 
period that began during FY 1996 would have to be at least 3,000.
    We received no comments on the rural referral center criteria.

C. Payments to Disproportionate Share Hospitals: Conforming Change 
Regarding Interpretation of Medicaid Patient Days Included in 
Disproportionate Patient Percentage (Sec. 412.106)

    Effective for discharges beginning on or after May 1, 1986, 
hospitals that treat a disproportionately large number of low-income 
patients receive additional payments through the disproportionate share 
(DSH) adjustment. One means of determining a hospital's DSH payment 
adjustment for a cost reporting period requires calculation of its 
disproportionate patient percentage for the period. The 
disproportionate patient percentage is the sum of a prescribed Medicare 
fraction and a Medicaid fraction for the hospital's fiscal period. 
Under clause (I) of section 1886(d)(5)(F)(vi) of the Act and 
Sec. 412.106(b)(2), the Medicare fraction is determined by dividing the 
number of the hospital's patient days for patients who were entitled 
(for such days) to benefits under both Medicare Part A and Supplemental 
Security Income (SSI) under Title XVI of the Act, by the total number 
of the hospital's patient days for the patients who were entitled to 
Medicare Part A. The Medicaid fraction is determined, in accordance 
with clause (II) of section 1886(d)(5)(F)(vi) of

[[Page 40985]]

the Act and Sec. 412.106(b)(4), by dividing the number of the 
hospital's patient days for patients who (for such days) were eligible 
for medical assistance under a State Medicaid plan approved under Title 
XIX of the Act but who were not entitled to Medicare Part A, by the 
total number of the hospital's patient days for that period.
    Initially, HCFA calculated the Medicaid fraction by interpreting 
section 1886(d)(5)(F)(vi)(II) of the Act to recognize as Medicaid 
patient days only those days for which the hospital received Medicaid 
payment for inpatient hospital services. See 51 Fed. Reg. 31454, 31460 
(1986). The agency's interpretation was declared invalid by four 
Federal circuit courts of appeals. See Cabell Huntington Hosp., Inc. v. 
Shalala, 101 F.3d 984, 990-91 (4th Cir. 1996) (following three other 
circuits). These courts held that the statute requires, for purposes of 
calculating the Medicaid fraction, inclusion of each patient day of 
service for which a patient was eligible on that day for medical 
assistance under an approved State Medicaid plan. Specifically, the 
statute requires inclusion of each hospital patient day for a patient 
eligible for Medicaid on such day, regardless of whether particular 
items or services were covered or paid under the State Medicaid plan.
    On February 27, 1997, the HCFA Administrator issued HCFA Ruling 97-
2, which acquiesced in the four adverse appellate court decisions. The 
Ruling changed the agency's statutory construction to comport with 
those decisions, in order to facilitate nationwide uniformity in the 
calculation of the Medicaid fraction. Like the court decisions, the 
Ruling provides that a hospital's Medicaid patient days include each 
patient day of service for which a patient was eligible on such day for 
medical assistance under an approved State Medicaid plan, regardless of 
whether particular items or services were covered or paid under the 
State plan. The Ruling also reflects the hospital's burden of 
furnishing data adequate to prove each claimed Medicaid patient day, 
and of verifying with the State that a patient was eligible for 
Medicaid during each day of the inpatient hospital stay.
    The Ruling further provides that the agency's new interpretation is 
effective February 27, 1997 for each cost reporting period that: (1) 
Begins on or after that effective date; (2) was not settled, as of that 
date, on the Medicaid patient days issue, by means of an applicable 
notice of program reimbursement (NPR) (see Sec. 405.1803); or (3) was 
settled through such an NPR as of the Ruling's effective date and is 
the subject of a pending administrative appeal or civil action that 
satisfies all applicable jurisdictional requirements of the Medicare 
statute and regulations. The Ruling also provides, however, that the 
change in statutory interpretation effected by the Ruling is not a 
basis for reopening a hospital cost reporting period (see 
Secs. 405.1885-405.1889) that was finalized previously on the same 
matter at issue.
    We proposed to revise Sec. 412.106(b)(4) in order to conform the 
Medicare regulations to the new statutory construction issued in HCFA 
Ruling 97-2. These revisions are necessary to ensure that the 
regulations comport with the four appellate court decisions that 
declared invalid the agency's prior interpretation and led to the 
issuance of the HCFA Ruling. The proposed revisions would further 
facilitate nationwide uniformity in the calculation of the Medicaid 
fraction.
    Since the proposed revisions were intended simply to conform the 
regulations to HCFA Ruling 97-2 (and hence to the four adverse court 
decisions), revised Sec. 412.106(b)(4) would reiterate the Ruling's 
change of interpretation that the Medicaid fraction under section 
1886(d)(5)(F)(vi)(II) of the Act includes each hospital patient day for 
a patient eligible for Medicaid on such day, regardless of whether 
particular items or services were covered or paid under the State 
Medicaid Plan. Our proposed revisions to Sec. 412.106(b)(4), like the 
Ruling, would continue to place on the hospital the burdens of 
production, proof, and verification as to each claimed Medicaid patient 
day.
    Under our proposal, revised Sec. 412.106(b)(4) would apply to cost 
reporting periods beginning on or after October 1, 1998. HCFA Ruling 
97-2, which includes the same provisions as proposed 
Sec. 412.106(b)(4), would continue to apply to any cost reporting 
period beginning before October 1, 1998 provided that, as of February 
27, 1997, there is for such period: no submitted cost report; no cost 
report settled on the Medicaid patient days issue through an applicable 
NPR; or a cost report settled on that issue, which is also the subject 
of a jurisdictionally proper administrative appeal or civil action on 
the issue.
    We received no comments in response to this proposal. Therefore, we 
are incorporating the proposed conforming change in this final rule.

D. Payment for Bad Debts (Sec. 413.80)

    Section 4451 of the Balanced Budget Act of 1997 reduces the payment 
for enrollee bad debt for hospitals. Specifically, this provision 
reduces the amount of bad debts otherwise treated as allowable costs, 
attributable to the deductibles and coinsurance amounts under this 
title, by 25 percent for cost reporting periods beginning during fiscal 
year 1998, by 40 percent for cost reporting periods beginning during 
fiscal year 1999, and by 45 percent for cost reporting periods 
beginning during a subsequent fiscal year. We proposed to conform the 
regulations to the statute.
    Section 4451 of the Balanced Budget Act of 1997 also provides that 
in determining such reasonable costs for hospitals, any copayments 
reduced under the election available for hospital outpatient services 
under section 1833(t)(5)(B) of the Act will not be treated as a bad 
debt. This provision will be implemented in the outpatient prospective 
payment system regulation that implements sections 4521, 4522, and 4523 
of the Balanced Budget Act of 1997, to be published later this year.
    We received one comment regarding the reduction in Medicare bad 
debt reimbursement which is discussed below.
    Comment: One commenter requested that the regulations and/or cost 
report forms (HCFA 2552-96) be modified to clarify that hospital-based 
skilled nursing facility bad debts will continue to be 100 percent 
reimbursable since freestanding skilled nursing facilities are not 
subject to the reduction in reimbursement and skilled nursing 
facilities are not mentioned in the law at section 1861(v)(1)(T). The 
commenter believed that in the BBA committee reports describing changes 
in reimbursement for Medicare bad debts, it seemed clear the changes 
were to apply to all providers, yet the law clearly stated that 
hospitals are the sole provider type subject to reductions in 
reimbursement. The commenter also noted that in reviewing the new 
hospital cost report forms, HCFA 2552-96, the commenter believed that 
the forms would apply the reduction in reimbursement to hospital-based 
skilled nursing facilities.
    Response: The HCFA 2552-96 hospital cost report forms do not apply 
the reduction in bad debt reimbursement to hospital-based skilled 
nursing facilities. Page 36-159, Line 26 and Page 36-164, Line 40 
require entering the reduction for ``hospitals only''. Section 4451 of 
the BBA, and these implementing regulations, apply only to hospitals 
and any subprovider units settled through the hospital cost report, 
whether or not they have a separate provider number. Included in this 
are rehabilitation units, psychiatric

[[Page 40986]]

units, and childrens' hospitals, which are considered hospital 
providers. Cost reports for skilled nursing facilities, home health 
agencies, outpatient therapy, comprehensive outpatient rehabilitation 
facilities, community mental health centers, federally qualified health 
centers, and rural health clinics (after January 1, 1998) are 
separately settled and bad debts for these providers are not reduced. 
The bad debt reduction does not apply to ambulatory surgical centers 
because they are paid on another basis (fee schedule). End stage renal 
disease bad debts are computed separately and are not reduced.

E. Payment for Direct Costs of Graduate Medical Education to Hospitals 
and Qualified Nonhospital Providers (Secs. 405.2468, 413.85, and 
413.86)

1. Statutory Background
    Since its inception in 1965, Medicare has provided payment only to 
hospitals for the costs of graduate medical education (GME) training. 
The BBA allows for direct GME payment to qualified nonhospital 
providers to encourage training of future physicians in nonhospital 
settings.
    Under section 1886(k) of the Act, as added by section 4625 of the 
BBA, the Secretary is now authorized, but not required, to pay 
qualified nonhospital providers for the direct costs of GME training. 
The Conference Report also notes that the Conferees believe this 
authority may help alleviate physician shortages in underserved rural 
areas. We believe that providing Medicare payment directly to qualified 
nonhospital providers may facilitate more training and better quality 
training in nonhospital sites.
    Section 1886(k) of the Act states: ``For cost reporting periods 
beginning on or after October 1, 1997, the Secretary may establish 
rules for payment to qualified nonhospital providers for their direct 
costs of medical education, if those costs are incurred in the 
operation of an approved medical residency training programs described 
in subsection (h).'' The statute further provides that, to the extent 
the Secretary exercises this broad discretionary authority, the rules 
``shall specify the amounts, form, and manner in which such payments 
will be made and the portion of such payments that will be made from 
each of the trust funds under this title.''
    a. Payments only to ``qualified nonhospital providers''. The 
statute confers broad discretion on the Secretary regarding whether and 
how to pay qualified nonhospital providers for direct GME costs. 
However, the statute does specify the entities whom the Secretary can 
pay--``qualified nonhospital providers.'' Section 1886(k)(2) of the Act 
defines ``qualified nonhospital providers'' to include: Federally 
Qualified Health Centers (FQHCs), as defined in section 1861(aa)(4); 
Rural Health Centers (RHCs), as defined in section 1861(aa)(2); 
Medicare+Choice organizations; and such other providers (other than 
hospitals) as the Secretary determines to be appropriate.
    b. Payments only for the ``direct costs'' of training. The statute 
also specifies the costs the Secretary can pay for under section 
1886(k) of the Act. Medicare pays hospitals for both the direct and 
indirect costs of medical education under sections 1886(h) and 
1886(d)(5)(B) of the Act respectively, but section 1886(k) of the Act 
provides for payment to qualified nonhospital providers only for the 
direct costs of medical education. In addition, section 1886(k) of the 
Act provides for payment for the direct costs of training medical 
residents only if those costs are incurred in the operation of an 
``approved medical residency training program.'' Accordingly, the 
statute authorizes Medicare payments to qualified nonhospital providers 
only for the costs of training medical residents, not for the costs of 
training other health professionals.
    In addition to adding section 1886(k) of the Act, section 4625 of 
the BBA amends section 1886(h)(3)(B) of the Act to prohibit double 
payments for direct GME to a hospital and a qualified nonhospital 
provider. This prohibition on double payments requires that the 
Secretary reduce a hospital's GME payments (the ``aggregate approved 
amount'' as defined in section 1886(h)(3)(b) of the Act) to the extent 
we pay a qualified nonhospital provider for GME under section 1886(k) 
of the Act.
2. Payment to Hospitals for GME
    Under sections 1886(d)(5)(B)(iv) and 1886(h)(4)(E) of the Act, a 
hospital may include the time a resident spends in nonprovider settings 
in its indirect medical education (IME) and direct GME full-time 
equivalent count if it incurs ``all or substantially all'' of the costs 
of training residents in the nonhospital site. Under Secs. 412.105(f) 
and 413.86(f)(1)(iii), a hospital may count resident training time in 
nonhospital sites for indirect and direct GME respectively if the 
resident is involved in patient care and there is a written agreement 
between the hospital and the nonhospital site that states that the 
resident's compensation for training time spent outside the hospital 
setting is to be paid by the hospital.
3. Proposed Policies
    Pursuant to section 4625 of the BBA, we proposed to provide 
Medicare payment to qualified nonhospital providers for the direct 
costs of GME training, effective for portions of cost reporting periods 
occurring on or after January 1, 1999. We proposed Medicare would make 
GME payments to the following ``qualified nonhospital providers''--
FQHCs, RHCs, and Medicare+Choice organizations. Under the authority of 
section 1886(k)(2)(D) of the Act, the Secretary may expand the 
definition of a ``qualified nonhospital provider'' to include such 
other providers (other than hospitals) as the Secretary determines to 
be appropriate. Once we have gained experience providing direct GME 
payments to FQHCs, RHCs, and Medicare+Choice organizations, we may 
consider including other types of nonhospital providers in the 
definition of a ``qualified nonhospital provider.''
    Additionally, we proposed that, under certain circumstances, a 
hospital may continue to receive GME payments for residents who train 
in the nonhospital setting. In those instances where a hospital is 
eligible to continue receiving GME payments for residents who train in 
the nonhospital setting, the nonhospital site could receive payment 
from the hospital for costs they incur in training medical residents. 
Thus, our proposed policy would promote the intent of section 4625 of 
the BBA to provide financial support, either directly from Medicare or 
through the hospital, to qualified nonhospital providers for the direct 
costs of training residents in the nonhospital site.
    a. ``All or substantially all'' of the costs of training. Similar 
to our current policy of paying hospitals for training in nonhospital 
sites, we proposed that a qualified nonhospital provider may receive 
payment for the direct costs of GME if it incurs ``all or substantially 
all'' of the training costs. Although we proposed to pay the qualified 
nonhospital provider only when it incurred ``all or substantially all'' 
of the costs of training, we solicited comment on possible methods for 
allocating the GME payments for training in the nonhospital site where 
neither the hospital nor the qualified nonhospital provider is 
incurring ``all or substantially all'' of the costs of the training 
program. Under the proposed system, we would pay either the hospital or 
the qualified nonhospital provider for the cost of training in the 
nonhospital site, depending on which

[[Page 40987]]

entity incurs ``all or substantially all'' of the costs of training in 
the nonhospital site. We proposed to revise the definition of ``all or 
substantially all'' of the costs, which currently applies only to 
hospitals. Under the proposed redefinition, a hospital or qualified 
nonhospital provider would incur ``all or substantially all'' of the 
costs for the training program in the nonhospital setting if it pays 
for, at a minimum: that portion of the costs of the teaching 
physicians' salaries and fringe benefits that are related to the time 
spent in teaching and supervision of residents; and residents' salaries 
and fringe benefits (including travel and lodging expenses where 
applicable).
    b. Definition of ``direct costs'' of medical education for 
qualified nonhospital providers. Section 4625 of the BBA provides for 
payment to qualified nonhospital providers only for the direct costs of 
training residents. Our proposed definition of ``direct costs'' for 
qualified nonhospital providers is comparable to the direct costs for 
hospitals under section 1886(h) of the Act. Under our proposed policy, 
direct GME costs include costs incurred by the nonhospital site for the 
education and training of medical residents in approved programs. We 
proposed to include the following costs in the definition of direct 
costs:
    <bullet> residents' salaries and fringe benefits (including related 
travel and lodging expenses where applicable);
    <bullet> that portion of costs of the teaching physicians' salaries 
and fringe benefits that are related to the time spent in teaching and 
supervision of residents; and
    <bullet> other related GME overhead costs.

Consistent with our policies on direct GME costs for hospitals, we 
proposed direct GME costs for qualified nonhospital providers will not 
include normal operating costs or the marginal increase in costs that 
the nonhospital site experiences as a result of having an approved 
medical residency training program. For example, a decrease in 
productivity and increased intensity in treatment patterns as the 
result of a training program do not constitute ``direct costs'' of 
training residents in the nonhospital setting; rather, these are the 
``indirect costs'' of such training.
    Also consistent with our policies for direct GME payments to 
hospitals, we proposed to pay qualified nonhospital providers only for 
training that is related to the delivery of patient care services.
    We also proposed that direct GME costs for qualified nonhospital 
providers, like direct GME costs for hospitals, would include only that 
portion of costs of the teaching physicians' salaries and fringe 
benefits associated with time spent in teaching and supervising 
residents. Specifically, a physician's time spent on teaching of a 
general nature would constitute a direct GME cost while activities 
spent in direct patient care which involve residents do not constitute 
direct costs. In addition, we proposed that direct costs in the 
qualified nonhospital provider would include that portion of teaching 
physicians' salaries and fringe benefits associated with time spent 
developing resident schedules and evaluating or rating the residents. 
Direct costs may also include the portion of a teaching physician's 
office costs allocated to GME.
    We stated that direct GME costs for qualified nonhospital providers 
would not include the following: a teaching physician's time spent in 
the care of individual patients which results in billable services; 
teaching physicians' activities that are related to the education of 
other health professionals (i.e., classroom instruction in connection 
with approved activities other than GME such as provider-operated 
nursing programs); teaching physicians' time spent on administrative 
and supervisory services to the qualified nonhospital provider that are 
unrelated to approved educational activities (i.e. operating costs); 
and teaching physician activities that involve nonallowable costs such 
as research and medical school activities that are not related to 
patient care in the nonhospital setting. Costs associated with the 
providing teaching services to undergraduate medical students are also 
not include in direct graduate medical education costs.
    GME overhead costs include only those costs that are allocable to 
direct GME and that are not used in patient care. For example, a 
portion of administrative and general costs could be appropriately 
allocated to an RHC's or FQHC's GME cost center. Similarly, a 
conference room that is dedicated specifically for the training of 
residents could be appropriately allocated to an RHC or FQHC's GME cost 
center. By contrast, patient care rooms added to an RHC or an FQHC 
cannot be appropriately allocated to an RHC's or FQHC's GME cost 
center.
    One of the advantages of the proposed definition of ``direct 
costs'' is that it is administratively feasible. Our definition of 
``direct costs'' for qualified nonhospital providers is comparable to 
the direct costs that are included in the per resident amount paid to 
hospitals under section 1886(h) of the Act. At present, there is 
limited information regarding the actual costs of training residents in 
nonhospital sites. After we gain experience providing direct GME 
payments to qualified nonhospital providers and have reviewed the GME 
costs separately reported by these qualified nonhospital providers, we 
may revise the definition of ``direct costs.'' We solicited comments on 
other elements that may constitute direct costs of GME in the qualified 
nonhospital provider that can be identified, reported, and verified as 
directly attributable to GME activities through the cost reporting 
process. We were interested in comments on whether we should include 
other costs in the definition of ``direct costs'' for qualified 
nonhospital providers and on the administrative feasibility of 
identifying the GME portion of those costs.
    c. Determining direct costs. One of our major concerns in 
developing policies for paying qualified nonhospital providers for the 
direct costs of GME is the administrative feasibility of determining 
the amount of direct costs incurred by the qualified nonhospital 
provider. It is our understanding that, currently, hospitals and 
nonhospital sites often share, to varying degrees, the costs of 
training residents in the nonhospital site. Because of the difficulty 
in apportioning costs between the hospital and the nonhospital for the 
training in the nonhospital site, we believe that it is not 
administratively feasible to pay both the hospital and the nonhospital 
site for the cost of training in the nonhospital site. We have been 
unable to devise a method for accurately apportioning costs between the 
two entities.
    Furthermore, the potential for both the hospital and the qualified 
nonhospital provider to be paid for the same direct GME expenses poses 
a significant problem for complying with section 1886(h)(3)(B) of the 
Act, as amended by the BBA, which specifically prohibits double 
payments. Under this provision, the Secretary shall reduce the 
hospital's GME payment (the ``aggregate approved amount'') to the 
extent we pay the qualified nonhospital provider for GME costs under 
section 1886(k) of the Act. Consequently, our policy must ensure that 
Medicare does not pay two entities for the same training time in the 
nonhospital site.
    Given that the hospital's per resident amount can include, but is 
not necessarily based on the costs of training in the nonhospital site, 
we were not able to devise an equitable way of reducing the hospital's 
per resident payment to reflect payments made

[[Page 40988]]

under section 1886(k) of the Act. It may not be equitable to subtract 
the exact amount of payment made to the qualified nonhospital provider 
from the hospital's per resident payment because the payment made to 
the nonhospital site may be unrelated to the hospital's per resident 
amount. We believe that the residents' salaries, teaching physicians' 
salaries, and overhead costs for the nonhospital setting will 
constitute a different proportion of the total GME costs in the 
nonhospital setting as compared with the hospital setting. Rather, it 
may be more equitable to determine the proportion of costs incurred by 
each entity and reduce the hospital's per resident payment by the 
proportion of GME costs incurred by the nonhospital site; however, 
since specific components of the per resident amount were not 
identified in the hospital's GME base year (1984), we cannot accurately 
determine the appropriate amount to reduce the current year hospital 
per resident payment amount. Moreover, to reduce the hospital's GME 
payments based solely on the amount paid to the qualified nonhospital 
provider could result in inequitable payments to the hospital, which 
has ongoing costs even when the resident is training in the nonhospital 
site. In fact, it could leave the hospital at risk of receiving no 
payment for the GME costs it has incurred.
    In order to encourage training in nonhospital sites, it is 
important to develop a policy that, while providing payment to 
qualified nonhospital providers, would also be equitable to hospitals. 
We believe that paying only the qualified nonhospital provider for the 
training costs could result in hospitals choosing not to rotate their 
residents to the nonhospital site. We have been unable to devise an 
equitable and accurate method for dividing the GME payment for training 
in the nonhospital site if neither the hospital, nor the nonhospital 
site incurs ``all or substantially all'' of the costs. As such, we 
solicited comment on possible methods for allocating the GME payments 
for training in the nonhospital site where neither the hospital nor the 
qualified nonhospital provider agrees who is incurring ``all or 
substantially all'' of the costs for the training program. We believe 
that the policies discussed below are equitable to both hospital and 
qualified nonhospital providers and will achieve Congress' objective of 
encouraging and supporting training in the nonhospital setting.
    Given our concerns about administrative feasibility, the statutory 
prohibition on double payments, and developing policies that are 
equitable to hospitals as well as qualified nonhospital providers, we 
believe the only feasible way to pay for training in nonhospital 
settings is to pay either the hospital or the nonhospital provider. 
Currently, hospitals may receive payment for the time residents spend 
in the nonhospital setting if the hospital incurs ``all or 
substantially all'' of the training costs. We proposed to adopt a 
similar policy for qualified nonhospital providers; that is, a 
qualified nonhospital provider may receive payment for the direct costs 
of GME if it incurs ``all or substantially all'' of the training costs.
    d. Payment to FQHC's and RHC's. We proposed to pay FQHC's or RHC's 
for direct GME costs based on reasonable costs if the FQHC or RHC 
incurs ``all or substantially all'' of the costs of training the 
resident in the nonhospital setting. The FQHC or RHC would have to 
report direct GME costs in a reimbursable cost center on its cost 
report under the proposal. Conversely, where an FQHC or RHC did not 
incur ``all or substantially all'' of the costs of training residents 
in the nonhospital site, the FQHC or RHC would report direct GME costs 
in a nonreimbursable cost center on the cost report.
    We proposed that the FQHC's and RHC's allowable direct GME costs be 
subject to reasonable cost principles in 42 CFR part 413 and other 
relevant provisions referenced in part 413. In addition, the FQHC's and 
RHC's direct GME costs would be subject to the Reasonable Compensation 
Equivalency limits under Secs. 415.60 and 415.70.
    Also, Medicare would pay only for its share of the direct costs of 
training in the qualified nonhospital provider. We proposed that the 
FQHC's and RHC's Medicare share equal the qualified nonhospital 
provider's ratio of Medicare visits to total visits. Thus, the amount 
of Medicare payment would equal the product of the clinic's Medicare 
allowed reasonable direct GME costs and the clinic's ratio of Medicare 
visits to total visits.
    For FQHC's and RHC's that incur ``all or substantially all'' of the 
costs for the training program in the nonhospital setting, we proposed 
that the direct GME costs would not be subject to the existing per 
visit payment caps for reimbursement under sections 505.1 and 505.2 of 
the Medicare Rural Health Clinic and Federally Qualified Health Centers 
Manual. We also proposed that, where payment is available under section 
1886(k) of the Act for residents working in either an FQHC or an RHC, 
the FQHC's and RHC's do not need to include residents as health care 
staff in the calculation of productivity standards under section 503 of 
the Manual.
    e. Payment to Medicare+Choice organizations. We proposed making 
direct GME payment to Medicare+Choice organizations which incur ``all 
or substantially all'' of the costs of training in a nonhospital site. 
The Medicare+Choice organization would be eligible to receive payment 
on a reasonable costs basis for residents' salaries and fringe benefits 
only for the time that the resident spends in the nonhospital setting. 
In addition, we proposed that the Medicare+Choice organization's 
allowed costs include only that portion of the teaching physician 
salaries and fringe benefits that is related to training in the 
nonhospital setting. We proposed limiting payment to Medicare+Choice 
organizations to residents' salaries and fringe benefits and 
supervisory teaching physician compensation which can be allocated to 
direct GME. We did not propose to pay Medicare+Choice organizations for 
the costs of overhead that may be associated with a GME program. We 
solicited suggestions for creating a methodology for allocating and 
reporting overhead costs for Medicare+Choice organizations and 
suggestions for mechanisms for the audit and review of the costs for 
Medicare+Choice organizations.
    Similar to our proposed policy for paying FQHCs and RHCs for direct 
costs of GME, we proposed that the Medicare+Choice organization's 
reimbursement for residents' salaries and fringe benefits (including 
related travel and lodging expenses where applicable) would be subject 
to the reasonable cost principles in 42 CFR part 413 and any other 
relevant provisions referenced in part 413. In addition, we proposed 
the Medicare+Choice organization's GME reimbursement would also be 
subject to the Reasonable Compensation Equivalency limits under 
Secs. 415.60 and 415.70.
    We proposed to allow the Medicare+Choice organization to receive 
direct GME payment only for the direct costs of training in the 
nonhospital site that are associated with the delivery of patient care 
services. In determining the amount of direct GME payments to 
Medicare+Choice organizations, we proposed adjusting for Medicare's 
share of those education costs. Medicare's share would equal the ratio 
of the total number of Medicare enrollees in the Medicare+Choice 
organization to total enrollees in the Medicare+Choice organization.
    We proposed that, in order to receive the direct GME payment, the

[[Page 40989]]

Medicare+Choice organization must produce a contractual agreement 
between itself and the nonhospital sites. Medicare+Choice organizations 
may contract with any nonhospital patient care site, including 
freestanding clinics, nursing homes, and physicians' offices in 
connection with approved programs. The contract between the 
Medicare+Choice organization and the nonhospital site must indicate 
that, for the time that residents spend in the nonhospital site, the 
Medicare+Choice organization agrees to pay for the cost of residents' 
salaries and fringe benefits. In addition, the contract must indicate 
that the Medicare+Choice organization agrees to pay the portion of the 
costs of teaching physicians' salaries and fringe benefits that is 
related to the time spent in teaching and supervision of residents and 
is unrelated to the volume of services provided by the physician. The 
contract must stipulate the portion of each teaching physician's time 
that will be spent training residents in the nonhospital setting. 
Moreover, the contract must indicate that the Medicare+Choice 
organization agrees to identify an amount for the cost of the teaching 
physician's salary based on the time that the resident spends in the 
nonhospital setting, not based upon a capitated rate for the delivery 
of physician services.
    f. Payment to hospitals. A hospital may include a resident's 
training time in a nonhospital setting in its FTE counts for direct GME 
and for IME if the hospital incurs ``all or substantially all'' of the 
costs for training in the nonhospital setting. We proposed that, in 
order for a hospital to include residents' training time in a 
nonhospital setting, the hospital and the nonhospital site must have a 
written contract which indicates the hospital is assuming financial 
responsibility for, at a minimum, the cost of residents' salaries and 
fringe benefits (including travel and lodging expenses where 
applicable) and the costs for that portion of teaching physicians' 
salaries and fringe benefits related to the time spent in teaching and 
supervision of residents.
    The contract must indicate that the hospital is assuming financial 
responsibility for these costs directly or that the hospital agrees to 
reimburse the nonhospital site for such costs. The contract must also 
contain an acknowledgment on the part of the qualified nonhospital 
provider if the nonhospital site is an FQHC or RHC that, since the 
residents' time is being counted by the hospital, the nonhospital site 
must report GME costs on the Medicare cost report in a nonreimbursable 
GME costs center. In addition, in order to determine teaching physician 
compensation that may be allocated to direct GME, the FQHC and RHC will 
have to specify the portion of the teaching physicians' time that will 
be spent training residents in the nonhospital setting. Under 
Sec. 413.86(f)(1)(iii), hospitals may contract with any nonhospital 
patient care site such as freestanding clinics, nursing homes, and 
physicians' offices in connection with approved programs. Payment to 
the hospital for the direct costs of GME training in the nonhospital 
setting will continue to reflect Medicare's share, which equals the 
hospital's ratio of Medicare inpatient days to total inpatient days.
5. Trust Funds
    Under section 1886(k)(1) of the Act, the rules established by the 
Secretary for paying qualified nonhospital providers for GME must 
specify the portion of Medicare payments that will be made from each of 
the Medicare trust funds. We proposed that GME payments made directly 
to an FQHC, RHC, or Medicare+Choice organization would be made from the 
Federal Supplementary Medical Insurance Trust Fund.
6. Proposed Effective Dates
    We proposed that the effective date of these provisions for FQHCs, 
RHCs, Medicare+Choice organizations, and hospitals would be January 1, 
1999. Of the provisions affecting hospitals, the policies for IME 
payments would apply to discharges occurring on or after January 1, 
1999. The policies concerning medical education payments to FQHCs, 
RHCs, and hospitals would apply to portions of cost reporting periods 
occurring on or after January 1, 1999. We proposed that Medicare+Choice 
organizations could begin receiving payments for direct GME costs 
incurred on or after January 1, 1999.
7. Responses to Comments Received on Proposed Policies and Final Rule 
Provisions
    Below we are summarize the comments we received on the proposed 
policies and provide our responses to those comments.
    a. Definition of qualified nonhospital provider. Comment: One 
commenter stated that HCFA should expand the definition of a qualified 
nonhospital provider to include preventive medicine residencies. This 
commenter quoted the Conference Report statement:

    The Conferees also note that preventive medicine residency 
training occurs most often in nonhospital settings and the Conferees 
encourage the Secretary to examine carefully the opportunities to 
provide support to such training programs.

The commenter further noted that a small number of residency programs 
would benefit if we adopted the suggestion.
    Response: Consistent with the direction of the Conference Report, 
we have examined how to encourage preventive medicine training through 
the Medicare program. We understand that preventive medicine training 
consists of one year of clinical training, one year of academic study, 
and a practicum year. To the extent that the one year of clinical 
training is provided in patient care sites that qualify to receive 
medical education payments, Medicare provides payment for training much 
in the same way we provide payment for all other specialty programs. A 
hospital can count a preventive medicine resident who receives training 
in all areas of the hospital complex. The hospital may also count a 
preventive medicine resident who receives training in a nonhospital 
site if the resident is involved in direct patient care and there is a 
written agreement between the hospital and the nonhospital site that 
the hospital is incurring ``all or substantially all'' of the costs of 
training the resident in the nonhospital site. FQHCs, RHCs, and 
Medicare+Choice organizations can receive payment on a reasonable cost 
basis for costs associated with training preventive medicine residents 
if the entity incurs ``all or substantially all'' of the costs.
    Since the year of academic study does not involve direct patient 
care, a hospital or qualified nonhospital provider cannot receive 
Medicare payment for that year of preventive medicine training. A 
fundamental principle of Medicare payment for education is that the 
residents must participate in patient care services to patients at the 
health care site. Although we believe that preventive medicine 
residents are engaging in activities that will benefit all patients, 
not just Medicare patients in general, the year of academic study does 
not constitute patient care services which would qualify for Medicare 
payment for GME.
    We understand the clinical training that preventive medicine 
residents receive may also occur in patient care sites that do not 
receive payments from Medicare, such as public health clinics. Even if 
the clinics were included under the definition of qualified nonhospital 
provider, Medicare payment to clinics for GME would likely still be 
very low because it would reflect the share of services provided by the 
clinic to

[[Page 40990]]

Medicare beneficiaries as compared to all services it provides. We do 
not believe that Medicare beneficiaries make significant use of public 
health clinics for Medicare covered services since these services are 
also available through their regular doctor. If we were to provide 
payments to public health clinics associated with the training of 
preventive medicine residents, we would also have to resolve technical 
problems related to providing payments to entities that have never had 
a relationship with Medicare. As we stated above, where a hospital or 
qualified nonhospital provider incurs ``all or substantially all'' of 
the costs of the clinical training in that nonhospital site, Medicare 
will make payments for GME costs associated with training preventive 
medicine residents.
    Comment: One commenter urged HCFA to consider including nonhospital 
dental clinics in the definition of qualified nonhospital providers. 
One commenter urged us to expand the definition of a qualified 
nonhospital provider to make payment of both direct and indirect GME 
directly to nursing homes and hospices. One commenter requested 
clarification as to whether our definition of a qualified nonhospital 
provider includes community mental health centers. If not, the 
commenter requested that we consider including community mental health 
centers in the definition of qualified nonhospital provider.
    Response: As we stated in the proposed rule, we believe that it is 
appropriate to have more experience with providing payments to the 
qualified nonhospital providers listed in the statute before we expand 
the definition to include other sites such as those stated by these 
commenters. We note that even if nonhospital dental clinics were 
included in the definition of a qualified nonhospital provider, a 
dental clinic's low Medicare share means the benefit of the provision 
would be small. Dental clinics are likely to have a low Medicare share 
because Medicare covers few dental services.
    Currently, our definition of qualified nonhospital provider does 
not include community mental health centers per se, but it may be 
possible for a community mental health center to meet the criteria for 
being designated as a rural health clinic under section 1861(aa)(2) of 
the Act and section 405.2402.
    We would note that a hospital or Medicare+Choice organization may 
receive payment associated with resident rotations through the 
nonhospital sites suggested by these commenters if the hospital or 
Medicare+Choice organization incurs ``all or substantially all'' of the 
costs at the clinic. In this way the clinic will be paid by the 
hospital for GME costs.
    Comment: One commenter argued that Congress specified that a 
qualified nonhospital provider includes FQHC's, RHC's, and managed care 
plans to ensure that these organizations were included but that 
Congress did not intend to limit qualified nonhospital providers to 
these organizations. The commenter believed that excluding other 
nonhospital sites from the definition of a qualified nonhospital 
provider is contrary to Congress' intent.
    Response: As we have stated, we will consider other nonhospital 
sites in the definition of qualified nonhospital providers once we have 
experience with these policies. We disagree that the proposal to limit 
the definition of a qualified nonhospital provider at this time to the 
entities listed in the statute is inconsistent with Congressional 
intent. The statute defines qualified nonhospital provider to include 
``such other providers (other than hospitals) as the Secretary 
determines to be appropriate.'' Thus, the statute authorizes but does 
not require the inclusion of other entities.
    Comment: One commenter stated that educational consortia are 
becoming important models for community-based graduate medical and 
nursing training and suggested that we expand the definition of 
qualified nonhospital provider to include consortia.
    Response: We are interested in learning more about the development 
of GME programs through educational consortia. Section 4628 of the BBA 
requires the Secretary to establish a demonstration project under which 
GME payments will be made to consortia. We will consider changes to our 
GME payment policies based on our evaluation of any future 
demonstration projects.
    Comment: One commenter urged us to expand the definition of a 
qualified nonhospital provider to include Osteopathic Postdoctoral 
Training Institutions (OPTIs), community based health care consortia 
consisting of one or more colleges accredited by the American 
Osteopathic Association (AOA), one or more AOA accredited hospitals, 
and other health care facilities such as nursing homes, ambulatory 
clinics, community health centers, and managed care organizations. The 
commenter suggested that payments be made directly to the OPTI based on 
the number of residents participating in OPTI hospitals or a national 
average payment. The commenter stated that the OPTI would distribute 
the payments among the consortia members.
    Response: An OPTI includes hospital and nonhospital sites as well 
as educational institutions and we believe an OPTI is a consortium. As 
we stated above, we will be studying GME payments to consortia in a 
demonstration project required by section 4628 of BBA.
    b. Definition of direct costs.
    Comment: One commenter suggested that direct costs of training in 
nonhospital sites should include mileage associated with travel between 
multiple clinic sites. The commenter also stated that direct costs 
should include the costs of telemedicine, including telephone, fax, 
videoconference, and the internet because these electronic 
communication mechanisms enable primary care residents in nonhospital 
sites to be trained for practice outside of the resource-rich, 
multispecialty hospital setting.
    Response: We agree that travel costs may be an element of direct 
costs when residents work in multiple nonhospital sites or when 
residents travel from a hospital training site to remote clinics. We 
disagree that the cost associated with telecommunication services 
should be allowable as training costs. Although telecommunication 
services may be integral to providing services to patients while 
residents are training in nonhospital sites, these services are not 
principally designed to be used as GME training tools. Rather, the 
telecommunication services to which the commenter is referring, like 
the use of a stethoscope or an examining room, are compensated as 
operating costs through Medicare's payments for patient care services.
    Comment: Several commenters stated that the effect of training on 
indirect costs is similar in nonhospital clinics and hospitals. One 
commenter suggested that indirect costs are easily identifiable and 
should be separately reimbursable in nonhospital settings.
    Response: The statute states that the ``Secretary may establish 
rules for payment to qualified nonhospital providers for the direct 
costs of medical education if those costs are incurred in operation of 
an approved medical residency training program described in subsection 
(h).'' The statute clearly limits payment to qualified nonhospital 
providers under section 1886(k) of the Act for the direct costs of GME.
    Comment: One commenter stated that the proposed regulations fail to 
reflect that FQHCs are eligible for Part B payments for allowable 
teaching costs even without the new methodology

[[Page 40991]]

established pursuant to the new BBA provision. Because FQHCs are 
governed by cost reimbursement principles that include teaching costs, 
FQHCs are already allowed to claim all training-related costs, 
including direct faculty and resident costs. This commenter suggested 
that FQHCs that participate in teaching programs should be able to 
recapture higher operating costs caused by lower productivity and 
increased overhead. According to this commenter, we should consider 
including the following in direct costs:

--Slowdown in productivity;
--Facilities and space for training;
--Transportation and living costs for residents;
--Availability of lab and radiology equipment and services;
--Administrative overhead;
--Increased intensity in treatment patterns used in training;
--Equipment costs;
--Library (either onsite or electronic access);
--Capital costs for startup of residency program;
--Increased complexity at teaching FQHCs; and
--Increased social complexity of patient case mix.

    Response: The costs of resident salaries and fringe benefits and 
supervising physicians may be allowable costs under Sec. 405.2470. If 
the RHC or FQHC were to have a written agreement with a hospital where 
the hospital provides compensation for these costs to the clinic, these 
costs would become nonreimbursable costs. However, FQHCs and RHCs that 
have an all-inclusive rate that exceeds the cap under sections 505.1 
and 505.2 of the Medicare Rural Health Clinic and Federally Qualified 
Health Centers Manual would still benefit from the proposed policy in 
that costs above the cap that would otherwise be nonreimbursable by 
Medicare can now be compensated as direct GME costs through the 
agreement with the hospital. That is, if the FQHC or RHC incurs ``all 
or substantially all'' of the costs and receives payment directly from 
Medicare, these costs are GME costs that are treated separately in 
applying the caps on the all-inclusive rate under sections 505.1 and 
505.2 of the Medicare Rural Health Clinic and Federally Qualified 
Health Centers Manual.
    An additional benefit in the situation where we pay the FQHC or RHC 
directly for GME is that residents do not need to be included as health 
care staff in the calculation of productivity standards under section 
503 of the Manual. We further believe that residents should be excluded 
from productivity standards in situations where the hospital is being 
paid for training time and GME costs are not reimbursable costs for the 
FQHC or RHC. We are adopting this policy in this final rule and will 
modify section 503 of the Manual accordingly. Among the items listed in 
this comment, we believe that costs which are directly related to the 
operation of a medical residency training program (facilities and space 
exclusively dedicated to training, resident travel costs between remote 
clinic sites) in addition to facility overhead which can be allocated 
to a medical education cost center constitute allowable direct GME 
costs for which the FQHC or RHC can receive payment directly from 
Medicare. We believe the remaining items listed are either indirect 
costs of training or allowable cost for patient care services under 
Sec. 405.2468(a) through (e) which can only be reimbursed as non-GME 
operating costs.
    Comment: One commenter was opposed to the application of reasonable 
compensation equivalents to physicians in FQHCs and RHCs. The commenter 
stated that the BBA required HCFA to subject RHCs to productivity 
standards and the per-visit cost limit. According to the commenter, if 
Congress had intended for the RCE limits to be imposed on RHCs, the BBA 
would have required such a policy. The commenter stated that, by 
definition, RHCs and FQHCs are located in areas where it is difficult 
to attract physicians and that the providers must pay compensation that 
exceeds the RCE limits to attract qualified physicians. The commenter 
requested that the limits not be imposed on FQHC and RHC services to 
individual patients.
    Response: For purposes of making indirect GME payments to FQHCs and 
RHCs, the RCE limits will only apply to the portion of a teaching 
physician's compensation that is attributable to direct GME. We are not 
applying the RCE limit to physician compensation that is related to 
providing services to individual patients. Because we intend to pay for 
these GME costs on a reasonable cost basis, it is necessary to apply 
the RCE limits to assure that GME costs will be reasonable.
    Comment: One commenter stated that if HCFA intends to compute the 
fixed cost for nonhospital training of all health professionals from 
the cost reimbursement data received over the next few years from 
qualified nonhospital providers, costs associated with training of 
nonphysician health practitioners should also be reported. This 
commenter stated that it will be difficult to collect these data at a 
later date.
    Response: FQHCs and RHCs seeking payment from Medicare for direct 
GME must appropriately classify those costs to a GME cost center on the 
cost report. These payments are limited to the direct costs the FQHC or 
RHC incurs for an approved medical residency training program as 
described under section 1886(h) of the Act. Training of non-physician 
health professionals are not included in these programs. Therefore, in 
submitting costs reports, FQHCs and RHCs must clearly distinguish the 
costs of training residents from the cost of training other health 
professionals in nonhospital sites. Although FQHCs and RHCs will need 
to document costs of approved medical residency programs to be 
allocated to the GME cost center, we do not believe the information 
benefit associated with obtaining data on training of other health 
practitioners would justify imposing an additional administrative 
burden on FQHCs and RHCs to report costs for which they will receive no 
payment.
    c. Revised definition of ``all or substantially all'' of the costs. 
Comment: A number of commenters felt the proposed redefinition of ``all 
or substantially all'' of the costs will be counterproductive and 
result in less training in nonhospital settings. One commenter stated 
that the current standard of ``or substantially all'' has helped to 
facilitate resident training in nonhospital sites. This commenter 
stated that there is strong anecdotal evidence that resident training 
in ambulatory sites has been increasing and recommended that any 
changes to existing policies be tested for the likelihood that they 
promote expanded ambulatory GME.
    Response: We disagree with the commenters who suggested that the 
proposed redefinition of ``all or substantially all'' of the costs of 
training residents in the nonhospital sites will result in less 
training in nonhospital settings. First, we do not believe that 
hospitals themselves will be discouraged from continuing to rotate 
residents to nonhospital sites. Hospitals must consider accreditation 
and other program requirements in addition to purely financial 
considerations. We have reviewed the program requirements for residency 
education in family practice and internal medicine in the 1997-1998 GME 
Directory. The Directory specifies that family practice residents must 
spend specified amounts of time and see a minimum number of patients in 
the family practice center in each residency program year. Similarly, 
the Directory specifies that at least 25

[[Page 40992]]

percent of the 3 year residency program for internal medicine must be 
in an ambulatory care setting. Given these requirements for primary 
care training programs, we do not believe that hospitals will respond 
to the revised definition of ``all or substantially all'' of the costs 
by rotating fewer residents to nonhospital sites. Moreover, a hospital 
that meets the ``all or substantially all'' criterion may count the 
resident's training time in the nonhospital site for direct GME as well 
as IME.
    Second, we believe that our proposal will encourage more ambulatory 
sites to participate in training. To the extent our policies would 
allow qualified nonhospital providers to receive payments directly from 
Medicare, more qualified nonhospital providers may be willing to become 
training sites. In addition, the hospital may incur supervisory 
teaching physician costs that previously might have been borne by the 
nonhospital site. Therefore, the nonhospital site either will receive 
revenues for costs that the site itself incurs or will no longer incur 
those costs.
    Comment: Several commenters agreed that it is appropriate to 
provide GME payment to the entity that incurs ``all or substantially 
all'' of the costs whether it be the hospital or the qualified 
nonhospital provider. Many of these commenters, however, believe that 
``all or substantially all'' of the costs should be limited to resident 
salaries and fringe benefits.
    Response: We disagree. Section 1886(h)(4)(E) of the Act states that 
hospitals may include residents in their FTE counts for direct GME if 
the hospital incurs ``all or substantially all of the costs of the 
training program in that setting.'' Section 1886(d)(5)(B)(iv) of the 
Act allows hospitals to count residents for IME effective October 1, 
1997 if the hospital ``incurs all or substantially all of the costs for 
the training program in that setting.'' As we stated previously and in 
the preamble to the proposed rule (63 FR 25597), we reviewed data on 
resident costs from recent Medicare hospital cost reports and found 
that, on average, resident salaries and fringe benefits account for 
less than half of total direct GME costs. We believe that the revised 
policy, which requires hospitals to incur a higher percentage of total 
training costs in the nonhospital setting than are accounted for by 
resident compensation reflect a better measure of ``all or 
substantially all'' of the costs than current policy.
    Comment: One commenter argued that the rationale for the proposal 
is insufficient to merit a change in current policy. This commenter 
stated that our proposal focused only cost data from hospitals and not 
nonhospital sites. This commenter believed that, because our proposal 
addressed training in nonhospital sites, it would be more appropriate 
to analyze resident salaries and fringe benefits as a share of overall 
training costs at nonhospital sites. The commenter acknowledged that 
these data are not available at the present time, but believed that 
resident compensation is likely to be a substantial component of 
overall training costs in nonhospital sites. The commenter noted that 
the preamble to the proposed rule indicates that residents' salaries 
and supervisory costs would likely ``constitute a different proportion 
of the total GME costs in the nonhospital setting as compared with the 
hospital setting.'' (63 FR 25597). The commenter added that direct GME 
payments to hospitals are based on 1984 hospital costs that may not 
accurately reflect current costs.
    Response: Our analysis is based on recent cost report data 
submitted to us by hospitals. That data shows that resident salaries 
and fringe benefits are less than half of total resident costs for 
hospitals. At this time, based on available data as well as a desire to 
treat hospitals and nonhospital sites equitably, we believe the 
hospital cost report data is a useful proxy for purposes of applying a 
standard of ``all or substantially all'' to nonhospital sites. We agree 
that it would be appropriate to analyze data on the cost of training 
from nonhospital sites and we will consider revisions to our policies 
as we obtain cost data from nonhospital sites.
    We note that, if resident compensation is, in fact, a larger 
percentage of total costs in the nonhospital site relative to the 
hospital, as suggested by this commenter, this would mean that costs 
other than resident compensation are a smaller proportion of total 
costs. The hospital would have to assume relatively modest additional 
costs through arrangements with nonhospital sites to continue counting 
the residents for indirect and direct GME. We also note that 
preliminary data by researchers studying costs incurred by a 
nonhospital site to train residents has shown that resident salary and 
fringe benefits are a smaller ratio of total costs at the nonhospital 
site relative to the hospital. If this conclusion is accurate, it would 
provide additional evidence that our revised definition is a better 
measure of ``all or substantially all'' of the costs.
    Comment: One commenter acknowledged that we revised the definition 
of ``all or substantially all'' to address a concern that nonhospital 
sites do not have sufficient resources to support their medical 
education activities, but argued that the proposed change in policy 
will not improve the ability of nonhospital sites to support training 
and may compromise existing and developing relationships between 
hospital and nonhospital GME sites. This commenter stated that the 
relationship between the hospital and nonhospital site should be 
voluntary and that it is up to the parties to define the appropriate 
parameters of their relationships, including how costs beyond the 
resident stipend and benefits should be accommodated.
    Response: As we stated earlier, we do not believe that this revised 
policy will compromise existing training relationships between 
hospitals and nonhospital sites. We agree with the commenter that 
arrangements between hospitals and nonhospital sites for training 
should be voluntary and the entities should be responsible for 
negotiating the parameters of their relationship. If a hospital and 
nonhospital site cannot agree on an arrangement regarding costs, the 
hospital may pursue an agreement with another nonhospital site for 
training. Similarly, if a nonhospital site cannot reach agreement with 
a hospital, it does not have to allow its facility to be used as a 
training site and can pursue a training arrangement with another 
hospital.
    Comment: One commenter asked why a nonhospital site would claim 
costs, and report an offset to those costs, if the hospital incurs the 
GME costs for training in the nonhospital site.
    Response: In response to this comment, in this final rule we are 
modifying the requirements for both hospitals and qualified nonhospital 
providers. As stated previously, hospitals are required to furnish a 
written agreement between the hospital and the nonhospital site that 
indicates that the hospital is incurring the cost of the resident's 
compensation in the nonhospital site and that the hospital is providing 
reasonable compensation for teaching activities to the nonhospital 
site. The agreement must also indicate the amounts being furnished to 
the nonhospital site for teaching activities. If the resident is 
working at an FQHC or RHC and there is a written agreement that allows 
the hospital to count the resident for indirect and direct GME, the 
FQHC or RHC must report its direct GME costs in a nonreimbursable cost 
center. The FQHC or RHC is not required to offset from those GME costs 
revenues received from the hospital.

[[Page 40993]]

    We are requiring the FQHC or RHC to report its direct GME costs in 
a nonreimbursable cost center because these costs will no longer be 
allowable costs under Sec. 405.2468(a) through (e). As stated earlier, 
direct GME costs will not be subject to the cap on the all-inclusive 
rate under section 503 of the RHC and FQHC Manual. The reporting of 
direct GME costs in a separate cost center on the FQHC and RHC cost 
report will also allow us to receive data on the costs of training in 
nonhospital sites.
    Comment: Some commenters argued that our proposal would impose 
undue administrative burden on hospitals and nonhospital sites by 
requiring them to report all of the GME costs they incur. One commenter 
stated that HCFA should retain the current definition of ``all or 
substantially all'' of the costs because it is logical, 
straightforward, and appropriate. This commenter asserted that it is 
difficult to isolate and quantify costs other than resident salaries 
and fringe benefits are incurred in nonhospital sites. According to 
this commenter, resident salaries and fringe benefits are easy to 
identify and their administration and recordkeeping can be monitored 
uniformly across the GME community. The commenter suggested that in 
assuming responsibility for resident compensation, the teaching 
hospital assumes responsibility for assuring that all residents are 
provided appropriate educational environments, supervision, and support 
for their training.
    Another commenter argued that the proposed redefinition of ``all or 
substantially all'' of the costs does not reflect certain services or 
costs (e.g. house staff credentialing and related functions) just as 
the per resident amounts do not reflect services or costs that are 
included in the proposal (e.g. resident travel and lodging). These 
commenters suggested that resident salaries and fringe benefits should 
suffice as a proxy that appropriate educational services at an 
appropriate cost are being delivered by the hospital for the 
nonhospital training. Another commenter stated that it is a managed 
care organization that pays the resident salaries and fringe benefits 
and that this should be sufficient for receiving GME payment in the 
nonhospital site. According to these commenters, the entity that incurs 
the costs of the resident compensation should be considered to be 
incurring ``all or substantially all'' of the costs and be eligible to 
count the resident for direct and indirect GME.
    Response: We do not believe that we are establishing a burdensome 
regulatory structure with tremendous documentation requirements. For 
hospitals seeking to count the time of residents training in the 
nonhospital site, we are requiring a written agreement between the 
hospital and the nonhospital site stating that the hospital will incur 
``all or substantially all'' of the costs. The written agreement must 
indicate that the hospital is incurring the cost of the resident 
salaries and providing compensation for supervisory teaching physician 
costs. The agreement must also specify the amounts paid to the 
nonhospital site. These agreements and amounts paid by the hospital to 
the nonhospital site may be the product of negotiation between the 
hospital and nonhospital site. The hospital does not have to report the 
nonhospital site's GME costs. We anticipate that in the course of any 
negotiation between the hospital and nonhospital site, the nonhospital 
site may need to identify its training costs. However, this is a matter 
between the hospital and nonhospital.
    If a hospital seeks to count the time of residents training in 
FQHC's and RHC's, the FQHC or RHC must identify its training costs in a 
nonreimbursable GME cost center. FQHC's and RHC's must separately 
report GME costs in order to distinguish these costs from other patient 
care costs that are paid for by Medicare on the basis of reasonable 
costs through the all inclusive rate. Under this final rule, we are not 
requiring FQHC's and RHC's to report the offset to those costs for 
payments received from the hospital. Requiring FQHC's and RHC's to 
report costs without offsetting revenues received from the hospital 
will allow us to obtain gross cost data on the costs of training in 
nonhospital sites.
    RHC's and FQHC's must identify teaching physician costs and 
allocate overhead to the direct GME cost center, in addition to the 
current cost reporting requirements for these entities. These entities 
are currently paid on the basis of costs, and we do not believe the 
additional cost reporting requirements will be substantial.
    We disagree with the comment that resident compensation should 
suffice as a proxy that appropriate educational services, at an 
appropriate cost, are being delivered and should be the sole criterion 
for determining which entity receives payment. Our concern in 
developing this policy is not whether we are paying for appropriate 
educational services but whether the entities that incur training costs 
are appropriately paid. Regardless of which entity incurs the cost of 
the resident's compensation, Medicare should only pay for appropriate 
educational services. Other regulations independent of the ``all or 
substantially all'' criterion ensure that Medicare pays for accredited 
educational programs.
    Comment: One commenter stated that teaching physicians in 
nonhospital sites may be remunerated through a variety of different 
arrangements, including ``in kind'' compensation for continuing 
education or through voluntary contributions. According to this 
commenter, the proposed policies would require hospitals and 
nonhospital sites to identify financial transactions which may not 
exist. The commenter further stated that there is no established 
methodology for defining or quantifying supervisory costs. The 
commenter noted that even if the costs could be identified, the costs 
would vary depending upon specialty and the year of residency training, 
which would require a sophisticated accounting infrastructure. The 
commenter also asserted that community-based physicians would be 
discouraged from training residents because of the administrative 
burden of documenting the precise number of hours they spend teaching 
or supervising residents.
    Response: We recognize that there could be a variety of financial 
arrangements between hospitals and nonhospital sites with regard to 
training. The hospital and the nonhospital site can take into account 
those types of arrangements in negotiating an agreement.
    Although there will be some additional cost reporting requirements 
imposed on FQHC's and RHC's that receive payment for direct GME through 
the hospital or directly from Medicare, there are established cost 
reporting principles for identifying these costs in providers. 
Medicare+Choice organizations, in addition to producing a written 
agreement with nonhospital sites, will have to report GME costs when 
they incur ``all or substantially all'' of the costs. We are developing 
a modest one page cost statement that will allow the Medicare+Choice 
organizations to claim direct GME costs that are eligible for payment. 
If an FQHC or RHC incurs ``all or substantially all'' of the costs of 
the program, and is therefore eligible to be paid directly for GME, we 
do not believe the burden of documenting supervisory physician time 
spent in GME activities will be substantial. Our expectation is that 
physicians will need to estimate the number of hours they will spend in 
GME and non-GME activities during the course of the year and verify the 
estimates with a limited time study. This is similar to the 
documentation that was required of hospitals to allocate teaching 
physician costs between Part A

[[Page 40994]]

and Part B and between operating costs and direct medical education.
    Comment: Several commenters suggested that we initiate 
demonstration projects addressing payment for GME in nonhospital sites. 
One commenter suggested that we analyze our proposed revision to ``all 
or substantially all'' of the costs through a demonstration project 
before implementing the changes on a nationwide basis. Such a 
demonstration project would indicate whether the proposed change would 
encourage or discourage training in nonhospital sites. Another 
commenter suggested that our proposed policy may adversely affect many 
GME programs and should be tested prior to being implemented on a 
national basis.
    Response: Congress established a provision in the BBA authorizing 
the Secretary to provide payment to nonhospital sites and we do not 
believe a demonstration project is necessary. Furthermore, since this 
policy is more stringent than existing regulations, we are doubtful 
that hospitals would participate voluntarily in a demonstration 
project.
    Comment: One commenter objected to the revision of the ``all or 
substantially all'' criteria and stated that the proposed policy would 
constrain the ability of teaching hospitals and Medicare+Choice 
organizations to develop reasonable rotations in hospitals and managed 
care plans. The commenter suggested an alternative under which a 
Medicare+Choice organization could submit a short application that 
would contain agreements between hospitals and Medicare+Choice 
organization addressing, among other things, the amount of time 
residents would spend at each site.
    Under this approach, we would pay the qualified nonhospital 
provider based on the product of a per resident amount, the number of 
FTE residents, and the Medicare share. Each resident would be counted 
as a partial FTE based for the hospital and for the qualified 
nonhospital provider based on the percentage of time worked at each 
site. A Medicare+Choice organization would be paid its FTE percentage 
times a portion of the hospital per resident payment amount or a 
national average per resident amount. This commenter argued that this 
approach would meet the Congressional objective of allowing residents 
to receive training in hospitals and Medicare+Choice organizations 
while prohibiting double payment without establishing a cumbersome new 
set of cost reporting requirements.
    Response: We considered the approach suggested by this commenter 
but we believe it would not facilitate training in qualified 
nonhospital providers. FQHC's, RHC's, and Medicare+Choice organizations 
generally provide a low percentage of total services to Medicare 
beneficiaries. The commenter's approach would to some extent substitute 
the Medicare share of the qualified nonhospital provider for the 
Medicare share of the hospital, and we believe this would result in 
lower Medicare payments overall for training in nonhospital sites. 
Also, we believe this approach would be inequitable to hospitals in 
that they would lose both the direct and indirect medical education 
payments for the proportion of time residents spend in the qualified 
nonhospital provider even though they have ongoing training costs while 
the residents train in the nonhospital site.
    We believe that it is reasonable to pay the hospital or qualified 
nonhospital provider which incurs ``all or substantially all'' of the 
costs. Furthermore, the revised definition reflects a better measure of 
``all or substantially all'' of the costs and will result in 
appropriate payment to hospitals for training in qualified nonhospital 
providers and other nonhospital sites.
    As we stated in the May 8 proposed rule (63 FR 25597), we also have 
concerns that it would not be equitable to eliminate the hospital's 
payment entirely for the time resident's spend in nonhospital sites 
because the hospital may continue to incur some of the costs associated 
with training residents in nonhospital sites. We believe that the 
policies we are adopting are equitable to both hospital and nonhospital 
sites and will achieve Congress' objective of encouraging training in 
nonhospital sites.
    Comment: One commenter stated that there might be important 
differences in the accounting and administrative systems of various 
categories of qualified nonhospital providers that might present some 
difficulties in identifying the cost data necessary to accurately 
complete cost reporting forms. Other commenters stated that hospitals 
will have difficulty obtaining the necessary data from the nonhospital 
sites to complete the agreements or that the revised definition of 
``all or substantially all'' would impose undue administrative burden. 
Another commenter stated that the revised definition of ``all or 
substantially all'' creates a major problem in identifying the portion 
of time office physicians spend in teaching and supervising residents 
and is another administrative burden placed on physicians.
    Response: As stated before, we do not believe we are imposing undue 
administrative burden. Direct GME costs for FQHC's and RHC's will have 
to be separately identified and reported. Although this will require 
the development of a mechanism for FQHC's and RHC's to allocate 
overhead and supervisory physician costs to the GME costs center, we do 
not believe that our policy will create significant administrative 
difficulties for FQHC's and RHC's, which already prepare cost reports 
for Medicare. As stated previously, we do not believe this process will 
generate a substantial burden on supervising physicians in FQHC's and 
RHC's beyond a written agreement between the clinic and the physician 
regarding the amount of time the physician expects to spend in GME 
activities and a time study verifying the allocation.
    The submission of a cost statement for GME will be a new 
responsibility for Medicare+Choice organizations which do not have 
experience with reporting costs. However, as stated above, we are 
developing a one page cost statement of GME expenses to limit the 
administrative burden on Medicare+Choice organizations.
    With regard to the concern expressed about creating a burdensome 
set of new cost reporting requirements, we reiterate that a condition 
of payment to the hospital for training in the nonhospital site is the 
production of the written agreement between the hospital and the 
nonhospital site. We are not requiring hospitals to submit cost data to 
Medicare as a precondition to counting the resident for indirect and 
direct GME.
    Comment: One commenter noted that some arrangements between 
hospitals and nonhospital settings for the training of residents 
predate the GME base year. This commenter stated that hospitals did not 
compensate nonhospital sites for supervisory teaching physician costs 
and it would not be fair to shift these costs to teaching hospitals. 
The commenter also stated that teaching hospitals have already entered 
into written agreements with nonhospital sites under the existing 
rules. According to the commenter, the proposed rule would necessitate 
renegotiation of thousands of agreements, imposing tremendous 
transaction costs upon the academic medical community. The commenter 
noted that if the agreements are not renegotiated prior to the 
effective date, the hospital will be unable to count the residents for 
direct and indirect GME, and this will have a lasting effect because of 
the 3 year averaging rules. Another commenter stated that there are 
many complex

[[Page 40995]]

contractual arrangements between hospital based programs and 
nonhospital sites regarding the placement, training and patient service 
utilization of residents, and any change in Medicare GME payment policy 
could have significant and unknown impacts on these current training 
structures.
    Response: The GME provisions of this final rule will be effective 
January 1, 1999. All other provisions of this final rule are effective 
October 1, 1998. By making a later effective date for the GME 
provisions, hospitals and nonhospital sites will have 5 months 
following publication of this final rule to negotiate agreements that 
will allow hospitals to continue counting residents training in 
nonhospital sites for indirect and direct GME. These agreements are 
related solely to financial arrangements for training in nonhospital 
sites. We do not believe that the agreements regarding these financial 
transactions will necessitate changes in the placement and training of 
residents.
    In response to the comment that it is unfair to shift costs to the 
hospital, we believe it is appropriate to include supervisory costs in 
the nonhospital site as part of ``all or substantially all'' of the 
costs that hospitals must incur to count the resident. Currently, the 
hospital is able to count the resident even though its costs for that 
resident may be lower during the time the resident trains outside the 
hospital. At the same time, the nonhospital site may have incurred 
costs for which it received no compensation. We believe that requiring 
the hospital to incur the costs associated with training in the 
nonhospital site is equitable to both the hospital and nonhospital site 
and is consistent with the statutory requirement that the hospital must 
incur ``all or substantially all'' of the costs.
    Comment: One commenter argued that we should not use reasonable 
costs as the basis for making payment to qualified nonhospital 
providers. This commenter stated that Medicare+Choice organizations do 
not submit cost reports and it would be extraordinarily expensive and 
cumbersome to report accounting costs. Several commenters also objected 
to our proposal to the extent we would allow overhead costs for FQHCs, 
RHCs, and hospitals but not Medicare+Choice organizations. These 
commenters believed that the policy cannot be justified on the basis 
that Medicare+Choice organizations do not submit cost reports. One 
commenter suggested that HCFA use predetermined payment amounts that do 
not require the subsequent submission of cost reports. The commenter 
noted that the proposed rule itself notes that direct GME payments are 
based on average per resident costs from 1984 that might bear little or 
no relation to accounting costs in 1998. Another commenter suggested 
that Medicare+Choice organizations should be paid an overhead factor 
for direct GME costs based on square footage of the clinic and a number 
of other factors. Alternatively, this commenter suggested use of an 
average overhead factor based on the number of residents trained until 
actual overhead expenses for Medicare+Choice organizations can be 
identified.
    Response:  Medicare+Choice organizations will typically contract 
with clinics for the provision of services to beneficiaries. In these 
situations, we can make payment directly to the Medicare+Choice 
organization if the plan produces a written agreement with the clinics 
where training occurs that the plan will incur ``all or substantially 
all'' of the costs associated with training in the nonhospital site. We 
are requiring a written agreement between the Medicare+Choice 
organization and the nonhospital sites. We believe that the primary 
components of GME costs are resident compensation and supervisory 
teaching physician costs and that facility overhead costs which can be 
allocated to direct GME are a smaller component of direct GME costs. 
Nevertheless, we agree that we should not limit allowable direct GME 
costs for Medicare+Choice organizations to resident compensation and 
supervisory physician costs. If the Medicare+Choice organization can 
document other direct GME costs that directly relate to a training 
program, we will allow these costs. We note that, at this time, it is 
not feasible to develop an average overhead factor which can be paid to 
Medicare+Choice organizations that incur ``all or substantially all'' 
of the costs of a training program in a nonhospital site. This is 
because our data systems on hospital GME costs do not distinguish 
between supervisory teaching physician costs and overhead costs 
attributable to direct GME.
    In response to the comment that we use square footage or other 
mechanisms as a basis for allocating overhead to GME costs for 
Medicare+Choice organizations, we are concerned about developing a 
sophisticated cost allocation process for determining Medicare+Choice 
allowable direct GME costs since Medicare+Choice organizations do not 
submit cost reports. However, we are revising our proposal to require 
the written agreement to state that the Medicare+Choice organization 
will incur the costs of residents' salaries and fringe benefits and 
provide reasonable compensation for the remaining costs of the training 
program in the nonhospital site. Based on the statement of costs, the 
Medicare+Choice organization will report its costs to HCFA and we will 
provide payment based on the lower of the Medicare+Choice 
organization's cost per resident or a national average of the hospital 
per resident amounts.
    Comment: Several commenters were concerned that if neither the 
hospital or nonhospital site incurs ``all or substantially all'' of the 
costs, neither setting would receive payment even though each entity 
incurs a portion of the training costs. One commenter suggested that 
there will be difficulty allocating costs under our proposed definition 
of ``incurring costs'' and stated that we should encourage affiliations 
and provide simpler and clearer guidance for institutions.
    Response: Under this final rule, an entity must incur ``all or 
substantially all'' of the costs to receive payments for the time the 
resident spends in the nonhospital site. Since we do not conduct cost-
finding to determine who bears ``all or substantially all'' of the 
graduate medical education costs, we are generally dependent on 
hospital and non-hospital provider agreements to determine who bears 
them. As stated earlier in this final rule as well as in the proposed 
rule, we do not believe it would be administratively feasible to 
apportion payments appropriate to the hospital and nonhospital site in 
situations where neither the hospital or nonhospital site agree on who 
incurs ``all or substantially all'' of the costs. We must also consider 
the statutory prohibition on double payments in these situations. 
Furthermore, although it may be appropriate to provide payment for GME 
costs where the nonhospital site incurs only a portion of the training 
costs, we do not believe it would be equitable to allow a nonhospital 
site to be paid where it was incurring only a portion of the costs but 
only allow payment to a hospital when it incurs ``all or substantially 
all'' of the costs.
    In response to the commenter who suggested that we should encourage 
``affiliations,'' we believe the revised definition of ``all or 
substantially all'' of the costs provides incentives for hospitals and 
nonhospital sites to reach agreement with regard to financial 
arrangements for training in nonhospital sites to avoid the situation 
where neither entity receives payment for GME.
    Comment: One commenter asked whether hospitals would be eligible to 
receive payments in situations where the teaching faculty volunteers 
their

[[Page 40996]]

services and neither the hospital or nonhospital entity incurs costs 
for supervisory teaching physicians, but the hospital incurs the costs 
of resident salaries and fringe benefits (including travel and lodging 
expenses where applicable). The commenter asked whether the contract 
should state that there are no teaching physician costs incurred and 
the remainder of the costs represent ``all or substantially all'' of 
the costs. Another commenter stated that the ``all or substantially 
all'' definition creates special problems where community physicians 
voluntarily serve in a teaching capacity without compensation. The 
commenter stated that the implication of the proposed policy is that 
some portion of the community physician's earnings must be included in 
the calculation and asked that we either delete the proposed change or 
specify that voluntary supervision of training residents does not need 
to be included in the definition of ``all or substantially all'' of the 
costs.
    Response: We have received anecdotal information that some 
supervisory teaching physicians participate in teaching activities 
without compensation in nonhospital clinics. Although there may be 
situations where a supervising physician is participating in teaching, 
we do not believe that lack of explicit compensation for teaching 
activities means that physicians are necessarily volunteering their 
time. Rather, we believe that the physician's compensation in the 
clinic encompasses both teaching and nonteaching activities. 
Nevertheless, for purposes of satisfying the requirement of a written 
agreement, the written agreement between a hospital and a nonhospital 
site may specify that there is no payment to the clinic for supervisory 
activities because the clinic does not have these costs.
    Comment: One commenter stated that a hospital was permitted to 
include, within in its GME base period costs, teaching physician costs 
related to the hospital by common ownership or control under 
Sec. 413.17. Citing the GME consistency principle at 
Sec. 412.113(b)(3), this commenter requested that we clarify that the 
same policy applies in the context of GME payment to nonhospital sites. 
That is, the regulation should include specific language which states 
that costs incurred by an organization related to the hospital under 
Sec. 413.17 will be recognized as if incurred by the hospital in 
applying the expanded definition of ``all or substantially all'' of the 
costs.
    Response: The consistency principle under Sec. 412.113(b)(3) 
required consistent treatment of medical education costs during the 
transition to the inpatient hospital PPS during the 1980s. This rule 
was intended to prevent medical education costs from being included in 
hospital payments for operating costs and also being paid on a 
reasonable costs basis to hospitals as GME during the early years of 
the PPS. We do not see a relationship between the consistency rule and 
our proposed policies with regard to payment for GME training in 
nonhospital sites.
    With regard to the costs of related parties under Sec. 413.17, our 
policy was not to include costs associated with training in nonhospital 
clinics in the per resident amount even though certain direct GME costs 
of related parties could have been allowable. We also do not believe 
that Sec. 413.17 has applicability to our proposed policy. We are 
requiring a written agreement between hospitals and nonhospital sites 
for purposes of this final rule, even where the hospital and 
nonhospital site are related organizations under Sec. 413.17. In 
practice, since we are requiring an agreement between hospitals and 
nonhospital sites that are under common ownership or control, the 
agreements should be a formality.
    Comment: One commenter stated that the necessary statutory and 
regulatory incentives do not exist for teaching hospitals to provide 
compensation to nonhospital sites for their GME costs.
    Response: We disagree. The proposed rule requires a written 
agreement between the hospital and nonhospital site that the hospital 
will provide compensation to the nonhospital site for certain types of 
GME costs. Without this agreement, the hospital will be unable to count 
the resident for indirect and direct GME. As stated earlier, the 
agreements must also indicate the amounts the hospital will actually 
pay to the nonhospital site for GME training.
    Comment: One commenter stated the definition of ``all or 
substantially all'' of the costs should not include residents' travel 
and lodging costs. This commenter stated that there is no rationale for 
this change and that the criteria imposes significant reporting burdens 
with no offsetting benefits. The commenter also stated that the phrase 
``where applicable'' is vague and requires additional definition 
language (related to distance, means of travel) if entities are to 
understand their reporting obligations.
    Response: Our intent in adding the phrase ``including residents 
travel and lodging costs, where applicable'' was to provide for the 
inclusion of direct GME costs that may be more prevalent in a 
nonhospital setting than in the hospital setting. The phrase ``where 
applicable'' means that depending on the specific arrangement in some 
cases, residents will be responsible for paying their own travel and 
lodging costs while serving at the nonhospital site. In other cases, it 
is possible that the site will pay for the residents to travel to the 
site and for lodging while at the site. This is basically a fringe 
benefit paid by the site for the resident. Therefore, in situations 
where travel and lodging is an expense of the nonhospital site while 
the resident is training there, the written agreement must indicate 
that the hospital will incur these costs. In determining whether the 
hospital has incurred ``all or substantially all'' of the costs of the 
program, the hospital must include this ``unique'' fringe benefit if it 
was paid for by the nonhospital site.
    Comment: One commenter stated that the proposed regulations 
effectively deny payments to FQHC's unless they incur ``all or 
substantially all'' of the costs of the program. The commenter stated 
that since the FQHC does not typically pay the residents' salaries, the 
proposed rule does not significantly increase the ability of the FQHC 
to recover GME costs. This commenter stated that it is eminently 
possible to devise a method under which hospitals that utilize 
qualified nonhospital providers would report costs showing allowable 
FQHC costs. In these situations, costs would be apportioned to the 
proper cost center.
    Response: We disagree. The FQHC can recover its GME costs either 
directly from Medicare if it incurs ``all or substantially all'' of the 
costs, or from the hospital through the written agreement. Without a 
written agreement that specifies the amounts the hospital will pay the 
nonhospital site for training in the nonhospital site, the hospital 
will be unable to count the resident for indirect and direct GME.
    d. Medicare share. Comment: One commenter stated that the 
limitation of direct GME payments to FQHC's based on Medicare's share 
at the FQHC will seriously constrain participation because only 8 
percent of FQHC patients are Medicare patients. The commenter quoted 
the Conference Report which states that ``the Conferees believe this 
authority may help alleviate physician shortages in rural areas.'' 
According to this commenter, the combination of requiring the FQHC to 
incur ``all or substantially all'' of the costs in order to receive 
payment and the limitation to Medicare share does little to provide 
sufficient resources to allow FQHC's to train physicians in underserved 
rural areas. The commenter believed the limitation of payments based on 
Medicare's share is not

[[Page 40997]]

required by the BBA provision authorizing GME to qualified nonhospital 
providers and is contrary to the intent of the law.
    Response: It is a fundamental and longstanding principle that, to 
the extent Medicare pays for certain types of costs, the Medicare 
program should pay only its fair share. This principle applies not only 
in the context of Medicare payment for medical education, but also to 
Medicare payment in general.
    Comment: One commenter stated that Medicare enrollees use 3.5 times 
the number of outpatient services as non-enrollees. The commenter 
suggested that it would be more equitable to base Medicare's share for 
Medicare+Choice organizations on the ratio of outpatient expenses for 
Medicare enrollees to total enrollees. As an alternative, this 
commenter suggested using Medicare visits to total visits to calculate 
Medicare share, consistent with the calculation in the inpatient 
setting of Medicare inpatient days to total inpatient days.
    Response: We believe that either of the proposals suggested by this 
commenter would impose significant additional reporting 
responsibilities on Medicare+Choice organizations which receive payment 
from Medicare for direct GME. Basing the Medicare share calculation on 
the ratio of outpatient expenses attributable to Medicare beneficiaries 
to total expenses would require Medicare+Choice organizations to 
provide a sophisticated report of expenses not unlike the Medicare cost 
report. In situations where the Medicare+Choice organization is 
contracting for services provided in a clinic, this would require the 
Medicare+Choice organization to document costs which are not even its 
own. We considered using the ratio of Medicare enrollee to total 
enrollee visits in the Medicare share calculation, but have concerns 
that this approach would also be burdensome in that it would require 
Medicare+Choice organizations to furnish utilization data for clinics 
or physician offices that they do not own or control.
    e. National average per resident amounts. Comment: One commenter 
argued that national average per resident amounts are not appropriate 
for the nonhospital setting. According to the commenter, residency 
training differs from other types of services because it involves 
complicated transactions with nongovernmental entities such as medical 
schools that may sponsor a hospital's programs and compensate 
physicians directly, and accreditation bodies that may require a 
certain content and curriculum in training programs.
    Response: We did not propose the use of national average per 
resident amounts in the nonhospital setting but will consider whether a 
national average per resident amount is appropriate after we have 
experience with the provision and have reliable data on the costs of 
training in the nonhospital setting.

f. Technical errors concerning GME policy published in the May 12, 1998 
final rule.

    In the May 12, 1998 final rule for the FY 1998 inpatient hospital 
prospective payment system, we set forth certain policies on GME. The 
portion of the May 12, 1998 final rule concerning counting residents 
for direct medical education (beginning at (63 FR 26327)) contained the 
following technical errors:
    <bullet> Merged Hospitals--On page 26329, third column, we stated 
that the FTE cap of merged hospitals would be the aggregation of the 
FTE cap for each hospital participating in the merger. We stated that 
Sec. 413.86 would be modified to reflect this policy, but we did not 
modify the regulations text. We do not believe a change to the 
regulations text is necessary.
    <bullet> Application of the FTE Cap--There is a discrepancy between 
the methodologies described in the August 29, 1997 final rule with 
comment period (62 FR 46005) and the May 12, 1998 final rule (63 FR 
26330) for application of the FTE cap in situations where a hospital 
has more residents than the cap. The methodology described in the May 
12, 1998 final rule is incorrect. The correct methodology is described 
in the August 29, 1997 final rule with comment period.
    <bullet> New Medical Residency Training Program--On page 26332, in 
the first column, we stated, ``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 
clarifying that, for hospitals that trained residents prior to January 
1, 1995, we will adjust the FTE caps for programs were accredited or 
began training residents on or after January 1, 1995 and prior to 
August 5, 1997.
    <bullet> Application of the FTE Cap to an Affiliated Group--On page 
26341, in the third column, we stated, ``If the combined FTE counts for 
the individual hospitals do not exceed the aggregate cap, we will pay 
each hospital based on its FTE cap as adjusted per agreements.'' That 
sentence should have read as follows: ``If the combined FTE counts for 
the individual hospitals exceed the aggregate cap, we will pay each 
hospital based on its FTE cap as adjusted per agreements.''

V. Changes to the Prospective Payment System for Capital-Related 
Costs

A. Cap on the Capital Indirect Medical Education Adjustment Ratio 
(Sec. 417.322)

    Under section 1886(g) of the Act, the Secretary has broad 
discretion in implementing the capital prospective payment system. 
Section 412.322 of the regulations specifies the formula for the 
capital indirect medical education (IME) adjustment factor. The capital 
IME adjustment is intended to pay the Medicare capital prospective 
payment system share of the indirect costs of medical education to 
teaching hospitals. The formula was incorporated in the August 30, 1991 
final rule for the capital prospective payment system (56 FR 43380), 
and uses the ratio of interns and residents to average daily census 
(defined as total inpatient days divided by the number of days in the 
cost reporting period). Section 1886(d)(5)(B) of the Act requires the 
use of the ratio of residents-to-beds to calculate the IME adjustment 
for the operating prospective payment system. However, pursuant to our 
authority under section 1886(g) of the Act, we adopted the resident to 
average daily census ratio for the capital prospective payment system 
because we believed it was a more appropriate method for measuring 
teaching intensity, and because we believed it was less subject to 
manipulation.
    The IME adjustment factor increases by approximately 2.8 percentage 
points for each 0.10 increase in the hospital's ratio of residents to 
average daily census. The IME adjustment for inpatient capital-related 
costs for hospitals paid under the prospective payment system takes the 
form of [e raised to the power (.2822 x ratio of interns and residents 
to average daily census)-1] where e is the natural antilog of 1, based 
on the total cost regression results. In order to determine the Federal 
rate portion of the hospital's payment, the IME adjustment factor is 
multiplied by the standard Federal rate, the DRG weight, the geographic 
adjustment factor, and any other relevant payment adjustments such as 
the DSH adjustment or the large urban add-on. The formula is as 
follows: (Standard Federal Rate) x (DRG weight) x (GAF) x (Large Urban 
Add-on, if applicable) x (COLA adjustment for hospitals located in 
Alaska and Hawaii) x (1 + Disproportionate Share Adjustment Factor + 
IME Adjustment Factor, if applicable).

[[Page 40998]]

    In the May 8, 1998 proposed rule (63 FR 25600) we indicated that it 
had come to our attention that because of the application of the 
capital IME adjustment, one hospital would receive a capital IME 
payment greater than its total hospital costs. We also stated that of 
the approximately 1,200 teaching hospitals in the United States, based 
on December 1997 data, 8 hospitals had a resident to average daily 
census ratio of more than 1.5. A resident to average daily census ratio 
of 1.5 results in a capital IME adjustment factor of 0.53, which 
increases the Federal rate portion of the hospital's capital payment by 
53 percent.
    To address this unintended effect of the capital IME methodology, 
we proposed capping the capital IME ratio at 1.5. A ratio greater than 
1.5 means a hospital has, on average, considerably more residents than 
inpatients. Capping the ratio at 1.5 would allow for one resident per 
patient on the inpatient side plus some outpatient training, and would 
keep capital IME payments more consistent with the costs incurred. 
Because the operating IME ratio is based on the number of beds, it has 
only slightly exceeded 1.0 in two cases. This change would ensure that 
the capital IME adjustment is more in line with hospital costs.
    We received no comments on our proposed change. We have decided to 
implement this policy as proposed. Effective October 1, 1998, the 
capital IME ratio will be capped at 1.5.

B. Payment Methodology for Mergers Involving New Hospitals 
(Sec. 412.331)

    The August 30, 1991 final rule (56 FR 43418), which implemented the 
capital prospective payment system, established special payment 
provisions for new hospitals. Under Sec. 412.324(b), a new hospital is 
paid 85 percent of its allowable Medicare capital-related costs through 
its first cost reporting period ending at least 2 years after the 
hospital accepts its first patient. The first cost reporting period 
beginning at least 1 year after the hospital accepts its first patient 
is the hospital's base year for purposes of determining its hospital-
specific rate. Section 412.302(b) defines a new hospital's old capital 
costs as allowable capital-related costs for land and depreciable 
assets that were put in use for patient care on or before the last day 
of the hospital's base year cost reporting period. Beginning with the 
third year, the hospital is paid under the fully prospective or hold-
harmless payment methodology, as appropriate. If the hospital is paid 
under the hold-harmless payment methodology, the hospital's hold-
harmless payments for its old capital costs can continue for up to 8 
years.
    In the August 30, 1991 final rule, we defined a new hospital as one 
that had operated (under previous or present ownership) for less than 2 
years and did not have a 12-month cost reporting period that ended on 
or before December 31, 1990. In the September 1, 1992 final rule (57 FR 
39789), as a result of situations brought to our attention after 
publication of the original prospective payment system final rule, we 
clarified that the new hospital exemption would not apply in situations 
where the facility was not truly a new hospital.
    In the May 8, 1998 proposed rule (63 FR 25600), we indicated that 
questions had arisen regarding application of our rules for payment of 
new hospitals in merger situations. We stated that consistent with our 
previously stated policy, we were proposing to further clarify the new 
hospital payment provisions. We proposed that, if during the period it 
is eligible for payment as a new hospital (as defined at 
Sec. 412.300(b) and Sec. 412.328(b)), a new hospital merges with one or 
more existing hospitals, and the merger meets the existing capital-
related reasonable cost rules regarding the criteria for recognizing a 
merger at Sec. 413.134 and the new hospital is the surviving 
corporation (as defined in Sec. 413.134(l)(2)), we would treat as old 
capital only those assets of the existing hospital that met the 
definition of old capital (as defined in Sec. 412.302(b)) prior to the 
merger, for purposes of determining payments after the merger.
    Any assets of the existing hospital that were considered new 
capital prior to the merger would still be considered new capital after 
the merger. However, the merger cannot be used to convert the existing 
hospital's new capital into old capital. After the merger, the 
discharges of each campus of the merged entity would maintain their 
pre-merger payment methodology until the end of the 2-year period that 
the new hospital campus is eligible for reasonable cost reimbursement 
as defined at Sec. 412.324(b). That is, the discharges at the new 
hospital would be paid based on 85 percent of its allowable Medicare 
hospital capital-related costs, while discharges from the existing 
hospital would continue to be paid under that hospital's methodology, 
that is, fully prospective or hold-harmless. At the end of this period, 
the intermediary would calculate a hospital specific rate for the 
``new'' campus of the merged hospital. Finally, the calculation 
methodology for hospital mergers at new Sec. 412.331(a)(1) and (2) 
would be performed and a combined hospital-specific rate would be 
determined and a payment methodology selected for the merged hospital 
as a whole.
    The calculation at Sec. 412.331(a)(1) and (2) uses each hospital's 
base year old capital costs. Any new capital of the previously existing 
hospital would not be used in the determination. If the merged entity 
qualifies for the hold-harmless payment methodology, only the capital 
which meets the definition of old capital at Sec. 412.302(b) would be 
eligible for hold-harmless payments.
    We received one comment on our proposal.
    Comment: One hospital association commented on the policy that only 
the assets of the existing hospital that met the definition of old 
capital prior to the merger would be treated as old capital after the 
merger, even if all of the capital had been acquired and put into use 
during the new hospital's base year. They also stated that the proposal 
changes the regulatory definition of a new hospital's old capital, 
revises its payment methodology determination, and creates special 
payment rules for new hospitals that merge with existing hospitals. The 
commenter also states that a hospital in a situation similar to that 
described in our example was told that after a merger between a new 
hospital and an existing hospital, all assets acquired by the new 
hospital in the base year would become old capital costs. The commenter 
suggests that if HCFA will not reconsider the proposed change, at least 
it should not be applied retroactively.
    Response: As indicated in the proposed rule, we addressed this 
issue because questions have arisen regarding application of our rules 
for payment for new hospitals in merger situations. Accordingly, we 
proposed to clarify the application of our rules in merger situations. 
Before the proposed rule, we had not specifically addressed in the 
Federal Register the issue of mergers between an ``existing'' hospital 
and a ``new'' hospital, but our clarification is consistent with 
existing rules; the clarification does not reflect new policy or a 
change in policy that can only be applied prospectively.
    The commenter is correct that with regard to the capital of the 
existing hospital that merges with a new hospital, our proposal would 
treat as old capital only capital that qualified as old capital prior 
to the merger. Any capital that was new capital of the existing 
hospital prior to the merger would remain new capital after the merger. 
The new hospital will be paid 85 percent of its allowable Medicare 
inpatient hospital capital-related costs through its

[[Page 40999]]

cost reporting period ending at least two years after the hospital 
accepts its first patient. In our September 1, 1992 final rule (57 FR 
39789), we clarified that the new hospital exemption under the capital 
prospective payment system would not apply to a facility that opened as 
an acute care hospital if that hospital had previously operated under 
current or prior ownership and had a historic asset base. We also 
clarified that even a hospital that replaced its entire facility (with 
or without a change of ownership) would not qualify for a new hospital 
exemption and that a previously existing PPS-excluded hospital (paid 
under section 1886(b) of the Act) that became an acute care hospital 
(paid under section 1886(d)) of the Act would not qualify as a new 
hospital. With this current proposal we are clarifying our rules as 
they apply to a new hospital which merges with an existing hospital.
    When a new hospital merges with an existing hospital that has 
already had the benefit of reasonable cost reimbursement prior to the 
inception of capital PPS, on October 1, 1991, we believe it would be 
inappropriate for all of the capital assets of a previously existing 
hospital to be eligible for payment as old capital simply because it 
merged with a new hospital. As with the other situations that we 
clarified in 1992, this current clarification of the regulation at 
Sec. 412.331(a)(3) is consistent with the principle that the new 
hospital exemption should only be available to those hospitals that had 
not received reasonable cost payments in the past and needed special 
payment protection during their initial period of operation. Our policy 
seeks to ensure that when a new hospital acquires the assets of an 
existing hospital through a merger, any assets of the existing hospital 
that were previously considered new capital prior to the merger are not 
transformed to old capital, as a result of the merger. The new hospital 
will still be paid 85 percent of its allowable Medicare capital-related 
costs for all other assets it acquires through the end of its base 
period.
    The commenter fails to note that our current payment rules at 
Sec. 412.331(a)(3) for merger situations already provide that only the 
existing capital-related costs related to the assets of each merged or 
consolidated hospital as of December 31, 1990 are recognized as old 
capital costs during the transition period. If the merged hospital is 
paid under the hold-harmless methodology after merger or consolidation, 
only that original base year old capital is eligible for hold-harmless 
payments. These rules mean that in cases of a merger between two 
existing hospitals, only the capital assets which were recognized as 
old capital prior to December 31, 1990 are eligible for payment as old 
capital after the merger. We are clarifying that this principle would 
also apply to the situation of merger between an existing hospital and 
a new hospital. The regulation that defines a new hospital's old 
capital was not intended to apply to capital acquired through merger 
with an existing hospital subject to capital PPS.
    Finally, the commenter is mistaken that HCFA has previously ruled 
that the new capital assets of an existing hospital could be paid as 
old capital after a merger with a new hospital. In fact, our policy is 
consistent with our regulation at Sec. 412.331(a)(3) cited above, in 
that only the existing capital-related costs related to the assets of 
each merged or consolidated hospital as of December 31, 1990 are 
recognized as old capital costs during the transition period.
    We are implementing this clarification as proposed. For an example 
of how our policy works, see the May 8, 1998 proposed rule (63 FR 
25601).

C. Special Exceptions Process

    As described in Sec. 412.348(g) of the regulations, an additional 
payment may be made for up to 10 years beyond the end of the capital 
PPS transition period for eligible hospitals that meet: (1) a project 
need requirement, (2) a project size requirement, and, (3) in the case 
of certain urban hospitals, an excess capacity test. The regulation 
establishing this special exceptions provision, and describing the 
criteria by which eligible hospitals qualify, was published on 
September 1, 1994 (59 FR 45385). At that time we described the purpose 
of the special exceptions process as ``* * * narrowly defined, focusing 
on a small group of hospitals who found themselves in a disadvantaged 
position. The target hospitals were those who had an immediate and 
imperative need to begin major renovations or replacements just after 
the beginning of the capital prospective payment system. These 
hospitals would not be eligible for protection under the old capital 
and obligated capital provisions, and would not have been allowed any 
time to accrue excess capital prospective payments to fund these 
projects.''
    The special exceptions process is available to certain classes of 
hospitals that meet the eligibility criteria described at 
Sec. 412.348(g)(1). The eligible classes of hospitals are sole 
community hospitals; urban hospitals with at least 100 beds that either 
have a disproportionate share percentage of 20.2 percent or receive at 
least 30 percent of their revenue from State or local funds for 
indigent care; and hospitals with a combined inpatient Medicare and 
Medicaid utilization of at least 70 percent.
    Eligible hospitals must satisfy a project need requirement as 
described at Sec. 412.348(g)(2) and a project size requirement as 
described at Sec. 412.348(g)(5). For hospitals in States with 
Certificate of Need (CON) requirements, the project need requirement is 
satisfied by obtaining CON approval. For other hospitals, the project 
need requirement is satisfied by meeting an age of assets test. The 
project size requirement is satisfied if the hospital completes the 
qualifying project during the period beginning on or after its first 
cost reporting period beginning on or after October 1, 1991 to the end 
of its last cost reporting period beginning before October 1, 2001, and 
the project meets certain cost thresholds specified in the regulations.
    The minimum payment level for qualifying hospitals is 70 percent of 
allowable capital-related costs. A qualifying hospital may receive 
payments for up to ten years from the year which it completes a 
qualifying project. Finally, the regulations at Sec. 412.348(g)(8) 
describe the cumulative payment comparison and offsetting amounts which 
are used to determine a qualifying hospital's exception payment.
    A few hospitals have expressed concern with the required completion 
date of October 1, 2001, and other qualifying criteria for the special 
exceptions. When we established the special exceptions process, we 
selected the hospital's cost reporting period beginning before October 
1, 2001 as the project completion date, because hospitals are eligible 
to receive special exceptions payments for up to ten years from the 
year in which they complete their project. If a project is completed by 
September 30, 2001, then exceptions payments could continue up to 
October 30, 2011. We intended to limit cost-based exceptions payments 
to the period not more than ten years beyond the end of the transition 
to fully prospective payment for capital. When we adopted the criteria 
for the special exceptions process, we selected the project completion 
date with the goal of not extending this transition unnecessarily. In 
addition, we believed that eligible hospitals will not have had the 
opportunity to reserve prior year capital PPS payments for financing 
projects begun in the early years of PPS.

[[Page 41000]]

    In order for us to analyze the impact of potential changes in the 
special exceptions policies, we are soliciting the following 
information on major capital construction projects as defined at 
Sec. 412.348(g)(5) that will be put to use for patient care on or after 
October 1, 1996:
    (1) Name, address, phone number and provider number of hospital;
    (2) Cost of capital project;
    (3) Date of CON approval, if required;
    (4) Start date of project; and
    (5) Anticipated completion date.
    Please forward this information by September 30, 1998 to the 
Division of Acute Care, Attention: Cassandra Black at the following 
address: HCFA, C4-01-26, 7500 Security Blvd., Baltimore, Md. 21244-
1850. We will analyze the data to determine whether any changes in the 
special exceptions policies are necessary. Any changes, if necessary, 
would be included in next year's FY 2000 proposed rule for hospital 
PPS.

VI. Changes for Hospitals and Units Excluded From the Prospective 
Payment System

Limits on and Adjustments to the Target Amounts for Excluded Hospitals 
and Units (Sec. 413.40(g))

1. Updated Caps
    Section 1886(b)(3) of the Act as amended by section 4414 of the BBA 
established caps on the target amounts for excluded hospitals and units 
for cost reporting periods beginning on or after October 1, 1997, 
through September 30, 2002. The caps on the target amounts apply to the 
following three categories of excluded hospitals: psychiatric hospitals 
and units, rehabilitation hospitals and units, and long-term care 
hospitals. For purposes of calculating the caps, the statute requires 
the Secretary to first calculate the 75th percentile of the target 
amounts for each class of hospital (psychiatric, rehabilitation, or 
long-term care) for cost reporting periods ending during FY 1996. The 
resulting amounts are updated by the market basket percentage to the 
applicable fiscal year.
    A discussion of how the caps on the target amounts were calculated 
for cost reporting periods beginning during FY 1998 can be found in the 
August 29, 1997, final rule with comment period (62 FR 46018). On March 
6, 1998, we published a correction notice correcting the caps for FY 
1998 (63 FR 11148).
    In the May 8 proposed rule for FY 1999, we published proposed caps 
for cost reporting periods beginning during FY 1999 (63 FR 25601); 
however, the caps that we published inadvertently reflected updates to 
the amounts published on August 29, 1997, rather than the corrected 
amounts published on March 6, 1998 (see May 13, 1998 correction notice, 
63 FR 26565). Thus, as corrected, the proposed caps for FY 1999 were as 
follows:

(1) Psychiatric hospitals and units: $10,797
(2) Rehabilitation hospitals and units: $19,582
(3) Long-term care hospitals: $38,630

These proposed caps reflected an update of 2.5 percent, the projected 
market basket percentage increase at the time we developed the proposed 
rule.
    The final projection of the market basket percentage for excluded 
hospitals and units for FY 1999, based on the most recent data 
available, is 2.4 percent. Accordingly, the final caps on the target 
amounts for existing hospitals for cost reporting periods beginning 
during FY 1999 are as follows:

(1) Psychiatric hospitals and units: $10,787
(2) Rehabilitation hospitals and units: $19,562
(3) Long-term care hospitals: $38,593
2. New Excluded Hospitals and Units (Sec. 413.40(f))
    Section 1886(b)(7) of the Act establishes a new statutory payment 
methodology for new psychiatric hospitals and units, rehabilitation 
hospitals and units, and long-term care hospitals. Under the statutory 
methodology, for a hospital that is within a class of hospitals 
specified in the statute and which first receives payments on or after 
October 1, 1997, the amount of payment will be determined as follows. 
For each of the first two cost reporting periods, the amount of payment 
is 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 and adjusted 
for differences in area wage levels.
    In the August 29, 1997 final rule with comment period, we published 
the figures for 110 percent of the national median of target amounts 
for each class of hospital (62 FR 46020). In the May 12, 1998 final 
rule for FY 1998, we revised the figure for long-term care hospitals to 
$21,494 (63 FR 26347).
    The table below lists 110 percent of the wage neutral national 
median target amounts for each class of excluded hospitals for cost 
reporting periods beginning during FY 1999. These figures reflect 
updates to the final FY 1998 figures by the projected market basket 
increase of 2.4 percent. For a new provider, the labor-related share of 
the target amount should be multiplied by the appropriate geographic 
area wage index and added to the nonlabor-related share in order to 
determine the limit on payment under the statutory payment methodology 
for new providers.

------------------------------------------------------------------------
                                                      Labor-   Nonlabor-
                       Total                         related    related 
                                                      share      share  
------------------------------------------------------------------------
(1) Psychiatric...................................     $6,214     $2,472
(2) Rehabilitation................................     12,219      4,858
(3) Long-Term Care................................     15,749      6,261
------------------------------------------------------------------------

    3. Classification of Hospitals and Units (Sec. 413.40(c))
    In the May 8 proposed rule, we stated that, after publication of 
the August 29, 1997 final rule with comment period, some excluded 
facilities had suggested that if they are currently excluded as one 
class of hospital or unit but also qualify for exclusion as another 
class of hospital, they should be permitted to choose which 
classification applies for purposes of applying the cap on target 
amounts. For example, some hospitals that participate in Medicare as 
psychiatric hospitals (defined under section 1861(f) of the Act, and 
the special conditions of participation in 42 CFR part 482 subpart E) 
have noted that they have average lengths of stay greater than 25 days. 
Those hospitals have asked to be ``reclassified'' as long-term care 
hospitals and given the benefit of the higher cap on target amounts 
applicable to that hospital class.
    In the proposed rule, we indicated that we had considered these 
hospitals' suggestions but, for reasons explained in that document, 
believed it would not be appropriate to adopt them. Accordingly, in the 
May 8 proposed rule, we proposed to revise Sec. 413.40(c)(4)(iii) to 
specify that, for purposes of that paragraph, the classification of a 
hospital that was excluded from the prospective payment system for its 
cost reporting period ending in FY 1996 would be determined by its 
classification (that is, the basis on which it was excluded) in FY 
1996. If a hospital or unit was not excluded for a cost reporting 
period ending in FY 1996, but could be excluded on more than one basis 
(for example, as either a rehabilitation or long-term care hospital) in 
a given cost reporting period, it would be assigned to the 
classification group with the lowest limit.
    Comment: One commenter agreed that psychiatric hospitals should not 
be allowed the higher cap on target amounts that is applicable to long-
term care hospitals, even if they also have average lengths of 
inpatient stay greater than 25 days. The commenter pointed out that 
psychiatric hospitals participate in Medicare under a provision of the 
law (section 1861(f) of the Act) that is separate from the provision 
applicable

[[Page 41001]]

to other excluded hospitals (section 1861(e) of the Act), and that the 
exclusion criteria for psychiatric hospitals differ from those for 
other hospitals. The commenter stated that because of these 
differences, a psychiatric hospital could not qualify for exclusion as 
another type of hospital or be eligible for the cap that applies to 
another type of hospital. The commenter suggested that it is 
unnecessary to specify that a psychiatric hospital cannot qualify for 
the cap on target amounts applicable to long-term care or other types 
of excluded hospitals.
    Response: If a hospital qualifies under more than one of the 
exclusion criteria pursuant to section 1886(d)(1)(B) of the Act, we 
would apply the lowest applicable cap to the hospital. For example, 
where a hospital qualifies as both a rehabilitation and long-term care 
hospital, we will apply the lower rehabilitation hospital cap to the 
hospital. Since this rule applies to all PPS-excluded hospitals, 
whether a psychiatric hospital can qualify as another type of hospital 
or not, the policy of applying the lowest cap is still needed.
    Comment: One commenter pointed out that some non-psychiatric 
(section 1861(e) of the Act) hospitals might be able to qualify for 
exclusion either as rehabilitation or as long-term care hospitals. The 
commenter stated that in many cases such facilities are excluded as 
long-term care hospitals. Therefore, the commenter recommended that any 
hospital in this category be given the benefit of the long-term care 
hospital cap.
    Response: We understand that some hospitals may simultaneously be 
able to qualify for exclusion on more than one basis. If a hospital is 
excluded from PPS as a certain type of hospital, we believe the 
hospital should be subject to the cap applicable for that class of 
hospital, even if it qualifies for exclusion on another basis. Thus, if 
a hospital qualifies for exclusion on more than one basis, then it is 
subject to all applicable caps, which in turn means the hospital's 
target amount cannot exceed the lowest of the applicable caps. We 
believe this policy not only is appropriate, but also provides greater 
incentives for efficient and cost-effective operation.
    Comment: Two commenters stated that if a hospital is classified as 
one type of hospital in any period to which the limits apply, and does 
not simultaneously qualify for exclusion on any other basis, the law 
(section 1886(b)(3) of the Act) does not authorize application of any 
cap other than the one applicable to the exclusion category to which 
the hospital is assigned. One commenter stated that this is the case 
even if the basis for the hospital's exclusion in a given cost 
reporting period is different than the basis for its exclusion for the 
cost reporting period ending during FY 1996 (for example, a hospital 
may have been excluded as a rehabilitation hospital during that period 
and later qualified for exclusion as a long-term care hospital).
    Response: We agree with the commenter that, if the basis for a 
hospital's exclusion for a given cost reporting period is different 
than the basis for the hospital's exclusion for the cost reporting 
period ending during FY 1996, the earlier basis of exclusion should not 
control which cap applies. We are revising Sec. 413.40(c)(4)(iv) 
accordingly. Thus, in applying the caps to excluded hospitals (or 
units), we will consider only the current basis (or bases) for 
exclusion. As stated above, if a hospital qualifies for more than one 
type of exclusion, its target amount may not exceed the lowest of the 
applicable caps.
    We note that, for the reasons explained in the proposed rule, we 
continue to be concerned that hospitals and units may seek changes in 
their basis of exclusion solely to take advantage of a higher cap, and 
that the resulting changes could compromise the effectiveness of the 
caps. We will monitor this situation carefully and may seek further 
legislative changes to the extent necessary to preserve the 
effectiveness of the caps.
    Comment: One commenter recommended that the regulations be revised 
to state that where two hospitals who are subject to different caps on 
TEFRA limits merge, the TEFRA cap that applies is the cap of the 
surviving hospital.
    Response: If two hospitals merge, the cap that applies depends on 
the status of the surviving entity. However, we do not believe that the 
regulations as described above, can be interpreted in any other way. 
Therefore, we do not agree that the regulations need to be revised to 
specifically address this situation.
    Comment: One commenter suggested that if a new hospital subject to 
the limits revised under Sec. 413.40(f)(2)(ii) changes the basis on 
which it is excluded from the PPS (for example, from being a 
rehabilitation hospital to a long-term care hospital), the cap applied 
for purposes of the comparison should be the cap applicable to the 
hospital's ``current'' exclusion category, not the hospital's previous 
exclusion category.
    Response: We agree that the cap applied should be based on the 
exclusion category for which the hospital currently qualifies. In light 
of the changes made in response to comments described above, we do not 
believe the regulations need to be further revised.
4. Exceptions
    The August 29, 1997 final rule with comment period (62 FR 46018) 
specified that a hospital that has a target amount that is capped at 
the 75th percentile, would not be granted an adjustment payment to the 
target amount (also referred to as an exception payment) as governed by 
Sec. 413.40(g)(3) 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. 
Since the hospital's target amount would not be determined based on its 
own experience in a base year, any comparison of costs or patient mix 
in its base year to costs or patient mix in the payment year would be 
irrelevant.
    In addition, in the May 8, 1998 proposed rule, we proposed to 
clarify that, to the extent we grant an exception in accordance with 
Sec. 413.40(g)(3) to a hospital not affected by the cap, the amount of 
the exception would be limited to the cap on the hospital's target 
amount. By establishing caps on TEFRA target amounts, Congress has 
limited payments to individual hospitals based on amounts that reflect 
the cost experience of other hospitals. Therefore, in determining the 
extent of any adjustment paid to a hospital as an exception under our 
regulations at Sec. 413.40(g)(3), we believe it is consistent with 
Congressional intent to limit the extent of the adjustment to the 
hospital's cap on its target amount.
    We proposed to revise Sec. 413.40(g)(1) in order to set forth the 
limitation on the adjustment payments.
    Comment: One commenter stated that the proposed rule conflicts with 
section 1886(b)(4)(A)(i) of the Act, which requires HCFA to provide for 
adjustments to providers who exceed their TEFRA ceiling. The commenter 
also believed that our proposed provision limiting the TEFRA exception 
to the TEFRA cap is inconsistent with HCFA's past TEFRA adjustment 
processing practices. The commenter also stated that the proposed rule 
would adversely affect beneficiaries by limiting the scope and extent 
of services that hospitals in high wage areas are financially able to 
deliver. For these reasons, the commenter requested that HCFA modify 
the proposed rule to permit the granting of exceptions to the TEFRA 
cap.
    Response: Section 1886(b)(4)(A)(i) of the Act provides that the 
Secretary

[[Page 41002]]

``shall provide'' for exceptions and adjustments ``where events beyond 
the hospital's control or extraordinary circumstances, including 
changes in the case mix of such hospital, create a distortion in the 
increase in costs for a cost reporting period.'' Prior to the enactment 
of Public Law 105-33, the payment for each excluded hospital was 
limited by a hospital-specific target amount, which was updated each 
year. The exceptions and adjustments provision provided for payments 
above the hospital's target amount if the hospital experienced ``a 
distortion in the increase in costs'' for a given period. Thus, a 
hospital could receive an exception based on its cost experience.
    The BBA enacted a system of caps which significantly changed the 
TEFRA payment system. Under the new system of TEFRA caps, a hospital's 
payments are not based solely on its own cost experience; instead, a 
hospital is now subject to a cap based on the cost experience of other 
hospitals.
    We believe our policies harmonize the exceptions provision and the 
cap provision. Under our policies, a hospital whose target amount is 
below the cap may receive an exception up to the cap. Thus, consistent 
with the mandate of section 1886(b)(4) of the Act, we continue to 
provide for exceptions, contrary to the assertion of the commenter. 
However, by establishing caps on TEFRA target amounts, Congress has 
limited payments to individual hospitals based on amounts that reflect 
the cost experience of other hospitals. Therefore, in determining the 
extent of any adjustment paid to a hospital as an exception under our 
regulations, we believe it is consistent with Congressional intent to 
limit the extent of the adjustment to the hospital's cap on its target 
amount. If a hospital's otherwise applicable target amount is above the 
cap, it cannot receive an exception based solely on a comparison of its 
current year costs or patient mix to base year costs or patient mix.

VII. MedPAC Recommendations

    As required by law, we have reviewed the March 1998 report 
submitted by MedPAC to Congress and gave its recommendations careful 
consideration in conjunction with the proposals set forth in the 
proposed rule. We also responded to the individual recommendations in 
the proposed rule. The comments we received on the treatment of the 
MedPAC recommendations are set forth below along with our responses to 
those comments. However, if we received no comments from the public 
concerning a MedPAC recommendation or our response to that 
recommendation, we have not repeated the recommendation and response in 
the discussion below. Recommendations concerning the update factors for 
inpatient operating costs and for hospitals and hospital distinct-part 
units excluded from the prospective payment system are discussed in 
Appendix C, of this final rule.

Potential Effects of Target Amount Caps

    Recommendation: The wage-related portion of the excluded hospital 
target amount caps should be adjusted by the appropriate hospital wage 
index to account for geographic differences in wages. (For more 
information see Volume 1, chapter 7, page 71 of the March 1998 report.)
    Response in the Proposed Rule: As MedPAC indicated in its 
recommendation, legislation would be required to adjust the target 
amount caps in such a substantial manner as to adjust for differences 
in area labor costs.
    Comment: Several commenters believed that the caps on the target 
amounts should be wage adjusted in order to recognize the different 
labor markets. They believe to do otherwise would be unfair and 
inequitable and may cause hospitals to cut back on services they 
provide to their Medicare beneficiaries.
    Response: We previously addressed this issue in the final rule 
published in the Federal Register on May 12, 1998 (63 FR 26345). Our 
decision, as expressed in our response in that final rule, remains 
unchanged.

VIII. Other Required Information

Requests for Data From the Public

    In order to respond promptly to public requests for data related to 
the prospective payment system, we have set up a process under which 
commenters can gain access to the raw data on an expedited basis. 
Generally, the data are available in computer tape format or 
cartridges; however, some files are available on diskette, and on the 
Internet at HTTP://WWW.HCFA.GOV/STATS/PUBFILES.HTML. In our May 8 
proposed rule, we published a list of data files that are available for 
purchase (63 FR 25603).

List of Subjects

42 CFR Part 405

    Administrative practice and procedure, Health facilities, Health 
professions, Kidney diseases, Medicare, Reporting and recordkeeping 
requirements, 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 Chapter IV is amended as set forth below:
    A. Part 405 is amended as follows:

PART 405--FEDERAL HEALTH INSURANCE FOR THE AGED AND DISABLED

    1. The authority citation for part 405 is revised to read as 
follows:

    Authority: Secs. 1102, 1861, 1862(a), 1871, 1874, 1881, and 
1886(k) of the Social Security Act (42 U.S.C. 1302, 1395x, 1395y(a), 
1395hh, 1395kk, 1395rr and 1395ww(k)), and sec. 353 of the Public 
Health Service Act (42 U.S.C. 263a), unless otherwise noted.

Subpart X--Rural Health Clinic and Federally Qualified Health 
Center Services

    2. In Sec. 405.2468, a new paragraph (f) is added to read as 
follows:


Sec. 405.2468  Allowable costs

* * * * *
    (f) Graduate medical education. (1) Effective for that portion of 
cost reporting periods occurring on or after January 1, 1999, if an RHC 
or an FQHC incurs ``all or substantially all'' of the costs for the 
training program in the nonhospital setting as defined in 
Sec. 413.86(b) of this chapter, the RHC or FQHC may receive direct 
graduate medical education payment for those residents.
    (2) Direct graduate medical education costs are not included as 
allowable cost under Sec. 405.2466(b)(1)(i); and therefore, are not 
subject to the limit on the all-inclusive rate for allowable costs.
    (3) Allowable graduate medical education costs must be reported on 
the RHC's or the FQHC's cost report under a separate cost center.
    (4) Allowable graduate medical education costs are non-reimbursable 
if payment for these costs are received from a hospital or a 
Medicare+Choice organization.
    (5) Allowable direct graduate medical education costs under 
paragraphs (f)(6) and (f)(7)(i) of this section, are subject to 
reasonable cost principles under part 413 and the reasonable 
compensation equivalency limits in Secs. 415.60 and 415.70 of this 
chapter.
    (6) The allowable direct graduate medical education costs are those 
costs

[[Page 41003]]

incurred by the nonhospital site for the educational activities 
associated with patient care services of an approved program, subject 
to the redistribution and community support principles in 
Sec. 413.85(c).
    (i) The following costs are allowable direct graduate medical 
education costs to the extent that they are reasonable--
    (A) The costs of the residents' salaries and fringe benefits 
(including travel and lodging expenses where applicable).
    (B) The portion of teaching physicians' salaries and fringe 
benefits that are related to the time spent teaching and supervising 
residents.
    (C) Facility overhead costs that are allocated to direct graduate 
medical education.
    (ii) The following costs are not allowable graduate medical 
education costs--
    (A) Costs associated with training, but not related to patient care 
services.
    (B) Normal operating and capital-related costs.
    (C) The marginal increase in patient care costs that the RHC or 
FQHC experiences as a result of having an approved program.
    (D) The costs associated with activities described in 
Sec. 413.85(d) of this chapter.
    (7) Payment is equal to the product of--
    (i) The RHC's or the FQHC's allowable direct graduate medical 
education costs; and
    (ii) Medicare's share, which is equal to the ratio of Medicare 
visits to the total number of visits (as defined in Sec. 405.2463).
    (8) Direct graduate medical education payments to RHCs and FQHCs 
made under this section are made from the Federal Supplementary Medical 
Insurance Trust Fund.
    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 1895hh).

Subpart A--General Provisions

    2. Section 412.4 is revised to read as follows:


Sec. 412.4  Discharges and transfers.

    (a) Discharges. Subject to the provisions of paragraphs (b) and (c) 
of this section, a hospital inpatient is considered discharged from a 
hospital paid under the prospective payment system when--
    (1) The patient is formally released from the hospital; or
    (2) The patient dies in the hospital.
    (b) Transfer--Basic rule. A discharge of a hospital inpatient is 
considered to be a transfer for purposes of payment under this part if 
the discharge is made under any of the following circumstances:
    (1) From a hospital to the care of another hospital that is--
    (i) Paid under the prospective payment system; or
    (ii) Excluded from being paid under the prospective payment system 
because of participation in an approved Statewide cost control program 
as described in subpart C of part 403 of this chapter.
    (2) From one inpatient area or unit of a hospital to another 
inpatient area or unit of the hospital that is paid under the 
prospective payment system.
    (c) Transfers--Special 10 DRG rule. For discharges occurring on or 
after October 1, 1998, a discharge of a hospital inpatient is 
considered to be a transfer for purposes of this part when the 
patient's discharge is assigned, as described in Sec. 412.60(c), to one 
of the qualifying diagnosis-related groups (DRGs) listed in paragraph 
(d) of this section and the discharge is made under any of the 
following circumstances--
    (1) To a hospital or distinct part hospital unit excluded from the 
prospective payment system under subpart B of this part.
    (2) To a skilled nursing facility.
    (3) To home under a written plan of care for the provision of home 
health services from a home health agency and those services begin 
within 3 days after the date of discharge.
    (d) Qualifying DRGs. The qualifying DRGs for purposes of paragraph 
(c) of this section are DRGs 14, 113, 209, 210, 211, 236, 263, 264, 
429, and 483.
    (e) Payment for discharges. The hospital discharging an inpatient 
(under paragraph (a) of this section) is paid in full, in accordance 
with Sec. 412.2(b).
    (f) Payment for transfers. (1) General rule. Except as provided in 
paragraph (f)(2) or (f)(3) of this section, a hospital that transfers 
an inpatient under the circumstances described in paragraph (b) or (c) 
of this section, is paid a graduated per diem rate for each day of the 
patient's stay in that hospital, not to exceed the amount that would 
have been paid under subparts D and M of this part if the patient had 
been discharged to another setting. The per diem rate is determined by 
dividing the appropriate prospective payment rate (as determined under 
subparts D and M of this part) by the geometric mean length of stay for 
the specific DRG to which the case is assigned. Payment is graduated by 
paying twice the per diem amount for the first day of the stay, and the 
per diem amount for each subsequent day, up to the full DRG payment.
    (2) Special rule for DRGs 209, 210, and 211. A hospital that 
transfers an inpatient under the circumstances described in paragraph 
(c) of this section and the transfer is assigned to DRGs 209, 210 or 
211 is paid as follows:
    (i) 50 percent of the appropriate prospective payment rate (as 
determined under subparts D and M of this part) for the first day of 
the stay; and
    (ii) 50 percent of the amount calculated under paragraph (f)(1) of 
this section for each day of the stay, up to the full DRG payment.
    (3) Transfer assigned to DRG 385. If a transfer is classified into 
DRG 385 (Neonates, died or transferred) the transferring hospital is 
paid in accordance with Sec. 412.2(e).
    (4) Outliers. Effective with discharges occurring on or after 
October 1, 1984, a transferring hospital may qualify for an additional 
payment for extraordinarily high-cost cases that meet the criteria for 
cost outliers as described in subpart F of this part.

Subpart F--Payment for Outlier Cases

    3. In Sec. 412.80, paragraph (b) is revised to read as follows:


Sec. 412.80  General provisions

* * * * *
    (b) Outlier cases in transferring hospitals. HCFA provides cost 
outlier payments to a transferring hospital for cases paid in 
accordance with Sec. 412.4(f), if the hospital's charges for covered 
services furnished to the beneficiary, adjusted to costs by applying 
cost-to-charge ratios as described in Sec. 412.84(h), exceed the DRG 
payment for the case plus a fixed dollar amount (adjusted for 
geographic variation in costs) as specified by HCFA, divided by the 
geometric mean length of stay for the DRG, and multiplied by an 
applicable factor determined as follows:
    (1) For transfer cases paid in accordance with Sec. 412.4(f)(1), 
the applicable factor is equal to the length of stay plus 1 day.
    (2) For transfer cases paid in accordance with Sec. 412.4(f)(2), 
the applicable factor is equal to 0.5 plus the product of the length of 
stay plus 1 day multiplied by 0.5.
* * * * *

[[Page 41004]]

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


Sec. 412.105  [Amended]

    4. In Sec. 412.105(f)(1)(ii)(C), the reference to 
``413.86(f)(1)(iii)'' is revised to read ``413.86(f)(4).''
    5. In Sec. 412.106, paragraph (b)(4) is revised to read as follows:


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

* * * * *
    (b) * * *
    (4) Second computation. The fiscal intermediary determines, for the 
same cost reporting period used for the first computation, the number 
of the hospital's patient days of service for which patients were 
eligible for Medicaid but not entitled to Medicare Part A, and divides 
that number by the total number of patient days in the same period. For 
purposes of this second computation, the following requirements apply:
    (i) A patient is deemed eligible for Medicaid on a given day if the 
patient is eligible for medical assistance under an approved State 
Medicaid plan on such day, regardless of whether particular items or 
services were covered or paid under the State plan.
    (ii) The hospital has the burden of furnishing data adequate to 
prove eligibility for each Medicaid patient day claimed under this 
paragraph, and of verifying with the State that a patient was eligible 
for Medicaid during each claimed patient hospital day.
* * * * *

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

    6. In Sec. 412.322, paragraph (a)(3) is revised to read as follows:


Sec. 412.322  Indirect medical education adjustment factor.

    (a) * * *
    (3) The measurement of teaching activity is the ratio of the 
hospital's full-time equivalent residents to average daily census. This 
ratio cannot exceed 1.5.
* * * * *
    7. In Sec. 412.331, paragraphs (a) and (b) are redesignated as 
paragraphs (b) and (c) respectively, a new paragraph (a) is added and 
the first sentence of the introductory text of newly redesignated 
paragraph (b) is revised to read as follows:


Sec. 412.331  Determining hospital-specific rates in cases of hospital 
merger, consolidation, or dissolution.

    (a) New hospital merger or consolidation. If, after a new hospital 
accepts its first patient but before the end of its base year, it 
merges with one or more existing hospitals, and two or more separately 
located hospital campuses are maintained, the hospital-specific rate 
and payment determination for the merged entity are determined as 
follows--
    (1) Post-merger base year payment methodology. The new campus is 
paid based on reasonable costs until the end of its base year. The 
existing campus remains on its previous payment methodology until the 
end of the new campus' base year. Effective with the first cost 
reporting period beginning after the the end of the new campus' base 
year, the intermediary determines a hospital-specific rate applicable 
to the new campus in accordance with Sec. 412.328, and then determines 
a revised hospital-specific rate for the merged entity in accordance 
with paragraph (a)(2) of this section.
    (2) Revised hospital-specific rate. Using each hospital's base 
period data, the intermediary determines a combined average discharge-
weighted hospital-specific rate.
    (3) Post-base year payment determination. To determine the 
applicable payment methodology under Sec. 412.336 and for payment 
purposes under Sec. 412.340 or Sec. 412.344, the discharge-weighted 
hospital-specific rate determined by the intermediary is compared to 
the Federal rate. The revised payment methodology is effective on the 
first day of the cost reporting period beginning after the end of the 
new campus' base year.
    (b) Existing hospital merger or consolidation. If, after the base 
year, two or more hospitals merge or consolidate into one hospital as 
provided for under Sec. 413.134(k) of this chapter and the provisions 
of paragraph (a) of this section do not apply, the intermediary 
determines a revised hospital-specific rate applicable to the combined 
facility under Sec. 412.328, which is effective beginning with the date 
of merger or consolidation. * * *
* * * * *
    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 FOR SKILLED NURSING FACILITIES

    1. The authority citation for part 413 is revised to read as 
follows:

    Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i) and 
(n), 1861(v), 1871, 1881, 1883, and 1866 of the Social Security Act 
(42 U.S.C. 1302, 1395f(b), 1395g, 1395l, 1395l(a), (i) and (n), 
1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww).

Subpart C--Limits on Cost Reimbursement

    2. In Sec. 413.40, paragraph (c)(4)(iv) is redesignated as 
paragraph (c)(4)(v), a new paragraph (c)(4)(iv) is added, and paragraph 
(g)(1) is revised to read as follows:


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

* * * * *
    (c) * * *
    (4) * * *
    (iv) For purposes of the limits on target amounts established under 
paragraph (c)(4)(iii) of this section, each hospital or unit that 
qualifies for exclusion as a member of only one class of excluded 
facility (psychiatric hospital or unit, rehabilitation hospital or 
unit, or long-term care hospital) will be subject to the limit 
applicable to that class. If a hospital or unit qualifies to be 
classified in more than one way under the exclusion criteria in subpart 
B of part 412 of this chapter, the hospital's or unit's target amount 
may not exceed the lowest applicable limit.
* * * * *
    (g) Adjustments--(1) General rule. HCFA may adjust the amount of 
the operating costs considered in establishing the rate-of-increase 
ceiling for one or more cost reporting periods, including both periods 
subject to the ceiling and the hospital's base period, under the 
circumstances specified in paragraphs (g)(2), (g)(3), and (g)(4) of 
this section. When an adjustment is requested by the hospital, HCFA 
makes an adjustment only to the extent that the hospital's operating 
costs are reasonable, attributable to the circumstances specified 
separately identified by the hospital, and verified by the 
intermediary. HCFA may grant an adjustment requested by the hospital 
only if the hospital's operating costs exceed the rate-of-increase 
ceiling imposed under this section. In the case of a psychiatric 
hospital or unit,

[[Page 41005]]

rehabilitation hospital or unit, or long-term care hospital, the amount 
of payment made to a hospital after an adjustment under paragraph 
(g)(3) of this section may not exceed the applicable limit based on 
75th percentile of the target amounts for hospitals of the same class 
as described in Sec. 413.40(c)(4)(iii).
* * * * *

Subpart F--Specific Categories of Costs

    3. In Sec. 413.80, paragraph (h) is redesignated as paragraph (i), 
and a new paragraph (h) is added to read as follows:


Sec. 413.80  Bad debts, charity, and courtesy allowances.

* * * * *
    (h) Limitations on bad debts. In determining reasonable costs for 
hospitals, the amount of bad debts otherwise treated as allowable costs 
(as defined in paragraph (e) of this section) is reduced--
    (1) For cost reporting periods beginning during fiscal year 1998, 
by 25 percent;
    (2) For cost reporting periods beginning during fiscal year 1999, 
by 40 percent; and
    (3) For cost reporting periods beginning during a subsequent fiscal 
year, by 45 percent.
* * * * *
    4. In Sec. 413.85, a new paragraph (h) is added to read as follows:


Sec. 413.85  Cost of educational activities.

* * * * *
    (h) Medicare+Choice organizations. (1) Effective January 1, 1999, 
Medicare+Choice organizations may receive direct graduate medical 
education payments for the time that residents spend in nonhospital 
provider settings such as freestanding clinics, nursing homes, and 
physicians' offices in connection with approved programs.
    (2) Medicare+Choice organizations may receive direct graduate 
medical education payments if all of the following conditions are met:
    (i) The resident spends his or her time in patient care activities.
    (ii) The Medicare+Choice organization incurs ``all or substantially 
all'' of the costs for the training program in the nonhospital setting 
as defined in Sec. 413.86(b).
    (iii) There is a written agreement between the Medicare+Choice 
organization and the nonhospital site that indicates the 
Medicare+Choice organization will incur the costs of the resident's 
salary and fringe benefits and provide reasonable compensation to the 
nonhospital site for teaching activities.
    (3) A Medicare+Choice organization's allowable direct graduate 
medical education costs, subject to the redistribution and community 
support principles in Sec. 413.85(c), consist of--
    (i) Residents' salaries and fringe benefits (including travel and 
lodging where applicable); and
    (ii) Reasonable compensation to the nonhospital site for teaching 
activities related to the training of medical residents.
    (4) The direct graduate medical education payment is equal to the 
product of--
    (i) The lower of--
    (A) The Medicare+Choice organization's allowable direct graduate 
medical education costs per resident as defined in paragraph (h)(3) of 
this section; or
    (B) The national average per resident amount; and
    (ii) Medicare's share, which is equal to the ratio of the number of 
Medicare beneficiaries enrolled to the total number of individuals 
enrolled in the Medicare+Choice organization.
    (5) Direct graduate medical education payments made to 
Medicare+Choice organizations under this section are made from the 
Federal Supplementary Medical Insurance Trust Fund.
    5. In Sec. 413.86, the introductory text of paragraph (b) is 
republished, a new definition in alphabetical order is added to 
paragraph (b), paragraphs (i) and (j) are redesignated as paragraphs 
(j)and (k) respectively, paragraph (f)(2) is redesignated as new 
paragraph (i), paragraphs (f)(2)(i) through (vii) are redesignated as 
paragraphs (i)(1) through (7) respectively, the introductory text of 
paragraph (f)(1) is redesignated as the introductory text of paragraph 
(f), paragraphs (f)(1)(i) through (iii) are redesignated as paragraphs 
(f)(1) through (3) respectively, paragraphs (f)(1)(iii)(A) and (B) are 
redesignated as (f)(3)(i) and (ii) respectively, new paragraphs (f)(2) 
and (f)(3) introductory text are revised, and a new paragraph (f)(4) is 
added to read as follows:


Sec. 413.86  Direct graduate medical education payments.

* * * * *
    (b) Definitions. For purposes of this section, the following 
definitions apply:
* * * * *
    All or substantially all of the costs for the training program in 
the nonhospital setting means the residents' salaries and fringe 
benefits (including travel and lodging where applicable) and the 
portion of the cost of teaching physicians' salaries and fringe 
benefits attributable to direct graduate medical education.
* * * * *
    (f) * * *
    (2) No individual may be counted as more than one FTE. Except as 
provided in paragraphs (f)(3) and (4) of this section, if a resident 
spends time in more than one hospital or, in a nonprovider setting, the 
resident counts as partial FTE based on the proportion of time worked 
at the hospital to the total time worked. A part-time resident counts 
as a partial FTE based on the proportion of allowable time worked 
compared to the total time necessary to fill a full-time internship or 
residency slot.
    (3) On or after July, 1, 1987 and for portions of cost reporting 
periods occurring before January 1, 1999, the time residents spend in 
nonprovider settings such as freestanding clinics, nursing homes, and 
physicians' offices in connection with approved programs is not 
excluded in determining the number of FTE residents in the calculation 
of a hospital's resident count if the following conditions are met--
* * * * *
    (4) For portions of cost reporting periods occurring on or after 
January 1, 1999, the time residents spend in nonprovider settings such 
as freestanding clinics, nursing homes, and physicians' offices in 
connection with approved programs may be included in determining the 
number of FTE residents in the calculation of a hospital's resident 
count if the following conditions are met--
    (i) The resident spends his or her time in patient care activities.
    (ii) The written agreement between the hospital and the nonhospital 
site must indicate that the hospital will incur the cost of the 
resident's salary and fringe benefits while the resident is training in 
the nonhospital site and the hospital is providing reasonable 
compensation to the nonhospital site for supervisory teaching 
activities. The agreement must indicate the compensation the hospital 
is providing to the nonhospital site for supervisory teaching 
activities.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance)


[[Page 41006]]


    Dated: July 23, 1998.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.

    Dated: July 27, 1998.
Donna E. Shalala,
Secretary.
    [Editorial Note: The following addendum and appendixes will not 
appear in the Code of Federal Regulations.]

Addendum--Schedule of Standardized Amounts Effective With 
Discharges Occurring On or After October 1, 1998, Payment Amounts 
for Blood Clotting Factor Effective for Discharges Occurring On or 
After October 1, 1998, and Update Factors and Rate-of-Increase 
Percentages Effective With Cost Reporting Periods Beginning On or 
After October 1, 1998

I. Summary and Background

    In this addendum, we set forth the amounts and factors for 
determining prospective payment rates for Medicare inpatient operating 
costs and Medicare inpatient capital-related costs. In addition, we set 
forth the updated add-on payment amounts for blood clotting factors. We 
also set forth rate-of-increase percentages for updating the target 
amounts for hospitals and hospital units excluded from the prospective 
payment system.
    For discharges occurring on or after October 1, 1998, except for 
sole community hospitals, Medicare-dependent, small rural hospitals, 
and hospitals located in Puerto Rico, each hospital's payment per 
discharge under the prospective payment system will be based on 100 
percent of the Federal national rate.
    Sole community hospitals are paid based on whichever of the 
following rates yield the greatest aggregate payment: the Federal 
national rate, the updated hospital-specific rate based on FY 1982 cost 
per discharge, or the updated hospital-specific rate based on FY 1987 
cost per discharge. Medicare-dependent, small rural hospitals are paid 
based on the Federal national rate or, if higher, the Federal national 
rate plus 50 percent of the difference between the Federal national 
rate and the updated hospital-specific rate based on FY 1982 or FY 1987 
cost per discharge, whichever is higher. For hospitals in Puerto Rico, 
the payment per discharge is based on the sum of 50 percent of a Puerto 
Rico rate and 50 percent of a national rate.
    As discussed below in section II, we are making changes in the 
determination of the prospective payment rates for Medicare inpatient 
operating costs. The changes, to be applied prospectively, affect the 
calculation of the Federal rates. In section III, we are updating the 
payments per unit for blood clotting factor provided to hospital 
inpatients who have hemophilia. In section IV of this addendum, we 
discuss our changes for determining the prospective payment rates for 
Medicare inpatient capital-related costs. Section V of this addendum 
sets forth our changes for determining the rate-of-increase limits for 
hospitals excluded from the prospective payment system. The tables to 
which we refer in the preamble to this final rule are presented at the 
end of this addendum in section VI.

II. Changes to Prospective Payment Rates For Inpatient Operating 
Costs for FY 1999

    The basic methodology for determining prospective payment rates for 
inpatient operating costs is set forth at Sec. 412.63 for hospitals 
located outside of Puerto Rico. The basic methodology for determining 
the prospective payment rates for inpatient operating costs for 
hospitals located in Puerto Rico is set forth at Secs. 412.210 and 
412.212. Below, we discuss the factors used for determining the 
prospective payment rates. The Federal and Puerto Rico rate changes 
will be effective with discharges occurring on or after October 1, 
1998. As required by section 1886(d)(4)(C) of the Act, we must also 
adjust the DRG classifications and weighting factors for discharges in 
FY 1999.
    In summary, the standardized amounts set forth in Tables 1A and 1C 
of section VI of this addendum reflect--
    <bullet> Updates of 0.5 percent for all areas (that is, the market 
basket percentage increase of 2.4 percent minus 1.9 percentage points);
    <bullet> An adjustment to ensure budget neutrality as provided for 
in sections 1886(d)(4)(C)(iii) and (d)(3)(E) of the Act by applying new 
budget neutrality adjustment factors to the large urban and other 
standardized amounts;
    <bullet> An adjustment to ensure budget neutrality as provided for 
in section 1886(d)(8)(D) of the Act by removing the FY 1998 budget 
neutrality factor and applying a revised factor; and
    <bullet> An adjustment to apply the revised outlier offset by 
removing the FY 1998 outlier offset and applying a new offset.
    The standardized amounts set forth in Tables 1E and 1F of section 
VI of this addendum, which apply to ``temporary relief'' hospitals (see 
62 FR 46001 for a discussion of these hospitals), reflect updates of 
0.8 percent for all areas but otherwise reflect the same adjustments as 
the national standardized amounts. As described in Sec. 412.107, these 
hospitals receive an update that is 0.3 percentage points more than the 
update factor applicable to all other prospective payment hospitals for 
FY 1999.

A. Calculation of Adjusted Standardized Amounts

1. Standardization of Base-Year Costs or Target Amounts
    Section 1886(d)(2)(A) of the Act required the establishment of 
base-year cost data containing allowable operating costs per discharge 
of inpatient hospital services for each hospital. The preamble to the 
September 1, 1983 interim final rule (48 FR 39763) contains a detailed 
explanation of how base-year cost data were established in the initial 
development of standardized amounts for the prospective payment system 
and how they are used in computing the Federal rates.
    Section 1886(d)(9)(B)(i) of the Act required that Medicare target 
amounts be determined for each hospital located in Puerto Rico for its 
cost reporting period beginning in FY 1987. The September 1, 1987 final 
rule contains a detailed explanation of how the target amounts were 
determined and how they are used in computing the Puerto Rico rates (52 
FR 33043, 33066).
    The standardized amounts are based on per discharge averages of 
adjusted hospital costs from a base period or, for Puerto Rico, 
adjusted target amounts from a base period, updated and otherwise 
adjusted in accordance with the provisions of section 1886(d) of the 
Act. Sections 1886(d)(2) (B) and (C) of the Act required that the base-
year per discharge costs be updated for FY 1984 and then standardized 
in order to remove from the cost data the effects of certain sources of 
variation in cost among hospitals. These include case mix, differences 
in area wage levels, cost of living adjustments for Alaska and Hawaii, 
indirect medical education costs, and payments to hospitals serving a 
disproportionate share of low-income patients.
    Under sections 1886(d)(2)(H) and (d)(3)(E) of the Act, in making 
payments under the prospective payment system, the Secretary estimates 
from time to time the proportion of costs that are wages and wage-
related costs. Since October 1, 1997, when the market basket was last 
revised, we have considered 71.1 percent of costs to be labor-related 
for purposes of the prospective payment system. For the Puerto Rico 
standardized amounts, the labor share is 71.3 percent. We are revising 
the discharge-weighted national standardized amount for Puerto Rico to 
reflect the proportion of discharges in large urban and other areas 
from the FY 1997 MedPAR file.

[[Page 41007]]

2. Computing Large Urban and Other Area Averages
    Sections 1886(d)(2)(D) and (3) of the Act require the Secretary to 
compute two average standardized amounts for discharges occurring in a 
fiscal year: one for hospitals located in large urban areas and one for 
hospitals located in other areas. In addition, under sections 
1886(d)(9)(B)(iii) and (C)(i) of the Act, the average standardized 
amount per discharge must be determined for hospitals located in urban 
and other areas in Puerto Rico. Hospitals in Puerto Rico are paid a 
blend of 50 percent of the applicable Puerto Rico standardized amount 
and 50 percent of a national standardized payment amount.
    Section 1886(d)(2)(D) of the Act defines ``urban area'' as those 
areas within a Metropolitan Statistical Area (MSA). A ``large urban 
area'' is defined as an urban area with a population of more than 
1,000,000. In addition, section 4009(i) of Public Law 100-203 provides 
that a New England County Metropolitan Area (NECMA) with a population 
of more than 970,000 is classified as a large urban area. As required 
by section 1886(d)(2)(D) of the Act, population size is determined by 
the Secretary based on the latest population data published by the 
Bureau of the Census. Urban areas that do not meet the definition of a 
``large urban area'' are referred to as ``other urban areas.'' Areas 
that are not included in MSAs are considered ``rural areas'' under 
section 1886(d)(2)(D) of the Act. Payment for discharges from hospitals 
located in large urban areas will be based on the large urban 
standardized amount. Payment for discharges from hospitals located in 
other urban and rural areas will be based on the other standardized 
amount.
    Based on 1997 population estimates published by the Bureau of the 
Census, 61 areas meet the criteria to be defined as large urban areas 
for FY 1999. These areas are identified by a footnote in Table 4A. We 
note that on June 23, 1998, the Office of Management and Budget 
announced the designation of the Missoula, Montana MSA. We have 
incorporated this change in this final rule.
3. Updating the Average Standardized Amounts
    Under section 1886(d)(3)(A) of the Act, we update the area average 
standardized amounts each year. In accordance with section 
1886(d)(3)(A)(iv) of the Act, we are updating the large urban and the 
other areas average standardized amounts for FY 1999 using the 
applicable percentage increases specified in section 1886(b)(3)(B)(i) 
of the Act. Section 1886(b)(3)(B)(i)(XIV) of the Act specifies that, 
for hospitals in all areas, the update factor for the standardized 
amounts for FY 1999 is equal to the market basket percentage increase 
minus 1.9 percentage points. The ``temporary relief'' provision under 
section 4401 of Public Law 105-33 provides for an update equal to the 
market basket percentage increase minus 1.6 percentage points for 
hospitals that are not Medicare-dependent, small rural hospitals, that 
receive no IME or DSH payments, that are located in a state in which 
aggregate Medicare operating payments for such hospitals were less than 
their aggregate allowable Medicare operating costs for their cost 
reporting periods beginning during FY 1995, and whose Medicare 
operating payments are less than their allowable Medicare operating 
costs for their cost reporting period beginning during FY 1999.
    The percentage change in the market basket reflects the average 
change in the price of goods and services purchased by hospitals to 
furnish inpatient care. The most recent forecast of the hospital market 
basket increase for FY 1999 is 2.4 percent. Thus, for FY 1999, the 
update to the average standardized amounts equals 0.5 percent (0.8 
percent for those hospitals qualifying under the ``temporary relief'' 
provision of Public Law 105-33).
    As in the past, we are adjusting the FY 1998 standardized amounts 
to remove the effects of the FY 1998 geographic reclassifications and 
outlier payments before applying the FY 1999 updates. That is, we are 
increasing the standardized amounts to restore the reductions that were 
made for the effects of geographic reclassification and outliers. We 
then apply the new offsets to the standardized amounts for outliers and 
geographic reclassifications for FY 1999.
    Although the update factor for FY 1999 is set by law, we are 
required by section 1886(e)(4)(A) of the Act to report to Congress on 
our final recommendation of update factors for FY 1999 for both 
prospective payment hospitals and hospitals excluded from the 
prospective payment system. We have included our final recommendations 
in Appendix C to this final rule.
4. Other Adjustments to the Average Standardized Amounts
    a. Recalibration of DRG Weights and Updated Wage Index--Budget 
Neutrality Adjustment. Section 1886(d)(4)(C)(iii) of the Act specifies 
that beginning in FY 1991, the annual DRG reclassification and 
recalibration of the relative weights must be made in a manner that 
ensures that aggregate payments to hospitals are not affected. As 
discussed in section II of the preamble, we normalized the recalibrated 
DRG weights by an adjustment factor, so that the average case weight 
after recalibration is equal to the average case weight prior to 
recalibration.
    Section 1886(d)(3)(E) of the Act specifies that the hospital wage 
index must be updated on an annual basis beginning October 1, 1993. 
This provision also requires that any updates or adjustments to the 
wage index must be made in a manner that ensures that aggregate 
payments to hospitals are not affected by the change in the wage index.
    To comply with the requirement of section 1886(d)(4)(C)(iii) of the 
Act that DRG reclassification and recalibration of the relative weights 
be budget neutral, and the requirement in section 1886(d)(3)(E) of the 
Act that the updated wage index be budget neutral, and the requirement 
in section 4410 of Public law 105-33 that application of the floor on 
the wage index be budget neutral, we used historical discharge data to 
simulate payments and compared aggregate payments using the FY 1998 
relative weights and wage index to aggregate payments using the FY 1999 
relative weights and wage index. The same methodology was used for the 
FY 1998 budget neutrality adjustment. (See the discussion in the 
September 1, 1992 final rule (57 FR 39832).) Based on this comparison, 
we computed a budget neutrality adjustment factor equal to 0.999006. We 
adjust the Puerto Rico-specific standardized amounts for the effect of 
DRG reclassification and recalibration. We computed a budget neutrality 
adjustment factor for Puerto Rico-specific standardized amounts equal 
to 0.998912. These budget neutrality adjustment factors are applied to 
the standardized amounts without removing the effects of the FY 1998 
budget neutrality adjustments. We do not remove the prior budget 
neutrality adjustment because estimated aggregate payments after the 
changes in the DRG relative weights and wage index should equal 
estimated aggregate payments prior to the changes. If we removed the 
prior year adjustment, we would not satisfy this condition.
    In addition, we will continue to apply the same FY 1999 adjustment 
factor to the hospital-specific rates that are effective for cost 
reporting periods beginning on or after October 1, 1998, in

[[Page 41008]]

order to ensure that we meet the statutory requirement that aggregate 
payments neither increase nor decrease as a result of the 
implementation of the FY 1999 DRG weights and updated wage index. (See 
the discussion in the September 4, 1990 final rule (55 FR 36073).)
    b. Reclassified hospitals--budget neutrality adjustment. Section 
1886(d)(8)(B) of the Act provides that certain rural hospitals are 
deemed urban effective with discharges occurring on or after October 1, 
1988. In addition, section 1886(d)(10) of the Act provides for the 
reclassification of hospitals based on determinations by the Medicare 
Geographic Classification Review Board (MGCRB). Under section 
1886(d)(10) of the Act, a hospital may be reclassified for purposes of 
the standardized amount or the wage index, or both.
    Under section 1886(d)(8)(D) of the Act, the Secretary is required 
to adjust the standardized amounts so as to ensure that total aggregate 
payments under the prospective payment system after implementation of 
the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the 
Act are equal to the aggregate prospective payments that would have 
been made absent these provisions. To calculate this budget neutrality 
factor, we used historical discharge data to simulate payments, and 
compared total prospective payments (including IME and DSH payments) 
prior to any reclassifications to total prospective payments after 
reclassifications. In the proposed rule, we applied an adjustment 
factor of 0.994019 to ensure that the effects of reclassification are 
budget neutral. The final budget neutrality adjustment factor is 
0.993433.
    The adjustment factor is applied to the standardized amounts after 
removing the effects of the FY 1998 budget neutrality adjustment 
factor. We note that the proposed FY 1999 adjustment reflected wage 
index and standardized amount reclassifications approved by the MGCRB 
or the Administrator as of February 27, 1998. The effects of any 
additional reclassification changes resulting from appeals and reviews 
of the MGCRB decisions for FY 1999 or from a hospital's request for the 
withdrawal of a reclassification request are reflected in the final 
budget neutrality adjustment that is required under section 
1886(d)(8)(D) of the Act and that is published in this final rule.
    c. Outliers. Section 1886(d)(5)(A) of the Act provides for payments 
in addition to the basic prospective payments for ``outlier'' cases, 
cases involving extraordinarily high costs (cost outliers). Section 
1886(d)(3)(B) of the Act requires the Secretary to adjust both the 
large urban and other area national standardized amounts by the same 
factor to account for the estimated proportion of total DRG payments 
made to outlier cases. Similarly, section 1886(d)(9)(B)(iv) of the Act 
requires the Secretary to adjust the large urban and other standardized 
amounts applicable to hospitals in Puerto Rico to account for the 
estimated proportion of total DRG payments made to outlier cases. 
Furthermore, under section 1886(d)(5)(A)(iv) of the Act, outlier 
payments for any year must be projected to be not less than 5 percent 
nor more than 6 percent of total payments based on DRG prospective 
payment rates.
    i. FY 1999 Outlier Thresholds. For FY 1998, the fixed loss cost 
outlier threshold is equal to the prospective payment for the DRG plus 
the IME and DSH payments plus $11,050 ($10,080 for hospitals that have 
not yet entered the prospective payment system for capital-related 
costs). The marginal cost factor for cost outliers (the percent of 
costs paid after costs for the case exceed the threshold) is 80 
percent. We applied an outlier adjustment to the FY 1998 standardized 
amounts of 0.948840 for the large urban and other areas rates and 
0.9382 for the capital Federal rate.
    We proposed to establish a fixed loss cost outlier threshold for FY 
1999 equal to the prospective payment rate for the DRG plus the IME and 
DSH payments plus $11,350 ($10,355 for hospitals that have not yet 
entered the prospective payment system for capital-related costs). In 
addition, we proposed to maintain the marginal cost factor for cost 
outliers at 80 percent. In setting the final FY 1999 outlier 
thresholds, we used updated data and a revised cost inflation factor. 
In this final rule, we are establishing a fixed loss cost outlier 
threshold for FY 1999 equal to the prospective payment rate for the DRG 
plus IME and DSH payments plus $11,100 ($10,129 for hospitals that have 
not yet entered the prospective payment system for capital-related 
costs). In addition, we are maintaining the marginal cost factor for 
cost outliers at 80 percent. In FY 1994, we began using a cost 
inflation factor rather than a charge inflation factor to update billed 
charges for purposes of estimating outlier payments. This refinement 
was made to improve our estimation methodology. For FY 1998, we used a 
cost inflation factor of minus 2.005 percent (a cost per case decrease 
of 2.005 percent). In the proposed rule, based on data then available, 
we used a cost inflation factor of minus 1.831 percent to set outlier 
thresholds for FY 1999. Based on the most recent data available, we are 
using a cost inflation factor of minus 1.724 percent to set the final 
FY 1999 outlier thresholds.
    ii. Other changes concerning outliers. In accordance with section 
1886(d)(5)(A)(iv) of the Act, we calculated outlier thresholds so that 
outlier payments are projected to equal 5.1 percent of total payments 
based on DRG prospective payment rates. In accordance with section 
1886(d)(3)(E), we reduced the FY 1999 standardized amounts by the same 
percentage to account for the projected proportion of payments paid to 
outliers.
    As stated in the September 1, 1993 final rule (58 FR 46348), we 
establish outlier thresholds that are applicable to both inpatient 
operating costs and inpatient capital-related costs. When we modeled 
the combined operating and capital outlier payments, we found that 
using a common set of thresholds resulted in a higher percentage of 
outlier payments for capital-related costs than for operating costs. We 
project that the thresholds for FY 1999 will result in outlier payments 
equal to 5.1 percent of operating DRG payments and 6.1 percent of 
capital payments based on the Federal rate.
    The proposed outlier adjustment factors applied to the standardized 
amounts for FY 1999 were as follows:

------------------------------------------------------------------------
                                                   Operating    Capital 
                                                 standardized   federal 
                                                    amounts       rate  
------------------------------------------------------------------------
National.......................................      0.948819     0.9378
Puerto Rico....................................      0.972962     0.9626
------------------------------------------------------------------------

    The final outlier adjustment factors applied to the standardized 
amounts for FY 1999 are as follows:

------------------------------------------------------------------------
                                                   Operating    Capital 
                                                 standardized   federal 
                                                    amounts       rate  
------------------------------------------------------------------------
National.......................................      0.948740     0.9392
Puerto Rico....................................      0.972959     0.9634
------------------------------------------------------------------------

    As in the proposed rule, we apply the outlier adjustment factors 
after removing the effects of the FY 1998 outlier adjustment factors on 
the standardized amounts.
    Table 8A in section VI of this addendum contains the updated 
Statewide average operating cost-to-charge ratios for urban hospitals 
and for rural hospitals to be used in calculating cost outlier payments 
for those hospitals for which the intermediary is unable to compute a 
reasonable hospital-specific cost-to-charge ratio. These Statewide

[[Page 41009]]

average ratios would replace the ratios published in the August 29, 
1997 final rule with comment period (62 FR 46113), effective October 1, 
1998. Table 8B contains comparable Statewide average capital cost-to-
charge ratios. These average ratios would be used to calculate cost 
outlier payments for those hospitals for which the intermediary 
computes operating cost-to-charge ratios lower than 0.217484 or greater 
than 1.27282 and capital cost-to-charge ratios lower than 0.01313 or 
greater than 0.17490. This range represents 3.0 standard deviations 
(plus or minus) from the mean of the log distribution of cost-to-charge 
ratios for all hospitals. We note that the cost-to-charge ratios in 
Tables 8A and 8B will be used during FY 1999 when hospital-specific 
cost-to-charge ratios based on the latest settled cost report are 
either not available or outside the three standard deviations range.
    iii. FY 1997 and FY 1998 outlier payments. In the August 29, 1997 
final rule with comment period (62 FR 46041), we stated that, based on 
available data, we estimated that actual FY 1997 outlier payments would 
be approximately 4.8 percent of actual total DRG payments. This was 
computed by simulating payments using actual FY 1996 bill data 
available at the time. That is, the estimate of actual outlier payments 
did not reflect actual FY 1997 bills but instead reflected the 
application of FY 1997 rates and policies to available FY 1996 bills. 
Our current estimate, using available FY 1997 bills, is that actual 
outlier payments for FY 1997 were approximately 5.5 percent of actual 
total DRG payments. We note that the MedPAR file for FY 1997 discharges 
continues to be updated.
    We currently estimate that actual outlier payments for FY 1998 will 
be approximately 5.4 percent of actual total DRG payments, slightly 
higher than the 5.1 percent we projected in setting outlier policies 
for FY 1998. This estimate is based on simulations using the March 1998 
update of the provider-specific file and the March 1998 update of the 
FY 1997 MedPAR file (discharge data for FY 1997 bills). We used these 
data to calculate an estimate of the actual outlier percentage for FY 
1998 by applying FY 1998 rates and policies to available FY 1997 bills.
    We received one comment on outliers, which commended us for 
improving our outlier estimation methodology.
5. FY 1999 Standardized Amounts
    The adjusted standardized amounts are divided into labor and 
nonlabor portions. Table 1A (Table 1E for ``temporary relief'' 
hospitals) contains the two national standardized amounts that are 
applicable to all hospitals, except for hospitals in Puerto Rico. Under 
section 1886(d)(9)(A)(ii) of the Act, the Federal portion of the Puerto 
Rico payment rate is based on the discharge-weighted average of the 
national large urban standardized amount and the national other 
standardized amount (as set forth in Table 1A and 1E). The labor and 
nonlabor portions of the national average standardized amounts for 
Puerto Rico hospitals are set forth in Table 1C (Table 1F for 
``temporary relief'' hospitals). These tables also include the Puerto 
Rico standardized amounts.

B. Adjustments for Area Wage Levels and Cost of Living

    Tables 1A, 1C, 1E and 1F, as set forth in section VI of this 
addendum, contain the labor-related and nonlabor-related shares used to 
calculate the prospective payment rates for hospitals located in the 50 
States, the District of Columbia, and Puerto Rico. This section 
addresses two types of adjustments to the standardized amounts that are 
made in determining the prospective payment rates as described in this 
addendum.
1. Adjustment for Area Wage Levels
    Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require 
that an adjustment be made to the labor-related portion of the 
prospective payment rates to account for area differences in hospital 
wage levels. This adjustment is made by multiplying the labor-related 
portion of the adjusted standardized amounts by the appropriate wage 
index for the area in which the hospital is located. In section III of 
the preamble, we discuss certain revisions we are making to the wage 
index. The wage index is set forth in Tables 4A through 4F of this 
addendum.
2. Adjustment for Cost of Living in Alaska and Hawaii
    Section 1886(d)(5)(H) of the Act authorizes an adjustment to take 
into account the unique circumstances of hospitals in Alaska and 
Hawaii. Higher labor-related costs for these two States are taken into 
account in the adjustment for area wages described above. For FY 1999, 
we are adjusting the payments for hospitals in Alaska and Hawaii by 
multiplying the nonlabor portion of the standardized amounts by the 
appropriate adjustment factor contained in the table below.

 Table of Cost-of-Living Adjustment Factors, Alaska and Hawaii Hospitals
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
Alaska--All areas.............................................     1.25 
Hawaii:                                                         ........
  County of Honolulu..........................................     1.225
  County of Hawaii............................................     1.15 
  County of Kauai.............................................     1.225
  County of Maui..............................................     1.225
  County of Kalawao...........................................     1.225
------------------------------------------------------------------------

    (The above factors are based on data obtained from the U.S. 
Office of Personnel Management.)

C. DRG Relative Weights

    As discussed in section II of the preamble, we have developed a 
classification system for all hospital discharges, assigning them into 
DRGs, and have developed relative weights for each DRG that reflect the 
resource utilization of cases in each DRG relative to Medicare cases in 
other DRGs. Table 5 of section VI of this addendum contains the 
relative weights that we will use for discharges occurring in FY 1999. 
These factors have been recalibrated as explained in section II.C of 
the preamble.

D. Calculation of Prospective Payment Rates for FY 1999 General Formula 
for Calculation of Prospective Payment Rates for FY 1999

    Prospective payment rate for all hospitals located outside of 
Puerto Rico except sole community hospitals and Medicare-dependent, 
small rural hospitals = Federal rate.
    Prospective payment rate for sole community hospitals = Whichever 
of the following rates yields the greatest aggregate payment: 100 
percent of the Federal rate, 100 percent of the updated FY 1982 
hospital-specific rate, or 100 percent of the updated FY 1987 hospital-
specific rate.
    Prospective payment rate for Medicare-dependent, small rural 
hospitals = 100 percent of the Federal rate plus, if the greater of the 
updated FY 1982 hospital-specific rate or the updated FY 1987 hospital-
specific rate is higher than the Federal rate, 50 percent of the 
difference between the applicable hospital-specific rate and the 
Federal rate.
    Prospective payment rate for Puerto Rico = 50 percent of the Puerto 
Rico rate + 50 percent of a discharge-weighted average of the national 
large urban standardized amount and the national other standardized 
amount.
1. Federal Rate
    For discharges occurring on or after October 1, 1998 and before 
October 1,

[[Page 41010]]

1999, except for sole community hospitals, Medicare-dependent, small 
rural hospitals, and hospitals in Puerto Rico, the hospital's payment 
is based exclusively on the Federal national rate.
    The payment amount is determined as follows:
    Step 1--Select the appropriate national standardized amount 
considering the type of hospital and designation of the hospital as 
large urban or other (see Table 1A or 1E, in section VI of this 
addendum).
    Step 2--Multiply the labor-related portion of the standardized 
amount by the applicable wage index (see Tables 4A, 4B, and 4C in 
section VI of this addendum).
    Step 3--For hospitals in Alaska and Hawaii, multiply the nonlabor-
related portion of the standardized amount by the appropriate cost-of-
living adjustment factor.
    Step 4--Add the amount from Step 2 and the nonlabor-related portion 
of the standardized amount (adjusted if appropriate under Step 3).
    Step 5--Multiply the final amount from Step 4 by the relative 
weight corresponding to the appropriate DRG (see Table 5 in section VI 
of this addendum).
2. Hospital-Specific Rate (Applicable Only to Sole Community Hospitals 
and Medicare-Dependent, Small Rural Hospitals)
    Sections 1886(d)(5)(D)(i) and (b)(3)(C) of the Act provide that 
sole community hospitals are paid based on whichever of the following 
rates yields the greatest aggregate payment: the Federal rate, the 
updated hospital-specific rate based on FY 1982 cost per discharge, or 
the updated hospital-specific rate based on FY 1987 cost per discharge.
    Sections 1886(d)(5)(G) and (b)(3)(D) of the Act provide that 
Medicare-dependent, small rural hospitals are paid based on whichever 
of the following rates yields the greatest aggregate payment: the 
Federal rate or the Federal rate plus 50 percent of the difference 
between the Federal rate and the greater of the updated hospital-
specific rate based on FY 1982 and FY 1987 cost per discharge.
    Hospital-specific rates have been determined for each of these 
hospitals based on both the FY 1982 cost per discharge and the FY 1987 
cost per discharge. For a more detailed discussion of the calculation 
of the FY 1982 hospital-specific rate and the FY 1987 hospital-specific 
rate, we refer the reader to the September 1, 1983 interim final rule 
(48 FR 39772); the April 20, 1990 final rule with comment (55 FR 
15150); and the September 4, 1990 final rule (55 FR 35994).
    a. Updating the FY 1982 and FY 1987 hospital-specific rates for FY 
1999. We are increasing the hospital-specific rates by 0.5 percent (the 
hospital market basket percentage increase of 2.4 percent minus 1.9 
percentage points) for sole community hospitals and Medicare-dependent, 
small rural hospitals located in all areas for FY 1999. Section 
1886(b)(3)(C)(iv) of the Act provides that the update factor applicable 
to the hospital-specific rates for sole community hospitals equals the 
update factor provided under section 1886(b)(3)(B)(iv) of the Act, 
which, for FY 1999, is the market basket rate of increase minus 1.9 
percentage points. Section 1886(b)(3)(D) of the Act provides that the 
update factor applicable to the hospital-specific rates for Medicare-
dependent, small rural hospitals equals the update factor provided 
under section 1886(b)(3)(B)(iv) of the Act, which, for FY 1999, is the 
market basket rate of increase minus 1.9 percentage points.
    b. Calculation of hospital-specific rate. For sole community 
hospitals and Medicare-dependent, small rural hospitals, the applicable 
FY 1999 hospital-specific rate would be calculated by increasing the 
hospital's hospital-specific rate for the preceding fiscal year by the 
applicable update factor (0.5 percent), which is the same as the update 
for all prospective payment hospitals except ``temporary relief'' 
hospitals. In addition, the hospital-specific rate would be adjusted by 
the budget neutrality adjustment factor (that is, 0.999006) as 
discussed in section II.A.4.a of this Addendum. This resulting rate 
would be used in determining under which rate a sole community hospital 
or Medicare-dependent, small rural hospital is paid for its discharges 
beginning on or after October 1, 1998, based on the formula set forth 
above.
3. General Formula for Calculation of Prospective Payment Rates for 
Hospitals Located in Puerto Rico Beginning on or After October 1, 1998 
and Before October 1, 1999
    a. Puerto Rico rate. The Puerto Rico prospective payment rate is 
determined as follows:
    Step 1--Select the appropriate adjusted average standardized amount 
considering the large urban or other designation of the hospital (see 
Table 1C or 1F of section VI of this addendum).
    Step 2--Multiply the labor-related portion of the standardized 
amount by the appropriate Puerto Rico-specific wage index (see Table 4F 
in section VI of this addendum).
    Step 3--Add the amount from Step 2 and the nonlabor-related portion 
of the standardized amount.
    Step 4--Multiply the result in Step 3 by 50 percent.
    Step 5--Multiply the amount from Step 4 by the appropriate DRG 
relative weight (see Table 5 in section VI of this addendum).
    b. National rate. The national prospective payment rate is 
determined as follows:
    Step 1--Multiply the labor-related portion of the national average 
standardized amount (see Table 1C or 1F of section VI of the addendum) 
by the appropriate national wage index (see Tables 4A and 4B in section 
VI of this addendum).
    Step 2--Add the amount from Step 1 and the nonlabor-related portion 
of the national average standardized amount.
    Step 3--Multiply the result in Step 2 by 50 percent.
    Step 4--Multiply the amount from Step 3 by the appropriate DRG 
relative weight (see Table 5 in section VI of this addendum).
    The sum of the Puerto Rico rate and the national rate computed 
above equals the prospective payment for a given discharge for a 
hospital located in Puerto Rico.

III. Changes to the Payment Rates for Blood Clotting Factor for 
Hemophilia Inpatients

    As discussed in our August 29, 1997 final rule with comment period 
(62 FR 46002) and our May 12, 1998 final rule (63 FR 26327), section 
4452 of Public Law 105-33 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 and who 
are hospital inpatients for discharges occurring on or after October 1, 
1997.
    We are calculating the add-on payment for FY 1999 using the same 
methodology we described in the August 29, 1997 and May 12, 1998 final 
rules. That is, we are establishing a price per unit of clotting factor 
based on the average wholesale price (AWP). To identify the AWP, we are 
using the most recent data available from First Databank. The add-on 
payment amount for each clotting factor, as described by HCFA's Common 
Procedure Coding System (HCPCS), is based on the median AWP of the 
several products available in that category of factor, discounted by 15 
percent.

[[Page 41011]]

    Based on this methodology, the prices per unit of factor for FY 
1999 are as follows:

J7190 Factor VIII (antihemophilic factor, human)...............     0.78
J7192 Factor VIII (antihemophilic factor, recombinant).........     1.00
J7194 Factor IX (complex)......................................     0.38
J7196 Other hemophilia clotting factors (e.g., anti-inhibitors)     1.10
Q0160 Factor IX (antihemophilic factor, purified,                       
 nonrecombinant)...............................................     0.93
Q0161 Factor IX (antihemophilic factor, purified, recombinant).     1.00
                                                                        

    These prices for blood clotting factor administered to inpatients 
who have hemophilia will be effective for discharges beginning on or 
after October 1, 1998 through September 30, 1999. Payment will be made 
for blood clotting factor only if there is an ICD-9-CM diagnosis code 
for hemophilia included on the bill.

IV. Changes to Payment Rates for Inpatient Capital-Related Costs 
for FY 1999

    The prospective payment system for hospital inpatient capital-
related costs was implemented for cost reporting periods beginning on 
or after October 1, 1991. Effective with that cost reporting period and 
during a 10-year transition period extending through FY 2001, hospital 
inpatient capital-related costs are paid on the basis of an increasing 
proportion of the capital prospective payment system Federal rate and a 
decreasing proportion of a hospital's historical costs for capital.
    The basic methodology for determining Federal capital prospective 
rates is set forth at Secs. 412.308 through 412.352. Below we discuss 
the factors that we used to determine the Federal rate and the 
hospital-specific rates for FY 1999. The rates will be effective for 
discharges occurring on or after October 1, 1998.
    For FY 1992, we computed the standard Federal payment rate for 
capital-related costs under the prospective payment system by updating 
the FY 1989 Medicare inpatient capital cost per case by an actuarial 
estimate of the increase in Medicare inpatient capital costs per case. 
Each year after FY 1992 we update the standard Federal rate, as 
provided in Sec. 412.308(c)(1), to account for capital input price 
increases and other factors. Also, Sec. 412.308(c)(2) provides that the 
Federal rate is adjusted annually by a factor equal to the estimated 
proportion of outlier payments under the Federal rate to total capital 
payments under the Federal rate. In addition, Sec. 412.308(c)(3) 
requires that the Federal rate be reduced by an adjustment factor equal 
to the estimated proportion of payments for exceptions under 
Sec. 412.348. Furthermore, Sec. 412.308(c)(4)(ii) requires that the 
Federal rate be adjusted so that the annual DRG reclassification and 
the recalibration of DRG weights and changes in the geographic 
adjustment factor are budget neutral. For FYs 1992 through 1995, 
Sec. 412.352 required that the Federal rate also be adjusted by a 
budget neutrality factor so that aggregate payments for inpatient 
hospital capital costs were projected to equal 90 percent of the 
payments that would have been made for capital-related costs on a 
reasonable cost basis during the fiscal year. That provision expired in 
FY 1996. Section 412.308(b)(2) describes the 7.4 percent reduction to 
the rate made in FY 1994, and Sec. 412.308(b)(3) describes the 0.28 
percent reduction to the rate made in FY 1996 as a result of the 
revised policy of paying for transfers. In the FY 1998 final rule with 
comment period (62 FR 45966) we implemented section 4402 of the BBA, 
which required that for discharges occurring on or after October 1, 
1997 and before October 1, 2002, the unadjusted standard Federal rate 
is reduced by 17.78 percent. A small part of that reduction will be 
restored effective October 1, 2002.
    For each hospital, the hospital-specific rate was calculated by 
dividing the hospital's Medicare inpatient capital-related costs for a 
specified base year by its Medicare discharges (adjusted for 
transfers), and dividing the result by the hospital's case mix index 
(also adjusted for transfers). The resulting case-mix adjusted average 
cost per discharge was then updated to FY 1992 based on the national 
average increase in Medicare's inpatient capital cost per discharge and 
adjusted by the exceptions payment adjustment factor and the budget 
neutrality adjustment factor to yield the FY 1992 hospital-specific 
rate. Since FY 1992, the hospital-specific rate has been updated 
annually for inflation and for changes in the exceptions payment 
adjustment factor. For FYs 1992 through 1995, the hospital-specific 
rate was also adjusted by a budget neutrality adjustment factor. In the 
FY 1998 final rule with comment period (62 FR 46012) we implemented 
section 4402 of the BBA, which required that for discharges occurring 
on or after October 1, 1997 and before October 1, 2002, the unadjusted 
hospital-specific rate is reduced by 17.78 percent. A small part of 
that reduction will also be restored effective October 1, 2002.
    To determine the appropriate budget neutrality adjustment factor 
and the exceptions payment adjustment factor, we developed a dynamic 
model of Medicare inpatient capital-related costs, that is, a model 
that projects changes in Medicare inpatient capital-related costs over 
time. With the expiration of the budget neutrality provision, the model 
is still used to estimate the exceptions payment adjustment and other 
factors. The model and its application are described in greater detail 
in Appendix B of this final rule.
    In accordance with section 1886(d)(9)(A) of the Act, under the 
prospective payment system for inpatient operating costs, hospitals 
located in Puerto Rico are paid for operating costs under a special 
payment formula. Prior to FY 1998, hospitals in Puerto Rico were paid a 
blended rate that consisted of 75 percent of the applicable 
standardized amount specific to Puerto Rico hospitals and 25 percent of 
the applicable national average standardized amount. However, effective 
October 1, 1997, as a result of section 4406 of the BBA, operating 
payments to hospitals in Puerto Rico are based on a blend of 50 percent 
of the applicable standardized amount specific to Puerto Rico hospitals 
and 50 percent of the applicable national average standardized amount. 
In conjunction with this change to the operating blend percentage, 
effective with discharges on or after October 1, 1997, we compute 
capital payments to hospitals in Puerto Rico based on a blend of 50 
percent of the Puerto Rico rate and 50 percent of the Federal rate. 
Section 412.374 provides for the use of this blended payment system for 
payments to Puerto Rico hospitals under the prospective payment system 
for inpatient capital-related costs. Accordingly, for capital-related 
costs we compute a separate payment rate specific to Puerto Rico 
hospitals using the same methodology used to compute the national 
Federal rate for capital.

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

    For FY 1998, the Federal rate was $371.51. In the proposed rule, we 
stated that the proposed FY 1999 Federal rate was $377.25. In this 
final rule, we are establishing a FY 1999 Federal rate of $378.05.
    In the discussion that follows, we explain the factors that were 
used to determine the FY 1999 Federal rate. In particular, we explain 
why the FY 1999 Federal rate has increased 1.76 percent compared to the 
FY 1998 Federal rate. Even though we estimate that Medicare hospital 
inpatient discharges will decline by approximately 2.25 percent between 
FY 1998 and FY 1999, we also estimate that aggregate capital payments

[[Page 41012]]

will increase by 2.78 percent during this same period. This aggregate 
increase is primarily due to the change in the federal rate blend 
percentage from 70 percent to 80 percent, the 1.76 percent increase in 
the rate, and a projected increase in case mix.
    The major factor contributing to the increase in the capital 
Federal rate for FY 1999 relative to FY 1998 is that the FY 1999 
exceptions reduction factor is 1.28 percent higher than the factor for 
FY 1998. The exceptions reduction factor equals 1 minus the projected 
percentage of exceptions payments. We estimate that the projected 
percentage of exceptions payments for FY 1999 will be lower than the 
projected percentage for FY 1998; accordingly, the FY 1999 rate 
reflects less of a reduction to account for exceptions than the FY 1998 
rate.
    Total payments to hospitals under the prospective payment system 
are relatively unaffected by changes in the capital prospective 
payments. Since capital payments constitute about 10 percent of 
hospital payments, a 1 percent change in the capital Federal rate 
yields only about 0.1 percent change in actual payments to hospitals. 
Aggregate payments under the capital prospective payment transition 
system are estimated to increase in FY 1999 compared to FY 1998.
1. Standard Federal Rate Update
    a. Description of the update framework. Under section 
412.308(c)(1), the standard Federal rate is updated on the basis of an 
analytical framework that takes into account changes in a capital input 
price index (CIPI) and other factors. The update framework consists of 
a CIPI and several policy adjustment factors. Specifically, we have 
adjusted the projected CIPI rate of increase as appropriate each year 
for case-mix index related changes, for intensity, and for errors in 
previous CIPI forecasts. The proposed rule reflected an update factor 
of 0.2 percent, based on data available at that time. Under the update 
framework the final update factor for FY 1999 is 0.1 percent. This 
update factor is based on a projected 0.7 percent increase in the CIPI, 
policy adjustment factors of -0.2, and a forecast error correction of 
-0.4 percent. We explain the basis for the FY 1999 CIPI projection in 
section D of this addendum. Here we describe the policy adjustments 
that have been applied.
    The case-mix index is the measure of the average DRG weight for 
cases paid under the prospective payment system. Because the DRG weight 
determines the prospective payment for each case, any percentage 
increase in the case-mix index corresponds to an equal percentage 
increase in hospital payments.
    The case-mix index can change for any of several reasons:
    <bullet> The average resource use of Medicare patients changes 
(``real'' case-mix change);
    <bullet> Changes in hospital coding of patient records result in 
higher weight DRG assignments (``coding effects''); and
    <bullet> The annual DRG reclassification and recalibration changes 
may not be budget neutral (``reclassification effect'').
    We define real case-mix change as actual changes in the mix (and 
resource requirements) of Medicare patients as opposed to changes in 
coding behavior that result in assignment of cases to higher-weighted 
DRGs but do not reflect higher resource requirements. In the update 
framework for the prospective payment system for operating costs, we 
adjust the update upwards to allow for real case-mix change, but remove 
the effects of coding changes on the case-mix index. We also remove the 
effect on total payments of prior changes to the DRG classifications 
and relative weights, in order to retain budget neutrality for all 
case-mix index-related changes other than patient severity. (For 
example, we adjusted for the effects of the FY 1992 DRG 
reclassification and recalibration as part of our FY 1994 update 
recommendation.) The operating adjustment consists of a reduction for 
total observed case-mix change, an increase for the portion of case-mix 
change that we determine is due to real case-mix change rather than 
coding modifications, and an adjustment for the effect of prior DRG 
reclassification and recalibration changes. We have adopted this case-
mix index adjustment in the capital update framework as well.
    For FY 1999, we are projecting a 1.0 percent increase in the case-
mix index. We estimate that real case-mix increase will equal 0.8 
percent in FY 1999. Therefore, the net adjustment for case-mix change 
in FY 1999 is--0.2 percentage points.
    We estimate that DRG reclassification and recalibration result in a 
0.0 percent change in the case mix when compared with the case-mix 
index that would have resulted if we had not made the reclassification 
and recalibration changes to the DRGs.
    The capital update framework contains an adjustment for forecast 
error. The input price index forecast is based on historical trends and 
relationships ascertainable at the time the update factor is 
established for the upcoming year. In any given year there may be 
unanticipated price fluctuations that may result in differences between 
the actual increase in prices faced by hospitals and the forecast used 
in calculating the update factors. In setting a prospective payment 
rate under the framework, we make an adjustment for forecast error only 
if our estimate of the capital input price index rate of increase for 
any year is off by 0.25 percentage points or more. There is a 2-year 
lag between the forecast and the measurement of the forecast error. We 
estimate a forecast error of -0.4 percentage points in the update for 
FY 1997. That is, current data indicate that the FY 1997 CIPI used in 
calculating the FY 1997 update factor overstated price increases by 0.4 
percent. Therefore we are making a -0.4 percent adjustment for forecast 
error in the update for FY 1999.
    Under the capital prospective payment system framework, we also 
make an adjustment for changes in intensity. We calculate this 
adjustment using the same methodology and data as in the framework for 
the operating prospective payment system. The intensity factor for the 
operating update framework reflects how hospital services are utilized 
to produce the final product, that is, the discharge. This component 
accounts for changes in the use of quality-enhancing services, changes 
in within-DRG severity, and expected modification of practice patterns 
to remove cost-ineffective services.
    We calculate case-mix constant intensity as the change in total 
charges per admission, adjusted for price level changes (the CPI 
hospital component), and changes in real case mix. The use of total 
charges in the calculation of the intensity factor makes it a total 
intensity factor, that is, charges for capital services are already 
built into the calculation of the factor. We have, therefore, 
incorporated the intensity adjustment from the operating update 
framework into the capital update framework. Without reliable estimates 
of the proportions of the overall annual intensity increases that are 
due, respectively, to ineffective practice patterns and to the 
combination of quality-enhancing new technologies and within-DRG 
complexity, we assume, as in the revised operating update framework, 
that one-half of the annual increase is due to each of these factors. 
The capital update framework thus provides an add-on to the input price 
index rate of increase of one-half of the estimated annual increase in 
intensity to allow for within-DRG severity increases and the adoption 
of quality-enhancing technology.

[[Page 41013]]

    For FY 1999, we have developed a Medicare-specific intensity 
measure based on a 5-year average using FY 1993-1997 data. In 
determining case-mix constant intensity, we found that observed case-
mix increase was 0.9 percent in FY 1993, 0.8 percent in FY 1994, 1.7 
percent in FY 1995, 1.6 percent in FY 1996, and 0.3 percent in FY 1997. 
For FY 1995 and FY 1996, we estimate that real case-mix increase was 
1.0 to 1.4 percent each year. The estimate for those years is supported 
by past studies of case-mix change by the RAND Corporation. The most 
recent study was ``Has DRG Creep Crept Up? Decomposing the Case Mix 
Index Change Between 1987 and 1988'' by G. M. Carter, J. P. Newhouse, 
and D. A. Relles, R-4098-HCFA/ProPAC (1991). The study suggested that 
real case-mix change was not dependent on total change, but was usually 
a fairly steady 1.0 to 1.5 percent per year. We use 1.4 percent as the 
upper bound because the RAND study did not take into account that 
hospitals may have induced doctors to document medical records more 
completely in order to improve payment. Following that study, we 
consider up to 1.4 percent of observed case-mix change as real for FY 
1992 through FY 1997. Based on this analysis, we believe that all of 
the observed case-mix increase for FY 1993, FY 1994 and FY 1997 is 
real.
    We calculate case-mix constant intensity as the change in total 
charges per admission, adjusted for price level changes (the CPI 
hospital component), and changes in real case-mix. Given estimates of 
real case mix of 0.9 percent for FY 1993, 0.8 percent for FY 1994, 1.0 
percent for FY 1995, and 1.0 percent for FY 1996, and 0.3 percent for 
FY 1997, we estimate that case-mix constant intensity declined by an 
average 1.5 percent during FYs 1993 through 1997, for a cumulative 
decrease of 7.3 percent. If we assume that real case-mix increase was 
0.9 percent for FY 1993, 0.8 percent for FY 1994, 1.4 percent for FY 
1995, 1.4 percent for FY 1996 and 0.3 percent for FY 1997, we estimate 
that case-mix constant intensity declined by an average 1.6 percent 
during FYs 1993 through 1997, for a cumulative decrease of 7.7 percent. 
Since we estimate that intensity has declined during that period, we 
are making a 0.0 percent intensity adjustment for FY 1999.
    In summary, the FY 1999 final update under our framework is 0.1 
percent. This update factor is based on a projected 0.7 percent 
increase in the CIPI, policy adjustment factors of -0.2, and a forecast 
error correction of -0.4 percent.
    b. Comparison of HCFA and MedPAC update recommendations. As 
discussed in the proposed rule, MedPAC recommended a 0.0 to 0.7 percent 
update to the standard Federal rate and we recommended a 0.2 percent 
update. (See the May 8, 1998 proposed rule for a discussion of the 
differences between the MedPAC and HCFA update frameworks (63 FR 
25615)). In this final rule, as discussed in the previous section, we 
are implementing a 0.1 percent update to the capital Federal rate.
    Comment: MedPAC noted our update recommendation of 0.2 percent was 
within the range of the 0.0 percent to 0.7 percent update which they 
had recommended. They also restated a comment from their March report, 
that although the operating and capital payment rates are determined 
separately, they are related to the costs generated by providing 
hospital services to the same Medicare patients, and distinguishing 
between them for payment purposes is arbitrary and does not foster 
efficient hospital decision-making about resource allocation. Since the 
transition to fully prospective payment for capital will end on 
September 30, 2001, the objective of combining the two payment systems 
should be kept in mind.
    Response: Several years ago ProPAC made a similar comment 
recommending the adoption of a single update framework for adjusting 
operating and capital prospective payment rates when the transition to 
full Federal rate capital payments is complete. In the September 1, 
1995 prospective payment system final rule (60 FR 45816) we responded 
that our long term goal was to develop a single update framework and 
that we would begin development of a unified framework. We stated that 
in the meantime we would maintain as much consistency as possible with 
the current operating framework in order to facilitate the eventual 
development of a unified framework. We believe that because of the 
similarities in the operating and capital update frameworks, they could 
be combined without too much difficulty. We maintain our goal of 
combining the update frameworks at the end of the capital transition 
period and may examine combining the payment systems post transition.
2. Outlier Payment Adjustment Factor
    Section 412.312(c) establishes a unified outlier methodology for 
inpatient operating and inpatient capital-related costs. A single set 
of thresholds is used to identify outlier cases for both inpatient 
operating and inpatient capital-related payments. Outlier payments are 
made only on the portion of the Federal rate that is used to calculate 
the hospital's inpatient capital-related payments (for example, 80 
percent for cost reporting periods beginning in FY 1999 for hospitals 
paid under the fully prospective methodology). Section 412.308(c)(2) 
provides that the standard Federal rate for inpatient capital-related 
costs be reduced by an adjustment factor equal to the estimated 
proportion of outlier payments under the Federal rate to total 
inpatient capital-related payments under the Federal rate. The outlier 
thresholds are set so that operating outlier payments are projected to 
be 5.1 percent of total operating DRG payments. The inpatient capital-
related outlier reduction factor reflects the inpatient capital-related 
outlier payments that would be made if all hospitals were paid 100 
percent of the Federal rate. For purposes of calculating the outlier 
thresholds and the outlier reduction factor, we model payments as if 
all hospitals were paid 100 percent of the Federal rate because, as 
explained above, outlier payments are made only on the portion of the 
Federal rate that is included in the hospital's inpatient capital-
related payments.
    In the August 29, 1997 final rule with comment period, we estimated 
that outlier payments for capital in FY 1998 would equal 6.18 percent 
of inpatient capital-related payments based on the Federal rate. 
Accordingly, we applied an outlier adjustment factor of 0.9382 to the 
Federal rate. For FY 1999, we estimate that outlier payments for 
capital will equal 6.08 percent of inpatient capital-related payments 
based on the Federal rate. We are, therefore, establishing an outlier 
adjustment factor of 0.9392 to the Federal rate. Thus, estimated 
capital outlier payments for FY 1999 represent a smaller percentage of 
total capital standard payments than in FY 1998.
    The outlier reduction factors are not built permanently into the 
rates; that is, they are not applied cumulatively in determining the 
Federal rate. Therefore, the net change in the outlier adjustment to 
the Federal rate for FY 1999 is 1.0011 (0.9392/0.9382). Thus, the 
outlier adjustment increases the FY 1999 Federal rate by 0.11 percent 
(1.0011-1) compared with the FY 1998 outlier adjustment.
3. Budget Neutrality Adjustment Factor for Changes in DRG 
Classifications and Weights and the Geographic Adjustment Factor
    Section 412.308(c)(4)(ii) requires that the Federal rate be 
adjusted so that

[[Page 41014]]

aggregate payments for the fiscal year based on the Federal rate after 
any changes resulting from the annual DRG reclassification and 
recalibration and changes in the GAF are projected to equal aggregate 
payments that would have been made on the basis of the Federal rate 
without such changes. We use the actuarial model, described in Appendix 
B, to estimate the aggregate payments that would have been made on the 
basis of the Federal rate without changes in the DRG classifications 
and weights and in the GAF. We also use the model to estimate aggregate 
payments that would be made on the basis of the Federal rate as a 
result of those changes. We then use these figures to compute the 
adjustment required to maintain budget neutrality for changes in DRG 
weights and in the GAF.
    For FY 1998, we calculated a GAF/DRG budget neutrality factor of 
0.9989. In the proposed rule for FY 1999, we proposed a GAF/DRG budget 
neutrality factor of 1.0032. In this final rule, based on calculations 
using updated data, we are applying a factor of 1.0027. The GAF/DRG 
budget neutrality factors are built permanently into the rates; that 
is, they are applied cumulatively in determining the Federal rate. This 
follows from the requirement that estimated aggregate payments each 
year be no more than they would have been in the absence of the annual 
DRG reclassification and recalibration and changes in the GAF. The 
incremental change in the adjustment from FY 1998 to FY 1999 is 1.0027. 
The cumulative change in the rate due to this adjustment is 1.0028 (the 
product of the incremental factors for FY 1993, FY 1994, FY 1995, FY 
1996, FY 1997, FY 1998, and FY 1999: 0.9980 x 1.0053 x 0.9998 x 0.9994 
x 0.9987 x 0.9989 x 1.0027 = 1.0028).
    This factor accounts for DRG reclassifications and recalibration 
and for changes in the GAF. It also incorporates the effects on the GAF 
of FY 1999 geographic reclassification decisions made by the MGCRB 
compared to FY 1998 decisions. However, it does not account for changes 
in payments due to changes in the disproportionate share and indirect 
medical education adjustment factors or in the large urban add-on.
4. Exceptions Payment Adjustment Factor
    Section 412.308(c)(3) requires that the standard Federal rate for 
inpatient capital-related costs be reduced by an adjustment factor 
equal to the estimated proportion of additional payments for exceptions 
under Sec. 412.348 relative to total payments under the hospital-
specific rate and Federal rate. We use an actuarial model described in 
Appendix B to determine the exceptions payment adjustment factor.
    For FY 1998, we estimated that exceptions payments would equal 3.41 
percent of aggregate payments based on the Federal rate and the 
hospital-specific rate. Therefore, we applied an exceptions reduction 
factor of 0.9659 (1--0.0341) in determining the Federal rate. In the 
May 8, 1998 proposed rule, we estimated that exceptions payments for FY 
1999 would equal 2.39 percent of aggregate payments based on the 
Federal rate and the hospital-specific rate. Therefore, we proposed an 
exceptions payment reduction factor of 0.9761 to the Federal rate for 
FY 1999. For this final rule, based on updated data, we estimate that 
exceptions payments for FY 1999 will equal 2.17 percent of aggregate 
payments based on the Federal rate and the hospital-specific rate. We 
are, therefore, applying an exceptions payment reduction factor of 
0.9783 (1--0.0217) to the Federal rate for FY 1999. The final 
exceptions reduction factor for FY 1999 is 1.28 percent higher than the 
factor for FY 1998 and .23 percent higher than the factor in the FY 
1999 proposed rule.
    The exceptions reduction factors are not built permanently into the 
rates; that is, the factors are not applied cumulatively in determining 
the Federal rate. Therefore, the net adjustment to the FY 1999 Federal 
rate is 0.9783/0.9659, or 1.0128.
5. Standard Capital Federal Rate for FY 1999
    For FY 1998, the capital Federal rate was $371.51. With the changes 
we proposed to the factors used to establish the Federal rate, we 
proposed that the FY 1999 Federal rate would be $377.25. In this final 
rule, we are establishing a FY 1999 Federal rate of $378.05. The 
Federal rate for FY 1999 was calculated as follows:
    <bullet> The FY 1999 update factor is 1.0010, that is, the update 
is 0.10 percent.
    <bullet> The FY 1999 budget neutrality adjustment factor that is 
applied to the standard Federal payment rate for changes in the DRG 
relative weights and in the GAF is 1.0027.
    <bullet> The FY 1999 outlier adjustment factor is 0.9392.
    <bullet> The FY 1999 exceptions payments adjustment factor is 
0.9783.
    Since the Federal rate has already been adjusted for differences in 
case mix, wages, cost of living, indirect medical education costs, and 
payments to hospitals serving a disproportionate share of low-income 
patients, we have made no additional adjustments in the standard 
Federal rate for these factors other than the budget neutrality factor 
for changes in the DRG relative weights and the GAF.
    We are providing a chart that shows how each of the factors and 
adjustments for FY 1999 affected the computation of the FY 1999 Federal 
rate in comparison to the FY 1998 Federal rate. The FY 1999 update 
factor has the effect of increasing the Federal rate by 0.10 percent 
compared to the rate in FY 1998, while the final geographic and DRG 
budget neutrality factor has the effect of increasing the Federal rate 
by 0.27 percent. The FY 1999 outlier adjustment factor has the effect 
of increasing the Federal rate by 0.11 percent compared to FY 1998. The 
FY 1999 exceptions reduction factor has the effect of increasing the 
Federal rate by 1.27 percent compared to the exceptions reduction 
factor for FY 1998. The combined effect of all the changes is to 
increase the Federal rate by 1.76 percent compared to the Federal rate 
for FY 1998.

              Comparison of Factors and Adjustments--FY 1998 Federal Rate and FY 1999 Federal Rate              
----------------------------------------------------------------------------------------------------------------
                                                                                                       Percent  
                                                                FY 98         FY 99        Change       change  
----------------------------------------------------------------------------------------------------------------
Update factor \1\.........................................        1.0090        1.0010       1.0010         0.10
GAF/DRG Adjustment Factor \1\.............................        0.9989        1.0027       1.0027         0.27
Outlier Adjustment Factor \2\.............................        0.9382        0.9392       1.0011         0.11
Exceptions Adjustment Factor \2\..........................        0.9659        0.9783       1.0128         1.28
Federal Rate..............................................     $371.51       $378.05         1.0176        1.76 
----------------------------------------------------------------------------------------------------------------
\1\ The update factor and the GAF/DRG budget neutrality factors are built permanently into the rates. Thus, for 
  example, the incremental change from FY 1998 to FY 1999 resulting from the application of the GAF/DRG budget  
  neutrality factor for FY 1999 is 1.0027.                                                                      

[[Page 41015]]

                                                                                                                
\2\ The outlier reduction factor and the exceptions reduction factor are not built permanently into the rates;  
  that is, these factors are not applied cumulatively in determining the rates. Thus, for example, the net      
  change resulting from the application of the FY 1999 outlier reduction factor is 0.9392/0.9382, or 1.0011.    

    We are also providing a chart that shows how the final FY 1999 
Federal rate differs from the proposed FY 1999 Federal rate.

       Comparison of Factors and Adjustments--FY 1999 Proposed Federal Rate and FY 1999 Final Federal Rate      
----------------------------------------------------------------------------------------------------------------
                                                             Proposed FY                               Percent  
                                                                 99        Final FY 99     Change       change  
----------------------------------------------------------------------------------------------------------------
Update factor.............................................        1.0020        1.0010       0.9990        -0.10
GAF/DRG Adjustment Factor.................................        1.0032        1.0027       0.9995        -0.05
Outlier Adjustment Factor.................................        0.9378        0.9392       1.0015         0.15
Exceptions Adjustment Factor..............................        0.9761        0.9783       1.0023         0.23
Federal Rate..............................................     $377.25       $378.05         1.0021         0.21
----------------------------------------------------------------------------------------------------------------

6. Special Rate for Puerto Rico Hospitals
    As explained at the beginning of this section, hospitals in Puerto 
Rico are paid based on 50 percent of the Puerto Rico rate and 50 
percent of the Federal rate. The Puerto Rico rate is derived from the 
costs of Puerto Rico hospitals only, while the Federal rate is derived 
from the costs of all acute care hospitals participating in the 
prospective payment system (including Puerto Rico). To adjust 
hospitals' capital payments for geographic variations in capital costs, 
we apply a geographic adjustment factor (GAF) to both portions of the 
blended rate. The GAF is calculated using the operating PPS wage index 
and varies depending on the MSA or rural area in which the hospital is 
located. We use the Puerto Rico wage index to determine the GAF for the 
Puerto Rico part of the capital blended rate and the national wage 
index to determine the GAF for the national part of the blended rate.
    Since we implemented a separate GAF for Puerto Rico, we applied 
separate budget neutrality adjustments for the national GAF and for the 
Puerto Rico GAF. We applied the same budget neutrality factor for DRG 
reclassifications and recalibration nationally and for Puerto Rico. 
Separate adjustments were unnecessary for FY 1998 since the Puerto Rico 
specific GAF was implemented that year. For FY 1999 the Puerto Rico GAF 
budget neutrality factor is 0.9988, while the DRG adjustment is 1.0034, 
for a combined cumulative adjustment of 1.0022. (For a more detailed 
explanation of this change see Appendix B.)
    In computing the payment for a particular Puerto Rico hospital, the 
Puerto Rico portion of the rate (50%) is multiplied by the Puerto Rico-
specific GAF for the MSA in which the hospital is located, and the 
national portion of the rate (50%) is multiplied by the national GAF 
for the MSA in which the hospital is located (which is computed from 
national data for all hospitals in the United States and Puerto Rico). 
In FY 1998, we implemented a 17.78 percent reduction to the Puerto Rico 
rate as a result of the BBA.
    For FY 1998, before application of the GAF, the special rate for 
Puerto Rico hospitals was $177.57. With the changes we proposed to the 
factors used to determine the rate, the proposed FY 1999 special rate 
for Puerto Rico was $180.73. In this final rule, the FY 1999 capital 
rate for Puerto Rico is $181.10.

B. Determination of Hospital-Specific Rate Update

    Section 412.328(e) of the regulations provides that the hospital-
specific rate for FY 1999 be determined by adjusting the FY 1998 
hospital-specific rate by the following factors:
1. Hospital-Specific Rate Update Factor
    The hospital-specific rate is updated in accordance with the update 
factor for the standard Federal rate determined under 
Sec. 412.308(c)(1). For FY 1999, we are updating the hospital-specific 
rate by a factor of 1.0010.
2. Exceptions Payment Adjustment Factor
    For FYs 1992 through FY 2001, the updated hospital-specific rate is 
multiplied by an adjustment factor to account for estimated exceptions 
payments for capital-related costs under Sec. 412.348, determined as a 
proportion of the total amount of payments under the hospital-specific 
rate and the Federal rate. For FY 1999, we estimated in the proposed 
rule that exceptions payments would be 2.39 percent of aggregate 
payments based on the Federal rate and the hospital-specific rate. 
Therefore, we proposed that the updated hospital-specific rate be 
adjusted by a factor of 0.9761. In this final rule, we estimate that 
exceptions payments will be 2.17 percent of aggregate payments based on 
the Federal rate and the hospital-specific rate. Accordingly, for FY 
1999, we are applying an exceptions reduction factor of 0.9783 to the 
hospital-specific rate. The exceptions reduction factors are not built 
permanently into the rates; that is, the factors are not applied 
cumulatively in determining the hospital-specific rate. The net 
adjustment to the FY 1999 hospital-specific rate is 0.9783/0.9659, or 
1.0128.
3. Net Change to Hospital-Specific Rate
    We are providing a chart to show the net change to the hospital-
specific rate. The chart shows the factors for FY 1998 and FY 1999 and 
the net adjustment for each factor. It also shows that the cumulative 
net adjustment from FY 1998 to FY 1999 is 1.0138, which represents a 
increase of 1.38 percent to the hospital-specific rate. For each 
hospital, the FY 1999 hospital-specific rate is determined by 
multiplying the FY 1998 hospital-specific rate by the cumulative net 
adjustment of 1.0138.

                            FY 1999 Update and Adjustments to Hospital-Specific Rates                           
----------------------------------------------------------------------------------------------------------------
                                                                                            Net        Percent  
                                                                 FY 98        FY 99      adjustment     change  
----------------------------------------------------------------------------------------------------------------
Update Factor...............................................       1.0090       1.0010       1.0010         0.10
Exceptions Payment Adjustment Factor........................       0.9659       0.9783       1.0128         1.28

[[Page 41016]]

                                                                                                                
Cumulative Adjustments......................................       0.9746       0.9880       1.0138        1.38 
----------------------------------------------------------------------------------------------------------------
Note: The update factor for the hospital-specific rate is applied cumulatively in determining the rates. Thus,  
  the incremental increase in the update factor from FY 1998 to FY 1999 is 1.0020. In contrast, the exceptions  
  payment adjustment factor is not applied cumulatively. Thus, for example, the incremental increase in the     
  exceptions reduction factor from FY 1998 to FY 1999 is 0.9783/0.9659, or 1.0128.                              

C. Calculation of Inpatient Capital-Related Prospective Payments for FY 
1999

    During the capital prospective payment system transition period, a 
hospital is paid for the inpatient capital-related costs under one of 
two payment methodologies--the fully prospective payment methodology or 
the hold-harmless methodology. The payment methodology applicable to a 
particular hospital is determined when a hospital comes under the 
prospective payment system for capital-related costs by comparing its 
hospital-specific rate to the Federal rate applicable to the hospital's 
first cost reporting period under the prospective payment system. The 
applicable Federal rate was determined by making adjustments as 
follows:
    <bullet> For outliers by dividing the standard Federal rate by the 
outlier reduction factor for that fiscal year; and,
    <bullet> For the payment adjustment factors applicable to the 
hospital (that is, the hospital's GAF, the disproportionate share 
adjustment factor, and the indirect medical education adjustment 
factor, when appropriate).
    If the hospital-specific rate is above the applicable Federal rate, 
the hospital is paid under the hold-harmless methodology. If the 
hospital-specific rate is below the applicable Federal rate, the 
hospital is paid under the fully prospective methodology.
    For purposes of calculating payments for each discharge under both 
the hold-harmless payment methodology and the fully prospective payment 
methodology, the standard Federal rate is adjusted as follows: 
(Standard Federal Rate) x (DRG weight) x (GAF) x (Large Urban Add-on, 
if applicable) x (COLA adjustment for hospitals located in Alaska and 
Hawaii) x (1 + Disproportionate Share Adjustment Factor + IME 
Adjustment Factor, if applicable). The result is the adjusted Federal 
rate.
    Payments under the hold-harmless methodology are determined under 
one of two formulas. A hold-harmless hospital is paid the higher of the 
following:
    <bullet> 100 percent of the adjusted Federal rate for each 
discharge; or
    <bullet> An old capital payment equal to 85 percent (100 percent 
for sole community hospitals) of the hospital's allowable Medicare 
inpatient old capital costs per discharge for the cost reporting period 
plus a new capital payment based on a percentage of the adjusted 
Federal rate for each discharge. The percentage of the adjusted Federal 
rate equals the ratio of the hospital's allowable Medicare new capital 
costs to its total Medicare inpatient capital-related costs in the cost 
reporting period.
    Once a hospital receives payment based on 100 percent of the 
adjusted Federal rate in a cost reporting period beginning on or after 
October 1, 1994 (or the first cost reporting period after obligated 
capital that is recognized as old capital under Sec. 412.302(c) is put 
in use for patient care, if later), the hospital continues to receive 
capital prospective payment system payments on that basis for the 
remainder of the transition period.
    Payment for each discharge under the fully prospective methodology 
is the sum of the following:
    <bullet> The hospital-specific rate multiplied by the DRG relative 
weight for the discharge and by the applicable hospital-specific 
transition blend percentage for the cost reporting period; and
    <bullet> The adjusted Federal rate multiplied by the Federal 
transition blend percentage.
    The blend percentages for cost reporting periods beginning in FY 
1999 are 80 percent of the adjusted Federal rate and 20 percent of the 
hospital-specific rate.
    Hospitals may also receive outlier payments for those cases that 
qualify under the thresholds established for each fiscal year. Section 
412.312(c) provides for a single set of thresholds to identify outlier 
cases for both inpatient operating and inpatient capital-related 
payments. Outlier payments are made only on that portion of the Federal 
rate that is used to calculate the hospital's inpatient capital-related 
payments. For fully prospective hospitals, that portion is 80 percent 
of the Federal rate for discharges occurring in cost reporting periods 
beginning during FY 1999. Thus, a fully prospective hospital will 
receive 80 percent of the capital-related outlier payment calculated 
for the case for discharges occurring in cost reporting periods 
beginning in FY 1999. For hold-harmless hospitals paid 85 percent of 
their reasonable costs for old inpatient capital, the portion of the 
Federal rate that is included in the hospital's outlier payments is 
based on the hospital's ratio of Medicare inpatient costs for new 
capital to total Medicare inpatient capital costs. For hold-harmless 
hospitals that are paid 100 percent of the Federal rate, 100 percent of 
the Federal rate is included in the hospital's outlier payments.
    The outlier thresholds for FY 1999 are in section II.A.4.c of this 
Addendum. For FY 1999, a case qualifies as a cost outlier if the cost 
for the case (after standardization for the indirect teaching 
adjustment and disproportionate share adjustment) is greater than the 
prospective payment rate for the DRG plus $11,100.
    During the capital prospective payment system transition period, a 
hospital may also receive an additional payment under an exceptions 
process if its total inpatient capital-related payments are less than a 
minimum percentage of its allowable Medicare inpatient capital-related 
costs. The minimum payment level is established by class of hospital 
under Sec. 412.348. The minimum payment levels for portions of cost 
reporting periods beginning in FY 1999 are:
    <bullet> Sole community hospitals (located in either an urban or 
rural area), 90 percent;
    <bullet> Urban hospitals with at least 100 beds and a 
disproportionate share patient percentage of at least 20.2 percent; and
    <bullet> Urban hospitals with at least 100 beds that qualify for 
disproportionate share payments under Sec. 412.106(c)(2), 80 percent; 
and
    <bullet> All other hospitals, 70 percent.
    Under Sec. 412.348(d), the amount of the exceptions payment is 
determined by comparing the cumulative payments made to the hospital 
under the capital prospective payment system to the cumulative minimum 
payment levels applicable to the hospital for each cost reporting 
period subject to that system.

[[Page 41017]]

Any amount by which the hospital's cumulative payments exceed its 
cumulative minimum payment is deducted from the additional payment that 
would otherwise be payable for a cost reporting period.
    New hospitals are exempted from the capital prospective payment 
system for their first 2 years of operation and are paid 85 percent of 
their reasonable costs during that period. A new hospital's old capital 
costs are its allowable costs for capital assets that were put in use 
for patient care on or before the later of December 31, 1990 or the 
last day of the hospital's base year cost reporting period, and are 
subject to the rules pertaining to old capital and obligated capital as 
of the applicable date. Effective with the third year of operation, we 
will pay the hospital under either the fully prospective methodology, 
using the appropriate transition blend in that Federal fiscal year, or 
the hold-harmless methodology. If the hold-harmless methodology is 
applicable, the hold-harmless payment for assets in use during the base 
period would extend for 8 years, even if the hold-harmless payments 
extend beyond the normal transition period.

D. Capital Input Price Index

1. Background
    Like the prospective payment hospital operating input price index, 
the Capital Input Price Index (CIPI) is a fixed-weight price index that 
measures the price changes associated with costs during a given year. 
The CIPI differs from the operating input price index in one important 
aspect--the CIPI reflects the vintage nature of capital, which is the 
acquisition and use of capital over time. Capital expenses in any given 
year are determined by the stock of capital in that year (that is, 
capital that remains on hand from all current and prior capital 
acquisitions). An index measuring capital price changes needs to 
reflect this vintage nature of capital. Therefore, the CIPI was 
developed to capture the vintage nature of capital by using a weighted-
average of past capital purchase prices up to and including the current 
year.
    Using Medicare cost reports, AHA data, and Securities Data 
Corporation data, a vintage-weighted price index was developed to 
measure price increases associated with capital expenses. We 
periodically update the base year for the operating and capital input 
prices to reflect the changing composition of inputs for operating and 
capital expenses. Currently, the CIPI is based to FY 1992 and was last 
rebased in 1997. The most recent explanation of the CIPI was discussed 
in the final rule with comment period for FY 1998 published in the 
August 29, 1997 Federal Register (62 FR 46050). The following Federal 
Register documents also describe development and revisions of the 
methodology involved with the construction of the CIPI: September 1, 
1992 (57 FR 40016), May 26, 1993 (58 FR 30448), September 1, 1993 (58 
FR 46490), May 27, 1994 (59 FR 27876), September 1, 1994 (59 FR 45517), 
June 2, 1995 (60 FR 29229), and September 1, 1995 (60 FR 45815), May 
31, 1996 (61 FR 27466), August 30, 1996 (61 FR 46196), and June 2, 1997 
(62 FR 29953), August 29, 1997 (67 FR 46050), and May 8, 1998 (63 FR 
25619).
2. Forecast of the CIPI for Federal Fiscal Year 1999
    DRI forecasts a 0.7 percent increase in the CIPI for FY 1999. This 
is the outcome of a projected 1.9 percent increase in vintage-weighted 
depreciation prices (building and fixed equipment, and movable 
equipment) and a 2.9 percent increase in other capital expense prices 
in FY 1999, partially offset by a 3.0 percent decline in vintage-
weighted interest rates in FY 1999. The weighted average of these three 
factors produces the 0.7 percent increase for the CIPI as a whole.

V. Changes to Payment Rates for Excluded Hospitals and Hospital 
Units: Rate-of-Increase Percentages

A. Rate-of-Increase Percentages for Excluded Hospitals and Hospital 
Units

    The inpatient operating costs of hospitals and hospital units 
excluded from the prospective payment system are subject to rate-of-
increase limits established under the authority of section 1886(b) of 
the Act, which is implemented in Sec. 413.40 of the regulations. Under 
these limits, an annual target amount (expressed in terms of the 
inpatient operating cost per discharge) is set for each hospital, based 
on the hospital's own historical cost experience trended forward by the 
applicable rate-of-increase percentages (update factors). In the case 
of a psychiatric hospital or unit, rehabilitation hospital or unit, or 
long-term care hospital, the target amount may not exceed the 75th 
percentile of target amounts for hospitals and units in the same class 
(psychiatric, rehabilitation, and long-term care). The target amount is 
multiplied by the number of Medicare discharges in a hospital's cost 
reporting period, yielding the ceiling on aggregate Medicare inpatient 
operating costs for the cost reporting period.
    Each hospital's target amount is adjusted annually, at the 
beginning of its cost reporting period, by an applicable update factor. 
Section 1886(b)(3)(B) of the Act provides that for cost reporting 
periods beginning on or after October 1, 1998 and before October 1, 
1999, the update factor is the market basket less a percentage point 
between 0 and 2.5 depending on the hospital's or unit's costs in 
relation to the ceiling. For hospitals with costs exceeding the ceiling 
by 10 percent or more, the update factor is the market basket increase. 
For hospitals with costs exceeding the ceiling by less than 10 percent, 
the update factor is the greater of 0 percent or the market basket 
minus .25 percent for each percentage point by which costs are less 
than 10 percent over the ceiling. For hospitals with costs equal to or 
less than the ceiling but greater than 66.7 percent of the ceiling, the 
update factor is the greater of 0 percent or the market basket minus 
2.5 percent. For hospitals with costs that do not exceed 66.7 percent 
of the ceiling, the update factor is 0.
    The most recent forecast of the market basket increase for FY 1999 
for hospitals and hospital units excluded from the prospective payment 
system is 2.4 percent; therefore, the update to a hospital's target 
amount for its cost reporting period beginning in FY 1999 would be 
between 0 and 2.4 percent.
    In addition, section 1886(b)(3)(H) of the Act provides that for 
cost reporting periods beginning on or after October 1, 1998 and before 
October 1, 1999, the target amount for psychiatric hospitals and units, 
rehabilitation hospitals and units, and long-term care hospitals may 
not exceed an updated cap that is based on the 75th percentile of 
target amounts for hospitals in the same class for cost reporting 
periods ending during FY 1996. The FY 1998 75th percentile target 
amounts were $10,534 for psychiatric hospitals and units, $19,104 for 
rehabilitation hospital and units, and $37,688 for long-term care 
hospitals. As discussed in detail in section VII. of the preamble, for 
purposes of calculating the caps, the statute requires the Secretary to 
first calculate the 75th percentile of the target amounts for each 
class of hospital (psychiatric, rehabilitation, or long-term care) for 
cost reporting periods ending during FY 1996. The resulting amounts are 
updated by the market basket percentage to the applicable fiscal year.

B. Wage Index Exceptions for Excluded Hospitals and Units

    In the August 30, 1991 final rule (56 FR 43232), we set forth our 
policy for target amount adjustments for

[[Page 41018]]

significant wage increases. Effective with cost reporting periods 
beginning on or after April 1, 1990, significant increases in wages 
since the base period are recognized as a basis for an adjustment in 
the target amount under Sec. 413.40(g).
    To qualify for an adjustment, the excluded hospital or hospital 
unit must be located in a labor market area for which the average 
hourly wage increased significantly more than the national average 
hourly wage between the hospital's base period and the period subject 
to the ceiling. We use the hospital wage index for prospective payment 
hospitals to determine the rate of increase in the average hourly wage 
in the labor market area. For a hospital to qualify for an adjustment, 
the wage index value for the cost reporting period subject to the 
ceiling must be at least 8 percent higher than the wage index based on 
wage survey data collected for the base year cost reporting period. If 
survey data are not available for one (or both) of the cost reporting 
periods used in the comparison, the wage index based on the latest 
available survey data collected before that cost reporting period will 
be used. For example, to make the comparison between a 1983 base period 
and a hospital's cost reporting period beginning in FY 1996, we would 
use the rate of increase between the wage index based on 1982 wage data 
and the wage index based on the FY 1995 data, since the FY 1995 data 
are the most recent data currently available. Further, the comparison 
is made without regard to geographic reclassifications made by the 
MGCRB under sections 1886(d) (8) and (10) of the Act. Therefore, the 
comparison is made based on the wage index value of the labor market 
area in which the hospital is actually located.
    We determine the amount of the adjustment for wage increases by 
considering three factors for the time between the base period and the 
period for which an adjustment is requested: The rate of increase in 
the hospital's average hourly wage; the rate of increase in the average 
hourly wage in the labor market area in which the hospital is located; 
and, the rate of increase in the national average hourly wage for 
hospital workers. The adjustment is limited to the amount by which the 
lower of the hospital's or the labor market area's rate of increase in 
average hourly wages significantly exceeds the national increase (that 
is, exceeds the national rate of increase by more than 8 percent). For 
purposes of computing the adjustment, the relative rate of increase in 
the average hourly wage for the labor market area is assumed to have 
been the same over each of the intervening years between the wage 
surveys.
    To determine the rate of increase in the national average hourly 
wage, we use the average hourly earnings (AHE) for hospital workers 
produced by the Bureau of Labor Statistics.
    The average hourly earnings for hospital workers show the following 
increases:

1992=4.8 percent
1993=3.6 percent
1994=2.7 percent
1995=3.3 percent
1996=3.1 percent
1997=2.0 percent
1998=2.6 percent
1999=2.7 percent

    We note that this section merely provides updated information with 
respect to areas that would qualify for the wage index adjustment under 
Sec. 413.30(g). This information was calculated in accordance with 
established policy and does not reflect any change in that policy. The 
geographic areas in which the percentage difference in wage indexes was 
sufficient to qualify for a wage index adjustment are listed in Table 
10 of section VI of the addendum to this final rule.

VI. Tables

    This section contains the tables referred to throughout the 
preamble to this final rule and in this Addendum. For purposes of this 
final rule, and to avoid confusion, we have retained the designations 
of Tables 1 through 5 that were first used in the September 1, 1983 
initial prospective payment final rule (48 FR 39844). Tables 1A, 1C, 
1D, 1E, 1F, 3C, 4A, 4B, 4C, 4D, 4E, 4F, 5, 6A, 6B, 6C, 6D, 6E, 6F, 6G, 
7A, 7B, 8A, 8B, and 10 are presented below. The tables presented below 
are as follows:

Table 1A--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor
Table 1C--Adjusted Operating Standardized Amounts for Puerto Rico, 
Labor/Nonlabor
Table 1D--Capital Standard Federal Payment Rate
Table 1E--National Adjusted Operating Standardized Amounts for 
``Temporary Relief'' Hospitals, Labor/Nonlabor
Table 1F--Adjusted Operating Standardized Amounts for ``Temporary 
Relief'' Hospitals in Puerto Rico, Labor/Nonlabor
Table 3C--Hospital Case Mix Indexes for Discharges Occurring in Federal 
Fiscal Year 1997 and Hospital Average Hourly Wage for Federal Fiscal 
Year 1999 Wage Index
Table 4A--Wage Index and Capital Geographic Adjustment Factor (GAF) for 
Urban Areas
Table 4B--Wage Index and Capital Geographic Adjustment Factor (GAF) for 
Rural Areas
Table 4C--Wage Index and Capital Geographic Adjustment Factor (GAF) for 
Hospitals That Are Reclassified
Table 4D--Average Hourly Wage for Urban Areas
Table 4E--Average Hourly Wage for Rural Areas
Table 4F--Puerto Rico Wage Index and Capital Geographic Adjustment 
Factor (GAF)
Table 5--List of Diagnosis Related Groups (DRGs), Relative Weighting 
Factors, Geometric Mean Length of Stay, and Arithmetic Mean Length of 
Stay Points Used in the Prospective Payment System
Table 6A--New Diagnosis Codes
Table 6B--New Procedure Codes
Table 6C--Invalid Diagnosis Codes
Table 6D--Invalid Procedure Codes
Table 6E--Revised Diagnosis Code Titles
Table 6F--Additions to the CC Exclusions List
Table 6G--Deletions to the CC Exclusions List
Table 7A--Medicare Prospective Payment System Selected Percentile 
Lengths of Stay FY 97 MEDPAR Update 03/98 GROUPER V15.0
Table 7B--Medicare Prospective Payment System Selected Percentile 
Lengths of Stay FY 97 MEDPAR Update 03/98 GROUPER V16.0
Table 8A--Statewide Average Operating Cost-to-Charge Ratios for Urban 
and Rural Hospitals (Case Weighted) July 1998
Table 8B--Statewide Average Capital Cost-to-Charge Ratios (Case 
Weighted) July 1998
Table 10--Percentage Difference on Wage Indexes for Areas that Qualify 
for a Wage Index Exception for Excluded Hospitals and Units

[[Page 41019]]



                   Table 1A.--National Adjusted Operating Standardized Amounts, Labor/Nonlabor                  
----------------------------------------------------------------------------------------------------------------
                    Large urban areas                                           Other areas                     
----------------------------------------------------------------------------------------------------------------
       Labor-related               Nonlabor-related              Labor-related             Nonlabor-related     
----------------------------------------------------------------------------------------------------------------
2,783.42...................                   1,313.41                    2,739.36                    1,113.47  
----------------------------------------------------------------------------------------------------------------


               Table 1C.--Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor               
----------------------------------------------------------------------------------------------------------------
                                                                  Large urban areas            Other areas      
                                                             ---------------------------------------------------
                                                                 Labor       Nonlabor      Labor       Nonlabor 
----------------------------------------------------------------------------------------------------------------
National....................................................     2,760.01     1,121.87     2,760.01     1,121.87
Puerto Rico.................................................     1,327.81       534.48     1,306.79       526.01
----------------------------------------------------------------------------------------------------------------


            Table 1D.--Capital Standard Federal Payment Rate            
------------------------------------------------------------------------
                                                                   Rate 
------------------------------------------------------------------------
National.......................................................   378.05
Puerto Rico....................................................   181.10
------------------------------------------------------------------------


 Table 1E.--National Adjusted Operating Standardized Amounts for ``Temporary Relief'' Hospitals, Labor/Nonlabor 
----------------------------------------------------------------------------------------------------------------
                    Large urban areas                                           Other areas                     
----------------------------------------------------------------------------------------------------------------
       Labor-related               Nonlabor-related              Labor-related             Nonlabor-related     
----------------------------------------------------------------------------------------------------------------
2,791.73...................                   1,134.76                    2,747.54                    1,116.79  
----------------------------------------------------------------------------------------------------------------


  Table 1F.--Adjusted Operating Standardized Amounts for ``Temporary Relief'' Hospitals in Puerto Rico, Labor/  
                                                    Nonlabor                                                    
----------------------------------------------------------------------------------------------------------------
                                                                  Large urban areas            Other areas      
                                                             ---------------------------------------------------
                                                                 Labor       Nonlabor      Labor       Nonlabor 
----------------------------------------------------------------------------------------------------------------
National....................................................     2,768.25     1,125.22     2,768.25     1,125.22
Puerto Rico.................................................     1,331.77       536.08     1,310.69       527.58
----------------------------------------------------------------------------------------------------------------

BILLING CODE 4120-01-P

[[Page 41020]]

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BILLING CODE 4120-01-C

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Table 4A.--Wage Index and Capital Geographic Adjustment Factor (GAF) for
                               Urban Areas                              
------------------------------------------------------------------------
                                                        Wage            
          Urban area (Constituent counties)             index      GAF  
------------------------------------------------------------------------
0040  Abilene, TX...................................    0.8083    0.8644
  Taylor, TX                                                            
0060  Aguadilla, PR.................................    0.4738    0.5996
  Aguada, PR                                                            
  Aguadilla, PR                                                         
  Moca, PR                                                              
0080  Akron, OH.....................................    0.9954    0.9968
  Portage, OH                                                           
  Summit, OH                                                            
0120  Albany, GA....................................    0.7993    0.8578
  Dougherty, GA                                                         
  Lee, GA                                                               
0160  Albany-Schenectady-Troy, NY...................    0.8629    0.9040
  Albany, NY                                                            
  Montgomery, NY                                                        
  Rensselaer, NY                                                        
  Saratoga, NY                                                          
  Schenectady, NY                                                       
  Schoharie, NY                                                         
0200  Albuquerque, NM...............................    0.8632    0.9042
  Bernalillo, NM                                                        
  Sandoval, NM                                                          
  Valencia, NM                                                          
0220  Alexandria, LA................................    0.8544    0.8978
  Rapides, LA                                                           
0240  Allentown-Bethlehem-Easton, PA................    1.0226    1.0154
  Carbon, PA                                                            
  Lehigh, PA                                                            
  Northampton, PA                                                       
0280  Altoona, PA...................................    0.9355    0.9554
  Blair, PA                                                             
0320  Amarillo, TX..................................    0.8509    0.8953
  Potter, TX                                                            
  Randall, TX                                                           
0380  Anchorage, AK.................................    1.3007    1.1973
  Anchorage, AK                                                         
0440  Ann Arbor, MI.................................    1.1057    1.0712
  Lenawee, MI                                                           
  Livingston, MI                                                        
  Washtenaw, MI                                                         
0450  Anniston, AL..................................    0.8676    0.9073
  Calhoun, AL                                                           
0460  Appleton-Oshkosh-Neenah, WI...................    0.8844    0.9193
  Calumet, WI                                                           
  Outagamie, WI                                                         
  Winnebago, WI                                                         
0470  Arecibo, PR...................................    0.4878    0.6117
  Arecibo, PR                                                           
  Camuy, PR                                                             
  Hatillo, PR                                                           
0480  Asheville, NC.................................    0.8960    0.9276
  Buncombe, NC                                                          
  Madison, NC                                                           
0500  Athens, GA....................................    0.8692    0.9085
  Clarke, GA                                                            
  Madison, GA                                                           
  Oconee, GA                                                            
0520  \1\ Atlanta, GA...............................    0.9936    0.9956
  Barrow, GA                                                            
  Bartow, GA                                                            
  Carroll, GA                                                           
  Cherokee, GA                                                          
  Clayton, GA                                                           
  Cobb, GA                                                              
  Coweta, GA                                                            
  DeKalb, GA                                                            
  Douglas, GA                                                           
  Fayette, GA                                                           
  Forsyth, GA                                                           
  Fulton, GA                                                            
  Gwinnett, GA                                                          
  Henry, GA                                                             
  Newton, GA                                                            
  Paulding, GA                                                          
  Pickens, GA                                                           
  Rockdale, GA                                                          
  Spalding, GA                                                          
  Walton, GA                                                            
0560  Atlantic-Cape May, NJ.........................                    
  Atlantic, NJ                                                          
  Cape May, NJ                                          1.0377    1.0257
0600  Augusta-Aiken, GA-SC..........................    0.9253    0.9482
  Columbia, GA                                                          
  McDuffie, GA                                                          
  Richmond, GA                                                          
  Aiken, SC                                                             
  Edgefield, SC                                                         
0640  \1\ Austin-San Marcos, TX.....................    0.8442    0.8905
  Bastrop, TX                                                           
  Caldwell, TX                                                          
  Hays, TX                                                              
  Travis, TX                                                            
  Williamson, TX                                                        
0680  \2\ Bakersfield, CA...........................    0.9959    0.9972
  Kern, CA                                                              
0720  \1\ Baltimore, MD.............................    0.9663    0.9768
  Anne Arundel, MD                                                      
  Baltimore, MD                                                         
  Baltimore City, MD                                                    
  Carroll, MD                                                           
  Harford, MD                                                           
  Howard, MD                                                            
  Queen Anne's, MD                                                      
0733  Bangor, ME....................................    0.9495    0.9651
  Penobscot, ME                                                         
0743  Barnstable-Yarmouth, MA.......................    1.5415    1.3449
  Barnstable, MA                                                        
0760  Baton Rouge, LA...............................    0.8891    0.9227
  Ascension, LA                                                         
  East Baton Rouge, LA                                                  
  Livingston, LA                                                        
  West Baton Rouge, LA                                                  
0840  Beaumont-Port Arthur, TX......................    0.9071    0.9354
  Hardin, TX                                                            
  Jefferson, TX                                                         
  Orange, TX                                                            
0860  Bellingham, WA................................    1.1459    1.0978
  Whatcom, WA                                                           
0870  \2\ Benton Harbor, MI.........................    0.8903    0.9235
  Berrien, MI                                                           
0875  \1\ Bergen-Passaic, NJ........................    1.1774    1.1183
  Bergen, NJ                                                            
  Passaic, NJ                                                           
0880  Billings, MT..................................    0.9162    0.9418
  Yellowstone, MT                                                       
0920  Biloxi-Gulfport-Pascagoula, MS................    0.8294    0.8798
  Hancock, MS                                                           
  Harrison, MS                                                          
  Jackson, MS                                                           
0960  Binghamton, NY................................    0.9078    0.9359
  Broome, NY                                                            
  Tioga, NY                                                             
1000  Birmingham, AL................................    0.9092    0.9369
  Blount, AL                                                            
  Jefferson, AL                                                         
  St. Clair, AL                                                         
  Shelby, AL                                                            
1010  Bismarck, ND..................................    0.8042    0.8614
  Burleigh, ND                                                          
  Morton, ND                                                            
1020  Bloomington, IN...............................    0.8984    0.9293
  Monroe, IN                                                            
1040  Bloomington-Normal, IL........................    0.8870    0.9212
  McLean, IL                                                            
1080  Boise City, ID................................    0.9209    0.9451
  Ada, ID                                                               
  Canyon, ID                                                            
1123  \1\ Boston-Worcester-Lawrence-Lowell-Brockton,                    
 MA-NH..............................................    1.1307    1.0878
  Bristol, MA                                                           
  Essex, MA                                                             
  Middlesex, MA                                                         
  Norfolk, MA                                                           
  Plymouth, MA                                                          
  Suffolk, MA                                                           
  Worcester, MA                                                         
  Hillsborough, NH                                                      
  Merrimack, NH                                                         
  Rockingham, NH                                                        
  Strafford, NH                                                         
1125  Boulder-Longmont, CO..........................    1.0059    1.0040
  Boulder, CO                                                           
1145  Brazoria, TX..................................    0.8925    0.9251
  Brazoria, TX                                                          
1150  Bremerton, WA.................................    1.1079    1.0727
  Kitsap, WA                                                            
1240  Brownsville-Harlingen-San Benito, TX..........    0.8255    0.8769
  Cameron, TX                                                           
1260  Bryan-College Station, TX.....................    0.8084    0.8645
  Brazos, TX                                                            
1280  \1\ Buffalo-Niagara Falls, NY.................    0.9607    0.9729
  Erie, NY                                                              
  Niagara, NY                                                           
1303  Burlington, VT................................    0.9616    0.9735
  Chittenden, VT                                                        
  Franklin, VT                                                          
  Grand Isle, VT                                                        
1310  Caguas, PR....................................    0.4419    0.5716
  Caguas, PR                                                            
  Cayey, PR                                                             
  Cidra, PR                                                             
  Gurabo, PR                                                            
  San Lorenzo, PR                                                       
1320  Canton-Massillon, OH..........................    0.8827    0.9181

[[Page 41053]]

                                                                        
  Carroll, OH                                                           
  Stark, OH                                                             
1350  Casper, WY....................................    0.9170    0.9424
  Natrona, WY                                                           
1360  Cedar Rapids, IA..............................    0.8833    0.9185
  Linn, IA                                                              
1400  Champaign-Urbana, IL..........................    0.8789    0.9154
  Champaign, IL                                                         
1440  Charleston-North Charleston, SC...............    0.9134    0.9399
  Berkeley, SC                                                          
  Charleston, SC                                                        
  Dorchester, SC                                                        
1480  Charleston, WV................................    0.9009    0.9310
  Kanawha, WV                                                           
  Putnam, WV                                                            
1520  \1\ Charlotte-Gastonia-Rock Hill, NC-SC.......    0.9562    0.9698
  Cabarrus, NC                                                          
  Gaston, NC                                                            
  Lincoln, NC                                                           
  Mecklenburg, NC                                                       
  Rowan, NC                                                             
  Stanly, NC                                                            
  Union, NC                                                             
  York, SC                                                              
1540  Charlottesville, VA...........................    1.0294    1.0200
  Albemarle, VA                                                         
  Charlottesville City, VA                                              
  Fluvanna, VA                                                          
  Greene, VA                                                            
1560  Chattanooga, TN-GA............................    0.9093    0.9370
  Catoosa, GA                                                           
  Dade, GA                                                              
  Walker, GA                                                            
  Hamilton, TN                                                          
  Marion, TN                                                            
1580  \2\ Cheyenne, WY..............................    0.8787    0.9153
  Laramie, WY                                                           
1600  \1\ Chicago, IL...............................    1.0469    1.0319
  Cook, IL                                                              
  DeKalb, IL                                                            
  DuPage, IL                                                            
  Grundy, IL                                                            
  Kane, IL                                                              
  Kendall, IL                                                           
  Lake, IL                                                              
  McHenry, IL                                                           
  Will, IL                                                              
1620  Chico-Paradise, CA............................    1.0167    1.0114
  Butte, CA                                                             
1640  \2\ Cincinnati, OH-KY-IN......................    0.9615    0.9735
  Dearborn, IN                                                          
  Ohio, IN                                                              
  Boone, KY                                                             
  Campbell, KY                                                          
  Gallatin, KY                                                          
  Grant, KY                                                             
  Kenton, KY                                                            
  Pendleton, KY                                                         
  Brown, OH                                                             
  Clermont, OH                                                          
  Hamilton, OH                                                          
  Warren, OH                                                            
1660  Clarksville-Hopkinsville, TN-KY...............    0.8231    0.8752
  Christian, KY                                                         
  Montgomery, TN                                                        
1680  \1\ Cleveland-Lorain-Elyria, OH...............    0.9907    0.9936
  Ashtabula, OH                                                         
  Cuyahoga, OH                                                          
  Geauga, OH                                                            
  Lake, OH                                                              
  Lorain, OH                                                            
  Medina, OH                                                            
1720  Colorado Springs, CO..........................    0.9410    0.9592
  El Paso, CO                                                           
1740  Columbia, MO..................................    0.8961    0.9276
  Boone, MO                                                             
1760  Columbia, SC..................................    0.9310    0.9522
  Lexington, SC                                                         
  Richland, SC                                                          
1800  Columbus, GA-AL...............................                    
  Russell, AL.......................................    0.8529    0.8968
  Chattahoochee, GA                                                     
  Harris, GA                                                            
  Muscogee, GA                                                          
1840  \1\ Columbus, OH..............................    0.9802    0.9864
  Delaware, OH                                                          
  Fairfield, OH                                                         
  Franklin, OH                                                          
  Licking, OH                                                           
  Madison, OH                                                           
  Pickaway, OH                                                          
1880  Corpus Christi, TX............................    0.8549    0.8982
  Nueces, TX                                                            
  San Patricio, TX                                                      
1900  \2\ Cumberland, MD-WV (Maryland Hospitals)....    0.8574    0.9000
  Allegany, MD                                                          
  Mineral, WV                                                           
1900  Cumberland, MD-WV (West Virginia Hospital)....    0.8259    0.8772
  Allegany, MD                                                          
  Mineral, WV                                                           
1920  \1\ Dallas, TX................................    0.9364    0.9560
  Collin, TX                                                            
  Dallas, TX                                                            
  Denton, TX                                                            
  Ellis, TX                                                             
  Henderson, TX                                                         
  Hunt, TX                                                              
  Kaufman, TX                                                           
  Rockwall, TX                                                          
1950  Danville, VA..................................    0.9065    0.9350
  Danville City, VA                                                     
  Pittsylvania, VA                                                      
1960  DavenportMoline-Rock Island, IA-IL............    0.8431    0.8897
  Scott, IA                                                             
  Henry, IL                                                             
  Rock Island, IL                                                       
2000  Dayton-Springfield, OH........................    0.9584    0.9713
  Clark, OH                                                             
  Greene, OH                                                            
  Miami, OH                                                             
  Montgomery, OH                                                        
2020  Daytona Beach, FL.............................    0.9153    0.9412
  Flagler, FL                                                           
  Volusia, FL                                                           
2030  Decatur, AL...................................    0.8251    0.8766
  Lawrence, AL                                                          
  Morgan, AL                                                            
2040  Decatur, IL...................................    0.8052    0.8621
  Macon, IL                                                             
2080  \1\ Denver, CO................................    1.0059    1.0040
  Adams, CO                                                             
  Arapahoe, CO                                                          
  Denver, CO                                                            
  Douglas, CO                                                           
  Jefferson, CO                                                         
2120  Des Moines, IA................................    0.8494    0.8942
  Dallas, IA                                                            
  Polk, IA                                                              
  Warren, IA                                                            
2160  \1\ Detroit, MI...............................    1.0567    1.0385
  Lapeer, MI                                                            
  Macomb, MI                                                            
  Monroe, MI                                                            
  Oakland, MI                                                           
  St. Clair, MI                                                         
  Wayne, MI                                                             
2180  Dothan, AL....................................    0.7909    0.8516
  Dale, AL                                                              
  Houston, AL                                                           
2190  Dover, DE.....................................    0.9383    0.9573
  Kent, DE                                                              
2200  Dubuque, IA...................................    0.8240    0.8758
  Dubuque, IA                                                           
2240  Duluth-Superior, MN-WI........................    1.0031    1.0021
  St. Louis, MN                                                         
  Douglas, WI                                                           
2281  Dutchess County, NY...........................    0.9904    0.9934
  Dutchess, NY                                                          
2290  \2\ Eau Claire, WI............................    0.8729    0.9111
  Chippewa, WI                                                          
  Eau Claire, WI                                                        
2320  El Paso, TX...................................    0.9235    0.9470
  El Paso, TX                                                           
2330  Elkhart-Goshen, IN............................    0.9388    0.9577
  Elkhart, IN                                                           
2335  \2\ Elmira, NY................................    0.8605    0.9022
  Chemung, NY                                                           
2340  Enid, OK......................................    0.7969    0.8560
  Garfield, OK                                                          
2360  Erie, PA......................................    0.9290    0.9508
  Erie, PA                                                              
2400  Eugene-Springfield, OR........................    1.1217    1.0818
  Lane, OR                                                              
2440  Evansville-Henderson, IN-KY...................    0.8547    0.8981

[[Page 41054]]

                                                                        
  Posey, IN                                                             
  Vanderburgh, IN                                                       
  Warrick, IN                                                           
  Henderson, KY                                                         
2520  Fargo-Moorhead, ND-MN.........................    0.9537    0.9681
  Clay, MN                                                              
  Cass, ND                                                              
2560  Fayetteville, NC..............................    0.8407    0.8880
  Cumberland, NC                                                        
2580  Fayetteville-Springdale-Rogers, AR............    0.8632    0.9042
  Benton, AR                                                            
  Washington, AR                                                        
2620  Flagstaff, AZ-UT..............................    0.9543    0.9685
  Coconino, AZ                                                          
  Kane, UT                                                              
2640  Flint, MI.....................................    1.1054    1.0710
  Genesee, MI                                                           
2650  Florence, AL..................................    0.7692    0.8355
  Colbert, AL                                                           
  Lauderdale, AL                                                        
2655  Florence, SC..................................    0.8520    0.8961
  Florence, SC                                                          
2670  Fort Collins-Loveland, CO.....................    1.0319    1.0217
  Larimer, CO                                                           
2680  \1\ Ft. Lauderdale, FL........................    0.9867    0.9909
  Broward, FL                                                           
2700  Fort Myers-Cape Coral, FL.....................    0.8936    0.9259
  Lee, FL                                                               
2710  Fort Pierce-Port St. Lucie, FL................    1.0263    1.0179
  Martin, FL                                                            
  St. Lucie, FL                                                         
2720  Fort Smith, AR-OK.............................    0.7639    0.8316
  Crawford, AR                                                          
  Sebastian, AR                                                         
  Sequoyah, OK                                                          
2750  \2\ Fort Walton Beach, FL.....................    0.8896    0.9230
  Okaloosa, FL                                                          
2760  Fort Wayne, IN................................    0.9066    0.9351
  Adams, IN                                                             
  Allen, IN                                                             
  De Kalb, IN                                                           
  Huntington, IN                                                        
  Wells, IN                                                             
  Whitley, IN                                                           
2800  \1\ Forth Worth-Arlington, TX.................    0.9729    0.9814
  Hood, TX                                                              
  Johnson, TX                                                           
  Parker, TX                                                            
  Tarrant, TX                                                           
2840  Fresno, CA....................................    1.0409    1.0278
  Fresno, CA                                                            
  Madera, CA                                                            
2880  Gadsden, AL...................................    0.8799    0.9161
  Etowah, AL                                                            
2900  Gainesville, FL...............................    0.9482    0.9642
  Alachua, FL                                                           
2920  Galveston-Texas City, TX......................    1.0848    1.0573
  Galveston, TX                                                         
2960  Gary, IN......................................    0.9482    0.9642
  Lake, IN                                                              
  Porter, IN                                                            
2975  \2\ Glens Falls, NY...........................    0.8605    0.9022
  Warren, NY                                                            
  Washington, NY                                                        
2980  Goldsboro, NC.................................    0.8548    0.8981
  Wayne, NC                                                             
2985  Grand Forks, ND-MN............................    0.8918    0.9246
  Polk, MN                                                              
  Grand Forks, ND                                                       
2995  Grand Junction, CO............................    0.9099    0.9374
  Mesa, CO                                                              
3000  \1\ Grand Rapids-Muskegon-Holland, MI.........    0.9992    0.9995
  Allegan, MI                                                           
  Kent, MI                                                              
  Muskegon, MI                                                          
  Ottawa, MI                                                            
3040  Great Falls, MT...............................    0.9304    0.9518
  Cascade, MT                                                           
3060  Greeley, CO...................................    0.9477    0.9639
  Weld, CO                                                              
3080  Green Bay, WI.................................    0.9268    0.9493
  Brown, WI                                                             
3120  \1\ Greensboro-Winston-Salem-High Point, NC...    0.9567    0.9701
  Alamance, NC                                                          
  Davidson, NC                                                          
  Davie, NC                                                             
  Forsyth, NC                                                           
  Guilford, NC                                                          
  Randolph, NC                                                          
  Stokes, NC                                                            
  Yadkin, NC                                                            
3150  Greenville, NC................................    0.9454    0.9623
  Pitt, NC                                                              
3160  Greenville-Spartanburg-Anderson, SC...........    0.9242    0.9475
  Anderson, SC                                                          
  Cherokee, SC                                                          
  Greenville, SC                                                        
  Pickens, SC                                                           
  Spartanburg, SC                                                       
3180  Hagerstown, MD................................    1.0204    1.0139
  Washington, MD                                                        
3200  Hamilton-Middletown, OH.......................    0.9253    0.9482
  Butler, OH                                                            
3240  Harrisburg-Lebanon-Carlisle, PA...............    1.0082    1.0056
  Cumberland, PA                                                        
  Dauphin, PA                                                           
  Lebanon, PA                                                           
  Perry, PA                                                             
3283  \1\<SUP>, \2\ Hartford, CT.........................    1.2100    1.1394
  Hartford, CT                                                          
  Litchfield, CT                                                        
  Middlesex, CT                                                         
  Tolland, CT                                                           
3285  \2\ Hattiesburg, MS...........................    0.7327    0.8082
  Forrest, MS                                                           
  Lamar, MS                                                             
3290  Hickory-Morganton-Lenoir, NC..................    0.8668    0.9067
  Alexander, NC                                                         
  Burke, NC                                                             
  Caldwell, NC                                                          
  Catawba, NC                                                           
3320  Honolulu, HI..................................    1.1535    1.1027
  Honolulu, HI                                                          
3350  Houma, LA.....................................    0.8215    0.8740
  Lafourche, LA                                                         
  Terrebonne, LA                                                        
3360  \1\ Houston, TX...............................    0.9904    0.9934
  Chambers, TX                                                          
  Fort Bend, TX                                                         
  Harris, TX                                                            
  Liberty, TX                                                           
  Montgomery, TX                                                        
  Waller, TX                                                            
3400  Huntington-Ashland, WV-KY-OH..................    0.9668    0.9771
  Boyd, KY                                                              
  Carter, KY                                                            
  Greenup, KY                                                           
  Lawrence, OH                                                          
  Cabell, WV                                                            
  Wayne, WV                                                             
3440  Huntsville, AL................................    0.8403    0.8877
  Limestone, AL                                                         
  Madison, AL                                                           
3480  \1\ Indianapolis, IN..........................    0.9852    0.9898
  Boone, IN                                                             
  Hamilton, IN                                                          
  Hancock, IN                                                           
  Hendricks, IN                                                         
  Johnson, IN                                                           
  Madison, IN                                                           
  Marion, IN                                                            
  Morgan, IN                                                            
  Shelby, IN                                                            
3500  Iowa City, IA.................................    0.9502    0.9656
  Johnson, IA                                                           
3520  Jackson, MI...................................    0.9244    0.9476
  Jackson, MI                                                           
3560  Jackson, MS...................................    0.8310    0.8809
  Hinds, MS                                                             
  Madison, MS                                                           
  Rankin, MS                                                            
3580  Jackson, TN...................................    0.8578    0.9003
  Madison, TN                                                           
  Chester, TN                                                           
3600  \1\ Jacksonville, FL..........................    0.8919    0.9246
  Clay, FL                                                              
  Duval, FL                                                             
  Nassau, FL                                                            
  St. Johns, FL                                                         
3605  \2\ Jacksonville, NC..........................    0.8130    0.8678
  Onslow, NC                                                            
3610  \2\ Jamestown, NY.............................    0.8605    0.9022
  Chautauqua, NY                                                        
3620  Janesville-Beloit, WI.........................    0.9071    0.9354
  Rock, WI                                                              
3640  Jersey City, NJ...............................    1.1623    1.1085
  Hudson, NJ                                                            

[[Page 41055]]

                                                                        
3660  Johnson City-Kingsport-Bristol, TN-VA.........    0.8792    0.9156
  Carter, TN                                                            
  Hawkins, TN                                                           
  Sullivan, TN                                                          
  Unicoi, TN                                                            
  Washington, TN                                                        
  Bristol City, VA                                                      
  Scott, VA                                                             
  Washington, VA                                                        
3680  \2\ Johnstown, PA.............................    0.8683    0.9078
  Cambria, PA                                                           
  Somerset, PA                                                          
3700  Jonesboro, AR.................................    0.7595    0.8283
  Craighead, AR                                                         
3710  Joplin, MO....................................    0.7890    0.8502
  Jasper, MO                                                            
  Newton, MO                                                            
3720  Kalamazoo-Battlecreek, MI.....................    1.1355    1.0909
  Calhoun, MI                                                           
  Kalamazoo, MI                                                         
  Van Buren, MI                                                         
3740  Kankakee, IL..................................    0.9438    0.9612
  Kankakee, IL                                                          
3760  \1\ Kansas City, KS-MO........................    0.9666    0.9770
  Johnson, KS                                                           
  Leavenworth, KS                                                       
  Miami, KS                                                             
  Wyandotte, KS                                                         
  Cass, MO                                                              
  Clay, MO                                                              
  Clinton, MO                                                           
  Jackson, MO                                                           
  Lafayette, MO                                                         
  Platte, MO                                                            
  Ray, MO                                                               
3800  Kenosha, WI...................................    0.9149    0.9409
  Kenosha, WI                                                           
3810  Killeen-Temple, TX............................    1.0131    1.0090
  Bell, TX                                                              
  Coryell, TX-                                                          
3840  Knoxville, TN.................................    0.8937    0.9259
  Anderson, TN                                                          
  Blount, TN                                                            
  Knox, TN                                                              
  Loudon, TN                                                            
  Sevier, TN                                                            
  Union, TN                                                             
3850  Kokomo, IN....................................    0.9295    0.9512
  Howard, IN                                                            
  Tipton, IN                                                            
3870  La Crosse, WI-MN..............................    0.8933    0.9256
  Houston, MN                                                           
  La Crosse, WI                                                         
3880  Lafayette, LA.................................    0.8311    0.8810
  Acadia, LA                                                            
  Lafayette, LA                                                         
  St. Landry, LA                                                        
  St. Martin, LA                                                        
3920  Lafayette, IN.................................    0.8928    0.9253
  Clinton, IN                                                           
  Tippecanoe, IN                                                        
3960  Lake Charles, LA..............................    0.7690    0.8354
  Calcasieu, LA                                                         
3980  Lakeland-Winter Haven, FL.....................    0.8896    0.9230
  Polk, FL                                                              
4000  Lancaster, PA.................................    0.9581    0.9711
  Lancaster, PA                                                         
4040  Lansing-East Lansing, MI......................    1.0112    1.0077
  Clinton, MI                                                           
  Eaton, MI                                                             
  Ingham, MI                                                            
4080  \2\ Laredo, TX................................    0.7441    0.8168
  Webb, TX                                                              
4100  Las Cruces, NM................................    0.8989    0.9296
  Dona Ana, NM                                                          
4120  \1\ Las Vegas, NV-AZ..........................    1.1438    1.0964
  Mohave, AZ                                                            
  Clark, NV                                                             
  Nye, NV                                                               
4150  Lawrence, KS..................................    0.8674    0.9072
  Douglas, KS                                                           
4200  Lawton, OK....................................    0.8716    0.9102
  Comanche, OK                                                          
4243  Lewiston-Auburn, ME...........................    0.9169    0.9423
  Androscoggin, ME                                                      
4280  Lexington, KY.................................    0.8525    0.8965
  Bourbon, KY                                                           
  Clark, KY                                                             
  Fayette, KY                                                           
  Jessamine, KY                                                         
  Madison, KY                                                           
  Scott, KY                                                             
  Woodford, KY                                                          
4320  Lima, OH......................................    0.8968    0.9281
  Allen, OH                                                             
  Auglaize, OH                                                          
4360  Lincoln, NE...................................    0.9323    0.9531
  Lancaster, NE                                                         
4400  Little Rock-North Little Rock, AR.............    0.8553    0.8985
  Faulkner, AR                                                          
  Lonoke, AR                                                            
  Pulaski, AR                                                           
  Saline, AR                                                            
4420  Longview-Marshall, TX.........................    0.8717    0.9103
  Gregg, TX                                                             
  Harrison, TX                                                          
  Upshur, TX                                                            
4480  \1\ Los Angeles-Long Beach, CA................    1.2070    1.1375
  Los Angeles, CA                                                       
4520  Louisville, KY-IN.............................    0.9113    0.9384
  Clark, IN                                                             
  Floyd, IN                                                             
  Harrison, IN                                                          
  Scott, IN                                                             
  Bullitt, KY                                                           
  Jefferson, KY                                                         
  Oldham, KY                                                            
4600  Lubbock, TX...................................    0.8514    0.8957
  Lubbock, TX                                                           
4640  Lynchburg, VA.................................    0.8919    0.9246
  Amherst, VA                                                           
  Bedford, VA                                                           
  Bedford City, VA                                                      
  Campbell, VA                                                          
  Lynchburg City, VA                                                    
4680  Macon, GA.....................................    0.8629    0.9040
  Bibb, GA                                                              
  Houston, GA                                                           
  Jones, GA                                                             
  Peach, GA                                                             
  Twiggs, GA                                                            
4720  Madison, WI...................................    1.0040    1.0027
  Dane, WI                                                              
4800  Mansfield, OH.................................    0.8552    0.8984
  Crawford, OH                                                          
  Richland, OH                                                          
4840  Mayaguez, PR..................................    0.4188    0.5510
  Anasco, PR                                                            
  Cabo Rojo, PR                                                         
  Hormigueros, PR                                                       
  Mayaguez, PR                                                          
  Sabana Grande, PR                                                     
  San German, PR                                                        
4880  McAllen-Edinburg-Mission, TX..................    0.8506    0.8951
  Hidalgo, TX                                                           
4890  Medford-Ashland, OR...........................    1.0042    1.0029
  Jackson, OR                                                           
4900  Melbourne-Titusville-Palm Bay, FL.............    0.9236    0.9470
  Brevard, FL                                                           
4920  \1\ Memphis, TN-AR-MS.........................    0.8371    0.8854
  Crittenden, AR                                                        
  DeSoto, MS                                                            
  Fayette, TN                                                           
  Shelby, TN                                                            
  Tipton, TN                                                            
4940  Merced, CA....................................    1.0240    1.0164
  Merced, CA                                                            
5000  \1\ Miami, FL.................................    1.0038    1.0026
  Dade, FL                                                              
5015  \1\ Middlesex-Somerset-Hunterdon, NJ..........    1.0785    1.0531
  Hunterdon, NJ                                                         
  Middlesex, NJ                                                         
  Somerset, NJ                                                          
5080  \1\ Milwaukee-Waukesha, WI....................    0.9135    0.9399
  Milwaukee, WI                                                         
  Ozaukee, WI                                                           
  Washington, WI                                                        
  Waukesha, WI                                                          
5120  \1\ Minneapolis-St. Paul, MN-WI...............    1.0877    1.0593
  Anoka, MN                                                             
  Carver, MN                                                            
  Chisago, MN                                                           
  Dakota, MN                                                            
  Hennepin, MN                                                          
  Isanti, MN                                                            
  Ramsey, MN                                                            
  Scott, MN                                                             
  Sherburne, MN                                                         
  Washington, MN                                                        
  Wright, MN                                                            

[[Page 41056]]

                                                                        
  Pierce, WI                                                            
  St. Croix, WI                                                         
5140  Missoula, MT..................................    0.9208    0.9451
  Missoula, MT                                                          
5160  Mobile, AL....................................    0.8395    0.8871
  Baldwin, AL                                                           
  Mobile, AL                                                            
5170  Modesto, CA...................................    1.0368    1.0251
  Stanislaus, CA                                                        
5190  \1\ Monmouth-Ocean, NJ........................    1.1341    1.0900
  Monmouth, NJ                                                          
  Ocean, NJ                                                             
5200  Monroe, LA....................................    0.8236    0.8756
  Ouachita, LA                                                          
5240  Montgomery, AL................................    0.7877    0.8492
  Autauga, AL                                                           
  Elmore, AL                                                            
  Montgomery, AL                                                        
5280  Muncie, IN....................................    0.9434    0.9609
  Delaware, IN                                                          
5330  Myrtle Beach, SC..............................    0.8196    0.8726
  Horry, SC                                                             
5345  Naples, FL....................................    1.0199    1.0136
  Collier, FL                                                           
5360  \1\ Nashville, TN.............................    0.9500    0.9655
  Cheatham, TN                                                          
  Davidson, TN                                                          
  Dickson, TN                                                           
  Robertson, TN                                                         
  Rutherford TN                                                         
  Sumner, TN                                                            
  Williamson, TN                                                        
  Wilson, TN                                                            
5380  \1\ Nassau-Suffolk, NY........................    1.3579    1.2331
  Nassau, NY                                                            
  Suffolk, NY                                                           
5483  \1\ New Haven-Bridgeport-Stamford-Waterbury-                      
 Danbury, CT........................................    1.2271    1.1504
  Fairfield, CT                                                         
  New Haven, CT                                                         
5523  \2\ New London-Norwich, CT....................    1.2100    1.1394
  New London, CT                                                        
5560  \1\ New Orleans, LA...........................    0.9330    0.9536
  Jefferson, LA                                                         
  Orleans, LA                                                           
  Plaquemines, LA                                                       
  St. Bernard, LA                                                       
  St. Charles, LA                                                       
  St. James, LA                                                         
  St. John The Baptist, LA                                              
  St. Tammany, LA                                                       
5600  \1\ New York, NY..............................    1.4431    1.2855
  Bronx, NY                                                             
  Kings, NY                                                             
  New York, NY                                                          
  Putnam, NY                                                            
  Queens, NY                                                            
  Richmond, NY                                                          
  Rockland, NY                                                          
  Westchester, NY                                                       
5640  \1\ Newark, NJ................................    1.0895    1.0605
  Essex, NJ                                                             
  Morris, NJ                                                            
  Sussex, NJ                                                            
  Union, NJ                                                             
  Warren, NJ                                                            
5660  Newburgh, NY-PA...............................    1.1247    1.0838
  Orange, NY                                                            
  Pike, PA                                                              
5720  \1\ Norfolk-Virginia Beach-Newport News, VA-NC    0.8214    0.8740
  Currituck, NC                                                         
  Chesapeake City, VA                                                   
  Gloucester, VA                                                        
  Hampton City, VA                                                      
  Isle of Wight, VA                                                     
  James City, VA                                                        
  Mathews, VA                                                           
  Newport News City, VA                                                 
  Norfolk City, VA                                                      
  Poquoson City, VA                                                     
  Portsmouth City, VA                                                   
  Suffolk City, VA                                                      
  Virginia Beach City, VA                                               
  Williamsburg City, VA                                                 
  York, VA                                                              
5775  \1\ Oakland, CA...............................    1.5194    1.3317
  Alameda, CA                                                           
  Contra Costa, CA                                                      
5790  Ocala, FL.....................................    0.9172    0.9425
  Marion, FL                                                            
5800  Odessa-Midland, TX............................    0.8683    0.9078
  Ector, TX                                                             
  Midland, TX                                                           
5880  \1\ Oklahoma City, OK.........................    0.8727    0.9110
  Canadian, OK                                                          
  Cleveland, OK                                                         
  Logan, OK                                                             
  McClain, OK                                                           
  Oklahoma, OK                                                          
  Pottawatomie, OK                                                      
5910  Olympia, WA...................................    1.1547    1.1035
  Thurston, WA                                                          
5920  Omaha, NE-IA..................................    0.9993    0.9995
  Pottawattamie, IA                                                     
  Cass, NE                                                              
  Douglas, NE                                                           
  Sarpy, NE                                                             
  Washington, NE                                                        
5945  \1\ Orange County, CA.........................    1.1472    1.0986
  Orange, CA                                                            
5960  \1\ Orlando, FL...............................    0.9834    0.9886
  Lake, FL                                                              
  Orange, FL                                                            
  Osceola, FL                                                           
  Seminole, FL                                                          
5990  \2\ Owensboro, KY.............................    0.7861    0.8481
  Daviess, KY                                                           
6015  \2\ Panama City, FL...........................    0.8896    0.9230
  Bay, FL                                                               
6020  Parkersburg-Marietta, WV-OH (West Virginia                        
 Hospitals).........................................    0.8034    0.8608
  Washington, OH                                                        
  Wood, WV                                                              
6020  \2\ Parkersburg-Marietta, WV-OH (Ohio                             
 Hospitals).........................................    0.8537    0.8973
  Washington, OH                                                        
  Wood, WV                                                              
6080  \2\ Pensacola, FL.............................    0.8896    0.9230
  Escambia, FL                                                          
  Santa Rosa, FL                                                        
6120  Peoria-Pekin, IL..............................    0.8081    0.8642
  Peoria, IL                                                            
  Tazewell, IL                                                          
  Woodford, IL                                                          
6160  \1\ Philadelphia, PA-NJ.......................    1.1382    1.0927
  Burlington, NJ                                                        
  Camden, NJ                                                            
  Gloucester, NJ                                                        
  Salem, NJ                                                             
  Bucks, PA                                                             
  Chester, PA                                                           
  Delaware, PA                                                          
  Montgomery, PA                                                        
  Philadelphia, PA                                                      
6200  \1\ Phoenix-Mesa, AZ..........................    0.9611    0.9732
  Maricopa, AZ                                                          
  Pinal, AZ                                                             
6240  Pine Bluff, AR................................    0.7929    0.8531
  Jefferson, AR                                                         
6280  \1\ Pittsburgh, PA............................    0.9809    0.9869
  Allegheny, PA                                                         
  Beaver, PA                                                            
  Butler, PA                                                            
  Fayette, PA                                                           
  Washington, PA                                                        
  Westmoreland, PA                                                      
6323  \2\ Pittsfield, MA............................    1.0857    1.0579
  Berkshire, MA                                                         
6340  Pocatello, ID.................................    0.8811    0.9170
  Bannock, ID                                                           
6360  Ponce, PR.....................................    0.4799    0.6049
  Guayanilla, PR                                                        
  Juana Diaz, PR                                                        
  Penuelas, PR                                                          
  Ponce, PR                                                             
  Villalba, PR                                                          
  Yauco, PR                                                             
6403  Portland, ME..................................    0.9595    0.9721
  Cumberland, ME                                                        
  Sagadahoc, ME                                                         
  York, ME                                                              
6440  \1\ Portland-Vancouver, OR-WA.................    1.1202    1.0808
  Clackamas, OR                                                         
  Columbia, OR                                                          
  Multnomah, OR                                                         
  Washington, OR                                                        
  Yamhill, OR                                                           
  Clark, WA                                                             

[[Page 41057]]

                                                                        
6483  \1\ Providence-Warwick-Pawtucket, RI..........    1.0824    1.0557
  Bristol, RI                                                           
  Kent, RI                                                              
  Newport, RI                                                           
  Providence, RI                                                        
  Washington, RI                                                        
6520  Provo-Orem, UT................................    0.9907    0.9936
  Utah, UT                                                              
6560  Pueblo, CO....................................    0.8731    0.9113
  Pueblo, CO                                                            
6580  Punta Gorda, FL...............................    0.9050    0.9339
  Charlotte, FL                                                         
6600  Racine, WI....................................    0.9149    0.9409
  Racine, WI                                                            
6640  \1\ Raleigh-Durham-Chapel Hill, NC............    0.9833    0.9885
  Chatham, NC                                                           
  Durham, NC                                                            
  Franklin, NC                                                          
  Johnston, NC                                                          
  Orange, NC                                                            
  Wake, NC                                                              
6660  Rapid City, SD................................    0.8226    0.8748
  Pennington, SD                                                        
6680  Reading, PA...................................    0.9254    0.9483
  Berks, PA                                                             
6690  Redding, CA...................................    1.1883    1.1254
  Shasta, CA                                                            
6720  Reno, NV......................................    1.1118    1.0753
  Washoe, NV                                                            
6740  \2\ Richland-Kennewick-Pasco, WA..............    1.0512    1.0348
  Benton, WA                                                            
  Franklin, WA                                                          
6760  Richmond-Petersburg, VA.......................    0.9231    0.9467
  Charles City County, VA                                               
  Chesterfield, VA                                                      
  Colonial Heights City, VA                                             
  Dinwiddie, VA                                                         
  Goochland, VA                                                         
  Hanover, VA                                                           
  Henrico, VA                                                           
  Hopewell City, VA                                                     
  New Kent, VA                                                          
  Petersburg City, VA                                                   
  Powhatan, VA                                                          
  Prince George, VA                                                     
  Richmond City, VA                                                     
6780  \1\ Riverside-San Bernardino, CA..............    1.0141    1.0096
  Riverside, CA                                                         
  San Bernardino, CA                                                    
6800  Roanoke, VA...................................    0.8528    0.8967
  Botetourt, VA                                                         
  Roanoke, VA                                                           
  Roanoke City, VA                                                      
  Salem City, VA                                                        
6820  Rochester, MN.................................    1.1723    1.1150
  Olmsted, MN                                                           
6840  \1\ Rochester, NY.............................    0.9677    0.9778
  Genesee, NY                                                           
  Livingston, NY                                                        
  Monroe, NY                                                            
  Ontario, NY                                                           
  Orleans, NY                                                           
  Wayne, NY                                                             
6880  Rockford, IL..................................    0.8634    0.9043
  Boone, IL                                                             
  Ogle, IL                                                              
  Winnebago, IL                                                         
6895  Rocky Mount, NC...............................    0.9031    0.9326
  Edgecombe, NC                                                         
  Nash, NC                                                              
6920  \1\ Sacramento, CA............................    1.1864    1.1242
  El Dorado, CA                                                         
  Placer, CA                                                            
  Sacramento, CA                                                        
6960  Saginaw-Bay City-Midland, MI..................    0.9507    0.9660
  Bay, MI                                                               
  Midland, MI                                                           
  Saginaw, MI                                                           
6980  St. Cloud, MN.................................    0.9607    0.9729
  Benton, MN                                                            
  Stearns, MN                                                           
7000  St. Joseph, MO................................    0.9910    0.9938
  Andrew, MO                                                            
  Buchanan, MO                                                          
7040  \1\ St. Louis, MO-IL..........................    0.9171    0.9425
  Clinton, IL                                                           
  Jersey, IL                                                            
  Madison, IL                                                           
  Monroe, IL                                                            
  St. Clair, IL                                                         
  Franklin, MO                                                          
  Jefferson, MO                                                         
  Lincoln, MO                                                           
  St. Charles, MO                                                       
  St. Louis, MO                                                         
  St. Louis City, MO                                                    
  Warren, MO                                                            
7080  \2\ Salem, OR.................................    0.9933    0.9954
  Marion, OR                                                            
  Polk, OR                                                              
7120  Salinas, CA...................................    1.5175    1.3306
  Monterey, CA                                                          
7160  \1\ Salt Lake City-Ogden, UT..................    0.9400    0.9585
  Davis, UT                                                             
  Salt Lake, UT                                                         
  Weber, UT                                                             
7200  San Angelo, TX................................    0.7662    0.8333
  Tom Green, TX                                                         
7240  \1\ San Antonio, TX...........................    0.8117    0.8669
  Bexar, TX                                                             
  Comal, TX                                                             
  Guadalupe, TX                                                         
  Wilson, TX                                                            
7320  \1\ San Diego, CA.............................    1.2336    1.1546
  San Diego, CA                                                         
7360  \1\ San Francisco, CA.........................    1.3507    1.2286
  Marin, CA                                                             
  San Francisco, CA                                                     
  San Mateo, CA                                                         
7400  \1\ San Jose, CA..............................    1.3724    1.2421
  Santa Clara, CA                                                       
7440  \1\ San Juan-Bayamon, PR......................    0.4633    0.5904
  Aguas Buenas, PR                                                      
  Barceloneta, PR                                                       
  Bayamon, PR                                                           
  Canovanas, PR                                                         
  Carolina, PR                                                          
  Catano, PR                                                            
  Ceiba, PR                                                             
  Comerio, PR                                                           
  Corozal, PR                                                           
  Dorado, PR                                                            
  Fajardo, PR                                                           
  Florida, PR                                                           
  Guaynabo, PR                                                          
  Humacao, PR                                                           
  Juncos, PR                                                            
  Los Piedras, PR                                                       
  Loiza, PR                                                             
  Luguillo, PR                                                          
  Manati, PR                                                            
  Morovis, PR                                                           
  Naguabo, PR                                                           
  Naranjito, PR                                                         
  Rio Grande, PR                                                        
  San Juan, PR                                                          
  Toa Alta, PR                                                          
  Toa Baja, PR                                                          
  Trujillo Alto, PR                                                     
  Vega Alta, PR                                                         
  Vega Baja, PR                                                         
  Yabucoa, PR                                                           
7460  San Luis Obispo-Atascadero-Paso Robles, CA....    1.0739    1.0500
  San Luis Obispo, CA                                                   
7480  Santa Barbara-Santa Maria-Lompoc, CA..........    1.1218    1.0819
  Santa Barbara, CA                                                     
7485  Santa Cruz-Watsonville, CA....................    1.4011    1.2598
  Santa Cruz, CA                                                        
7490  Santa Fe, NM..................................    0.9623    0.9740
  Los Alamos, NM                                                        
  Santa Fe, NM                                                          
7500  Santa Rosa, CA................................    1.3099    1.2031
  Sonoma, CA                                                            
7510  Sarasota-Bradenton, FL........................    0.9553    0.9692
  Manatee, FL                                                           
  Sarasota, FL                                                          
7520  Savannah, GA..................................    1.0081    1.0055
  Bryan, GA                                                             
  Chatham, GA                                                           
  Effingham, GA                                                         
7560  \2\ Scranton--Wilkes-Barre--Hazleton, PA......    0.8683    0.9078
  Columbia, PA                                                          
  Lackawanna, PA                                                        
  Luzerne, PA                                                           
  Wyoming, PA                                                           
7600  \1\ Seattle-Bellevue-Everett, WA..............    1.1560    1.1044

[[Page 41058]]

                                                                        
  Island, WA                                                            
  King, WA                                                              
  Snohomish, WA                                                         
7610  Sharon, PA....................................    0.8866    0.9209
  Mercer, PA                                                            
7620  \2\ Sheboygan, WI.............................    0.8729    0.9111
  Sheboygan, WI                                                         
7640  Sherman-Denison, TX...........................    0.8588    0.9010
  Grayson, TX                                                           
7680  Shreveport-Bossier City, LA...................    0.9400    0.9585
  Bossier, LA                                                           
  Caddo, LA                                                             
  Webster, LA                                                           
7720  Sioux City, IA-NE.............................    0.8499    0.8946
  Woodbury, IA                                                          
  Dakota, NE                                                            
7760  Sioux Falls, SD...............................    0.8931    0.9255
  Lincoln, SD                                                           
  Minnehaha, SD                                                         
7800  South Bend, IN................................    0.9880    0.9918
  St. Joseph, IN                                                        
7840  Spokane, WA...................................    1.0952    1.0643
  Spokane, WA                                                           
7880  Springfield, IL...............................    0.8739    0.9118
  Menard, IL                                                            
  Sangamon, IL                                                          
7920  Springfield, MO...............................    0.8088    0.8647
  Christian, MO                                                         
  Greene, MO                                                            
  Webster, MO                                                           
8003  Springfield, MA...............................    1.0857    1.0579
  Hampden, MA                                                           
  Hampshire, MA                                                         
8050  State College, PA.............................    0.9469    0.9633
  Centre, PA                                                            
8080  \2\ Steubenville-Weirton, OH-WV (Ohio                             
 Hospitals).........................................    0.8537    0.8973
  Jefferson, OH                                                         
  Brooke, WV                                                            
  Hancock, WV                                                           
8080  Steubenville-Weirton, OH-WV (West Virginia                        
 Hospitals).........................................    0.8447    0.8909
  Jefferson, OH                                                         
  Brooke, WV                                                            
  Hancock, WV                                                           
8120  Stockton-Lodi, CA.............................    1.1099    1.0740
  San Joaquin, CA                                                       
8140  Sumter, SC....................................    0.8144    0.8688
  Sumter, SC                                                            
8160  Syracuse, NY..................................    0.9420    0.9599
  Cayuga, NY                                                            
  Madison, NY                                                           
  Onondaga, NY                                                          
  Oswego, NY                                                            
8200  \2\ Tacoma, WA................................    1.0512    1.0348
  Pierce, WA                                                            
8240  \2\ Tallahassee, FL...........................    0.8896    0.9230
  Gadsden, FL                                                           
  Leon, FL                                                              
8280  \1\ Tampa-St. Petersburg-Clearwater, FL.......    0.9203    0.9447
  Hernando, FL                                                          
  Hillsborough, FL                                                      
  Pasco, FL                                                             
  Pinellas, FL                                                          
8320  Terre Haute, IN...............................    0.9010    0.9311
  Clay, IN                                                              
  Vermillion, IN                                                        
  Vigo, IN                                                              
8360  Texarkana, AR-Texarkana, TX...................    0.8542    0.8977
  Miller, AR                                                            
  Bowie, TX                                                             
8400  Toledo, OH....................................    1.0012    1.0008
  Fulton, OH                                                            
  Lucas, OH                                                             
  Wood, OH                                                              
8440  Topeka, KS....................................    0.9833    0.9885
  Shawnee, KS                                                           
8480  Trenton, NJ...................................    1.0532    1.0361
  Mercer, NJ                                                            
8520  Tucson, AZ....................................    0.9047    0.9337
  Pima, AZ                                                              
8560  Tulsa, OK.....................................    0.8481    0.8933
  Creek, OK                                                             
  Osage, OK                                                             
  Rogers, OK                                                            
  Tulsa, OK                                                             
  Wagoner, OK                                                           
8600  Tuscaloosa, AL................................    0.7658    0.8330
  Tuscaloosa, AL                                                        
8640  Tyler, TX.....................................    0.8837    0.9188
  Smith, TX                                                             
8680  \2\ Utica-Rome, NY............................    0.8605    0.9022
  Herkimer, NY                                                          
  Oneida, NY                                                            
8720  Vallejo-Fairfield-Napa, CA....................    1.2845    1.1870
  Napa, CA                                                              
  Solano, CA                                                            
8735  Ventura, CA...................................    1.0715    1.0484
  Ventura, CA                                                           
8750  Victoria, TX..................................    0.8400    0.8875
  Victoria, TX                                                          
8760  Vineland-Millville-Bridgeton, NJ..............    1.0463    1.0315
  Cumberland, NJ                                                        
8780  Visalia-Tulare-Porterville, CA................    1.0105    1.0072
  Tulare, CA                                                            
8800  Waco, TX......................................    0.8389    0.8867
  McLennan, TX                                                          
8840  \1\ Washington, DC-MD-VA-WV...................    1.0812    1.0549
  District of Columbia, DC                                              
  Calvert, MD                                                           
  Charles, MD                                                           
  Frederick, MD                                                         
  Montgomery, MD                                                        
  Prince Georges, MD                                                    
  Alexandria City, VA                                                   
  Arlington, VA                                                         
  Clarke, VA                                                            
  Culpeper, VA                                                          
  Fairfax, VA                                                           
  Fairfax City, VA                                                      
  Falls Church City, VA                                                 
  Fauquier, VA                                                          
  Fredericksburg City, VA                                               
  King George, VA                                                       
  Loudoun, VA                                                           
  Manassas City, VA                                                     
  Manassas Park City, VA                                                
  Prince William, VA                                                    
  Spotsylvania, VA                                                      
  Stafford, VA                                                          
  Warren, VA                                                            
  Berkeley, WV                                                          
  Jefferson, WV                                                         
8920  Waterloo-Cedar Falls, IA......................    0.8350    0.8838
  Black Hawk, IA                                                        
8940  Wausau, WI....................................    0.9753    0.9830
  Marathon, WI                                                          
8960  \1\ West Palm Beach-Boca Raton, FL............    1.0203    1.0139
  Palm Beach, FL                                                        
9000  \2\ Wheeling, WV-OH (West Virginia Hospitals).    0.7892    0.8503
  Belmont, OH                                                           
  Marshall, WV                                                          
  Ohio, WV                                                              
9000  \2\ Wheeling, WV-OH (Ohio Hospitals)..........    0.8537    0.8973
  Belmont, OH                                                           
  Marshall, WV                                                          
  Ohio, WV                                                              
9040  Wichita, KS...................................    0.8917    0.9245
  Butler, KS                                                            
  Harvey, KS                                                            
  Sedgwick, KS                                                          
9080  Wichita Falls, TX.............................    0.7847    0.8470
  Archer, TX                                                            
  Wichita, TX                                                           
9140  \2\ Williamsport, PA..........................    0.8683    0.9078
  Lycoming, PA                                                          
9160  Wilmington-Newark, DE-MD......................    1.1894    1.1261
  New Castle, DE                                                        
  Cecil, MD                                                             
9200  Wilmington, NC................................    0.9364    0.9560
  New Hanover, NC                                                       
  Brunswick, NC                                                         
9260  \2\ Yakima, WA................................    1.0512    1.0348
  Yakima, WA                                                            
9270  Yolo, CA......................................    1.0636    1.0431
  Yolo, CA                                                              
9280  York, PA......................................    0.9431    0.9607
  York, PA                                                              
9320  Youngstown-Warren, OH.........................    0.9836    0.9887
  Columbiana, OH                                                        
  Mahoning, OH                                                          
  Trumbull, OH                                                          
9340  Yuba City, CA.................................    1.0889    1.0601

[[Page 41059]]

                                                                        
  Sutter, CA                                                            
  Yuba, CA                                                              
9360  Yuma, AZ......................................    1.0080    1.0055
  Yuma, AZ                                                              
------------------------------------------------------------------------
\1\ Large Urban Area                                                    
\2\ Hospitals geographically located in the area are assigned the       
  statewide rural wage index for FY 1999.                               


Table 4B.--Wage Index and Capital Geographic Adjustment Factor (GAF) for
                               Rural Areas                              
------------------------------------------------------------------------
                                                        Wage            
                    Nonurban area                       index      GAF  
------------------------------------------------------------------------
Alabama.............................................    0.7338    0.8090
Alaska..............................................    1.2456    1.1623
Arizona.............................................    0.8007    0.8588
Arkansas............................................    0.7265    0.8035
California..........................................    0.9959    0.9972
Colorado............................................    0.8454    0.8914
Connecticut.........................................    1.2100    1.1394
Delaware............................................    0.8826    0.9180
Florida.............................................    0.8896    0.9230
Georgia.............................................    0.7905    0.8513
Hawaii..............................................    1.0933    1.0630
Idaho...............................................    0.8495    0.8943
Illinois............................................    0.7942    0.8540
Indiana.............................................    0.8398    0.8873
Iowa................................................    0.7793    0.8430
Kansas..............................................    0.7330    0.8084
Kentucky............................................    0.7861    0.8481
Louisiana...........................................    0.7481    0.8198
Maine...............................................    0.8485    0.8936
Maryland............................................    0.8574    0.9000
Massachusetts.......................................    1.0857    1.0579
Michigan............................................    0.8903    0.9235
Minnesota...........................................    0.8613    0.9028
Mississippi.........................................    0.7327    0.8082
Missouri............................................    0.7468    0.8188
Montana.............................................    0.8596    0.9016
Nebraska............................................    0.7690    0.8354
Nevada..............................................    0.9276    0.9498
New Hampshire.......................................    1.0262    1.0179
New Jersey \1\......................................  ........          
New Mexico..........................................    0.8136    0.8683
New York............................................    0.8605    0.9022
North Carolina......................................    0.8130    0.8678
North Dakota........................................    0.7514    0.8222
Ohio................................................    0.8537    0.8973
Oklahoma............................................    0.7139    0.7939
Oregon..............................................    0.9933    0.9954
Pennsylvania........................................    0.8683    0.9078
Puerto Rico.........................................    0.4089    0.5420
Rhode Island \1\....................................  ........          
South Carolina......................................    0.8063    0.8629
South Dakota........................................    0.7524    0.8230
Tennessee...........................................    0.7508    0.8218
Texas...............................................    0.7441    0.8168
Utah................................................    0.8878    0.9217
Vermont.............................................    0.9436    0.9610
Virginia............................................    0.7863    0.8482
Washington..........................................    1.0512    1.0348
West Virginia.......................................    0.7892    0.8503
Wisconsin...........................................    0.8729    0.9111
Wyoming.............................................    0.8787   0.9153 
------------------------------------------------------------------------
\1\ All counties within the State are classified as urban.              


Table 4C.--Wage Index and Capital Geographic Adjustment Factor (GAF) for
                     Hospitals That are Reclassified                    
------------------------------------------------------------------------
                                                        Wage            
                        Area                            index      GAF  
------------------------------------------------------------------------
Abilene, TX.........................................    0.8083    0.8644
Albany, GA..........................................    0.7905    0.8513
Albuquerque, NM.....................................    0.8632    0.9042
Alexandria, LA......................................    0.8544    0.8978
Allentown-Bethlehem-Easton, PA......................    1.0226    1.0154
Amarillo, TX........................................    0.8509    0.8953
Anchorage, AK.......................................    1.3007    1.1973
Asheville, NC.......................................    0.8960    0.9276
Atlanta, GA.........................................    0.9936    0.9956
Augusta-Aiken, GA-SC................................    0.9253    0.9482
Baltimore, MD.......................................    0.9663    0.9768
Barnstable-Yarmouth, MA.............................    1.4458    1.2872
Baton Rouge, LA.....................................    0.8891    0.9227
Benton Harbor, MI...................................    0.8903    0.9235
Bergen-Passaic, NJ..................................    1.1774    1.1183
Billings, MT........................................    0.9162    0.9418
Binghamton, NY......................................    0.9078    0.9359
Birmingham, AL......................................    0.9092    0.9369
Bismarck, ND........................................    0.7863    0.8482
Boise City, ID......................................    0.9209    0.9451
Boston-Worcester-Lawrence-Lowell-Brockton, MA-NH....    1.1307    1.0878
Brazoria, TX........................................    0.8925    0.9251
Bryan-College Station, TX...........................    0.8084    0.8645
Buffalo-Niagara Falls, NY...........................    0.9607    0.9729
Burlington, VT......................................    0.9616    0.9735
Caguas, PR..........................................    0.4419    0.5716
Canton-Massillon, OH................................    0.8827    0.9181
Casper, WY..........................................    0.9170    0.9424
Champaign-Urbana, IL................................    0.8789    0.9154
Charleston-North Charleston, SC.....................    0.9134    0.9399
Charleston, WV......................................    0.8782    0.9149
Charlotte-Gastonia-Rock Hill, NC-SC.................    0.9562    0.9698
Charlottesville, VA.................................    0.9754    0.9831
Chattanooga, TN-GA..................................    0.8888    0.9224
Chicago, IL.........................................    1.0469    1.0319
Cincinnati, OH-KY-IN................................    0.9615    0.9735
Clarksville-Hopkinsville, TN-KY.....................    0.8231    0.8752
Cleveland-Lorain-Elyria, OH.........................    0.9907    0.9936
Columbia, MO........................................    0.8817    0.9174
Columbus, GA-AL.....................................    0.8529    0.8968
Columbus, OH........................................    0.9802    0.9864
Corpus Christi, TX..................................    0.8549    0.8982
Dallas, TX..........................................    0.9364    0.9560
Danville, VA........................................    0.8735    0.9115
Davenport-Moline-Rock Island, IA-IL.................    0.8431    0.8897
Dayton-Springfield, OH..............................    0.9584    0.9713
Denver, CO..........................................    1.0059    1.0040
Des Moines, IA......................................    0.8494    0.8942
Duluth-Superior, MN-WI..............................    1.0031    1.0021
Dutchess County, NY.................................    0.9904    0.9934
Elkhart-Goshen, IN..................................    0.9388    0.9577
Eugene-Springfield, OR..............................    1.1072    1.0722
Evansville-Henderson, IN-KY.........................    0.8433    0.8898
Fargo-Moorhead, ND-MN...............................    0.9264    0.9490
Fayetteville, NC....................................    0.8407    0.8880
Flagstaff, AZ-UT....................................    0.9543    0.9685
Flint, MI...........................................    1.1054    1.0710
Fort Collins-Loveland, CO...........................    1.0319    1.0217
Ft. Lauderdale, FL..................................    0.9867    0.9909
Fort Pierce-Port St. Lucie, FL......................    1.0263    1.0179
Fort Smith, AR-OK...................................    0.7535    0.8238
Fort Walton Beach, FL...............................    0.8640    0.9047
Forth Worth-Arlington, TX...........................    0.9729    0.9814
Gadsden, AL.........................................    0.8799    0.9161
Gainesville, FL.....................................    0.9482    0.9642
Goldsboro, NC.......................................    0.8353    0.8841
Grand Forks, ND-MN..................................    0.8918    0.9246
Grand Junction, CO..................................    0.9099    0.9374
Grand Rapids-Muskegon-Holland, MI...................    0.9878    0.9916
Great Falls, MT.....................................    0.9304    0.9518
Greeley, CO.........................................    0.9376    0.9568
Green Bay, WI.......................................    0.9268    0.9493
Greenville, NC......................................    0.9118    0.9387
Greenville-Spartanburg-Anderson, SC.................    0.9242    0.9475
Harrisburg-Lebanon-Carlisle, PA.....................    1.0082    1.0056
Hartford, CT........................................    1.1879    1.1251
Hattiesburg, MS.....................................    0.7327    0.8082
Hickory-Morganton-Lenoir, NC........................    0.8668    0.9067
Honolulu, HI........................................    1.1535    1.1027
Houston, TX.........................................    0.9904    0.9934
Huntington-Ashland, WV-KY-OH........................    0.9295    0.9512
Huntsville, AL......................................    0.8240    0.8758
Indianapolis, IN....................................    0.9748    0.9827
Iowa City, IA.......................................    0.9382    0.9573
Jackson, MS.........................................    0.8310    0.8809
Jackson, TN.........................................    0.8578    0.9003
Jacksonville, FL....................................    0.8919    0.9246
Johnson City-Kingsport-Bristol, TN-VA...............    0.8792    0.9156
Jonesboro, AR.......................................    0.7595    0.8283
Joplin, MO..........................................    0.7890    0.8502
Kalamazoo-Battlecreek, MI...........................    1.1102    1.0742
Kansas City, KS-MO..................................    0.9666    0.9770
Knoxville, TN.......................................    0.8937    0.9259
Lafayette, LA.......................................    0.8311    0.8810
Lansing-East Lansing, MI............................    0.9995    0.9997
Las Cruces, NM......................................    0.8989    0.9296

[[Page 41060]]

                                                                        
Las Vegas, NV-AZ....................................    1.1438    1.0964
Lexington, KY.......................................    0.8525    0.8965
Lima, OH............................................    0.8787    0.9153
Lincoln, NE.........................................    0.9051    0.9340
Little Rock-North Little Rock, AR...................    0.8553    0.8985
Los Angeles-Long Beach, CA..........................    1.2070    1.1375
Louisville, KY-IN...................................    0.9113    0.9384
Macon, GA...........................................    0.8502    0.8948
Madison, WI.........................................    1.0040    1.0027
Mansfield, OH.......................................    0.8552    0.8984
Memphis, TN-AR-MS...................................    0.8371    0.8854
Merced, CA..........................................    1.0240    1.0164
Milwaukee-Waukesha, WI..............................    0.9135    0.9399
Minneapolis-St. Paul, MN-WI.........................    1.0877    1.0593
Modesto, CA.........................................    1.0368    1.0251
Monroe, LA..........................................    0.8097    0.8654
Montgomery, AL......................................    0.7877    0.8492
Myrtle Beach, SC....................................    0.8196    0.8726
Nashville, TN.......................................    0.9322    0.9531
New Haven-Bridgeport-Stamford-Waterbury-Danbury, CT.    1.2271    1.1504
New London-Norwich, CT..............................    1.1665    1.1112
New Orleans, LA.....................................    0.9330    0.9536
New York, NY........................................    1.4431    1.2855
Newburgh, NY-PA.....................................    1.1247    1.0838
Oakland, CA.........................................    1.5194    1.3317
Odessa-Midland, TX..................................    0.8683    0.9078
Oklahoma City, OK...................................    0.8727    0.9110
Omaha, NE-IA........................................    0.9993    0.9995
Orange County, CA...................................    1.1472    1.0986
Orlando, FL.........................................    0.9834    0.9886
Peoria-Pekin, IL....................................    0.8081    0.8642
Philadelphia, PA-NJ.................................    1.1382    1.0927
Pittsburgh, PA......................................    0.9661    0.9767
Pocatello, ID (Idaho Hospital)......................    0.8673    0.9071
Pocatello, ID (Wyoming Hospitals)...................    0.8787    0.9153
Portland, ME........................................    0.9595    0.9721
Portland-Vancouver, OR-WA...........................    1.1202    1.0808
Provo-Orem, UT......................................    0.9907    0.9936
Raleigh-Durham-Chapel Hill, NC......................    0.9833    0.9885
Rapid City, SD......................................    0.8226    0.8748
Reno, NV............................................    1.1118    1.0753
Rochester, MN.......................................    1.1723    1.1150
Rockford, IL........................................    0.8634    0.9043
Sacramento, CA......................................    1.1864    1.1242
Saginaw-Bay City-Midland, MI........................    0.9507    0.9660
St. Cloud, MN.......................................    0.9607    0.9729
St. Louis, MO-IL....................................    0.9171    0.9425
Salt Lake City-Ogden, UT............................    0.9400    0.9585
San Diego, CA.......................................    1.2336    1.1546
Santa Fe, NM........................................    0.9493    0.9650
Santa Rosa, CA......................................    1.2934    1.1927
Seattle-Bellevue-Everett, WA........................    1.1560    1.1044
Sharon, PA..........................................    0.8866    0.9209
Sherman-Denison, TX.................................    0.8266    0.8777
Sioux City, IA-NE...................................    0.8499    0.8946
Sioux Falls, SD.....................................    0.8828    0.9182
South Bend, IN......................................    0.9880    0.9918
Spokane, WA.........................................    1.0752    1.0509
Springfield, IL.....................................    0.8739    0.9118
Springfield, MO.....................................    0.8088    0.8647
State College, PA...................................    0.8812    0.9170
Syracuse, NY........................................    0.9420    0.9599
Tallahassee, FL.....................................    0.8518    0.8960
Tampa-St. Petersburg-Clearwater, FL.................    0.9203    0.9447
Texarkana, AR-Texarkana, TX.........................    0.8542    0.8977
Toledo, OH..........................................    1.0012    1.0008
Topeka, KS..........................................    0.9609    0.9731
Tucson, AZ..........................................    0.9047    0.9337
Tulsa, OK...........................................    0.8376    0.8857
Tuscaloosa, AL......................................    0.7658    0.8330
Tyler, TX...........................................    0.8837    0.9188
Vallejo-Fairfield-Napa, CA..........................    1.2845    1.1870
Victoria, TX........................................    0.8400    0.8875
Washington, DC-MD-VA-WV.............................    1.0812    1.0549
Waterloo-Cedar Falls, IA............................    0.8350    0.8838
Wausau, WI..........................................    0.9442    0.9614
Wichita, KS.........................................    0.8789    0.9154
Wichita Falls, TX...................................    0.7677    0.8344
Rural Alabama.......................................    0.7338    0.8090
Rural Illinois......................................    0.7942    0.8540
Rural Louisiana.....................................    0.7481    0.8198
Rural Massachusetts.................................    1.0421    1.0286
Rural Michigan......................................    0.8903    0.9235
Rural Minnesota.....................................    0.8613    0.9028
Rural Missouri......................................    0.7468    0.8188
Rural Nevada........................................    0.8851    0.9198
Rural New Mexico....................................    0.8136    0.8683
Rural Oregon........................................    0.9933    0.9954
Rural Washington....................................    1.0512    1.0348
Rural Wyoming.......................................    0.8787    0.9153
------------------------------------------------------------------------


             Table 4D.--Average Hourly Wage for Urban Areas             
------------------------------------------------------------------------
                                                                Average 
                          Urban area                             hourly 
                                                                  wage  
------------------------------------------------------------------------
Abilene, TX..................................................    16.5825
Aguadilla, PR................................................     9.8222
Akron, OH....................................................    20.5687
Albany, GA...................................................    16.5708
Albany-Schenectady-Troy, NY..................................    17.8900
Albuquerque, NM..............................................    17.8958
Alexandria, LA...............................................    17.7146
Allentown-Bethlehem-Easton, PA...............................    21.2002
Altoona, PA..................................................    19.3951
Amarillo, TX.................................................    17.6070
Anchorage, AK................................................    26.6324
Ann Arbor, MI................................................    22.9238
Anniston, AL.................................................    17.9884
Appleton-Oshkosh-Neenah, WI..................................    18.3354
Arecibo, PR..................................................    10.1129
Asheville, NC................................................    18.5755
Athens, GA...................................................    18.0203
Atlanta, GA..................................................    20.6008
Atlantic-Cape May, NJ........................................    23.9678
Augusta-Aiken, GA-SC.........................................    19.1829
Austin-San Marcos, TX........................................    17.5021
Bakersfield, CA..............................................    19.3407
Baltimore, MD................................................    20.0332
Bangor, ME...................................................    19.6846
Barnstable-Yarmouth, MA......................................    31.9593
Baton Rouge, LA..............................................    18.4325
Beaumont-Port Arthur, TX.....................................    18.8069
Bellingham, WA...............................................    23.7572
Benton Harbor, MI............................................    17.7241
Bergen-Passaic, NJ...........................................    25.3184
Billings, MT.................................................    18.9960
Biloxi-Gulfport-Pascagoula, MS...............................    17.1946
Binghamton, NY...............................................    18.8217
Birmingham, AL...............................................    18.8506
Bismarck, ND.................................................    16.6736
Bloomington, IN..............................................    18.6271
Bloomington-Normal, IL.......................................    18.3900
Boise City, ID...............................................    19.0323
Boston-Worcester-Lawrence-Lowell-Brockton, MA-NH.............    23.4028
Boulder-Longmont, CO.........................................    20.8550
Brazoria, TX.................................................    18.5041
Bremerton, WA................................................    22.9686
Brownsville-Harlingen-San Benito, TX.........................    17.1138
Bryan-College Station, TX....................................    16.2473
Buffalo-Niagara Falls, NY....................................    19.9187
Burlington, VT...............................................    19.8983
Caguas, PR...................................................     9.1414
Canton-Massillon, OH.........................................    18.3002
Casper, WY...................................................    18.0774
Cedar Rapids, IA.............................................    18.3134
Champaign-Urbana, IL.........................................    18.1242
Charleston-North Charleston, SC..............................    18.9373
Charleston, WV...............................................    18.6776
Charlotte-Gastonia-Rock Hill, NC-SC..........................    19.8253
Charlottesville, VA..........................................    21.3425
Chattanooga, TN-GA...........................................    18.8525
Cheyenne, WY.................................................    16.9321
Chicago, IL..................................................    21.7048
Chico-Paradise, CA...........................................    21.0787
Cincinnati, OH-KY-IN.........................................    19.9348
Clarksville-Hopkinsville, TN-KY..............................    16.7045
Cleveland-Lorain-Elyria, OH..................................    20.5401
Colorado Springs, CO.........................................    19.5098
Columbia, MO.................................................    18.5780
Columbia, SC.................................................    19.3016
Columbus, GA-AL..............................................    17.6831
Columbus, OH.................................................    20.3213
Corpus Christi, TX...........................................    17.6885
Cumberland, MD-WV............................................    17.1237
Dallas, TX...................................................    19.4566
Danville, VA.................................................    18.7936
Davenport-Moline-Rock Island, IA-IL..........................    17.4790
Dayton-Springfield, OH.......................................    19.8696
Daytona Beach, FL............................................    18.9775
Decatur, AL..................................................    17.1056
Decatur, IL..................................................    16.6936
Denver, CO...................................................    20.8379
Des Moines, IA...............................................    17.5526
Detroit, MI..................................................    21.9074
Dothan, AL...................................................    16.3982

[[Page 41061]]

                                                                        
Dover, DE....................................................    19.4527
Dubuque, IA..................................................    17.0836
Duluth-Superior, MN-WI.......................................    20.6977
Dutchess County, NY..........................................    21.8781
Eau Claire, WI...............................................    17.8112
El Paso, TX..................................................    19.1468
Elkhart-Goshen, IN...........................................    19.3331
Elmira, NY...................................................    17.5367
Enid, OK.....................................................    16.5214
Erie, PA.....................................................    19.2614
Eugene-Springfield, OR.......................................    23.2566
Evansville, Henderson, IN-KY.................................    17.7198
Fargo-Moorhead, ND-MN........................................    19.7733
Fayetteville, NC.............................................    17.4302
Fayetteville-Springdale-Rogers, AR...........................    17.8965
Flagstaff, AZ-UT.............................................    19.7032
Flint, MI....................................................    22.9184
Florence, AL.................................................    15.9479
Florence, SC.................................................    17.6631
Fort Collins-Loveland, CO....................................    21.3936
Fort Lauderdale, FL..........................................    20.3766
Fort Myers-Cape Coral, FL....................................    18.5257
Fort Pierce-Port St. Lucie, FL...............................    21.2784
Fort Smith, AR-OK............................................    15.8375
Fort Walton Beach, FL........................................    17.8995
Fort Wayne, IN...............................................    18.7962
Fort Worth-Arlington, TX.....................................    20.1487
Fresno, CA...................................................    21.5811
Gadsden, AL..................................................    18.2411
Gainesville, FL..............................................    19.6396
Galveston-Texas City, TX.....................................    22.4914
Gary, IN.....................................................    19.6025
Glens Falls, NY..............................................    17.6404
Goldsboro, NC................................................    17.7222
Grand Forks, ND-MN...........................................    18.3589
Grand Junction, CO...........................................    17.0997
Grand Rapids-Muskegon-Holland, MI............................    20.7161
Great Falls, MT..............................................    18.4336
Greeley, CO..................................................    19.6480
Green Bay, WI................................................    19.0230
Greensboro-Winston-Salem-High Point, NC......................    19.8355
Greenville, NC...............................................    19.6007
Greenville-Spartanburg-Anderson, SC..........................    19.1612
Hagerstown, MD...............................................    21.1564
Hamilton-Middletown, OH......................................    19.1833
Harrisburg-Lebanon-Carlisle, PA..............................    20.9016
Hartford, CT.................................................    24.5817
Hattiesburg, MS..............................................    15.0868
Hickory-Morganton-Lenoir, NC.................................    18.4995
Honolulu, HI.................................................    23.9148
Houma, LA....................................................    17.0314
Houston, TX..................................................    20.5336
Huntington-Ashland, WV-KY-OH.................................    20.0441
Huntsville, AL...............................................    17.4211
Indianapolis, IN.............................................    20.4258
Iowa City, IA................................................    19.6992
Jackson, MI..................................................    19.1645
Jackson, MS..................................................    17.2283
Jackson, TN..................................................    17.7852
Jacksonville, FL.............................................    18.4915
Jacksonville, NC.............................................    15.6996
Jamestown, NY................................................    15.9148
Janesville-Beloit, WI........................................    18.8060
Jersey City, NJ..............................................    24.0964
Johnson City-Kingsport-Bristol, TN-VA........................    18.2276
Johnstown, PA................................................    17.9084
Jonesboro, AR................................................    15.3904
Joplin, MO...................................................    16.3572
Kalamazoo-Battlecreek, MI....................................    23.5418
Kankakee, IL.................................................    19.5674
Kansas City, KS-MO...........................................    20.0395
Kenosha, WI..................................................    18.9676
Killeen-Temple, TX...........................................    21.0041
Knoxville, TN................................................    18.5294
Kokomo, IN...................................................    19.2700
La Crosse, WI-MN.............................................    18.5196
Lafayette, LA................................................    17.1506
Lafayette, IN................................................    18.3693
Lake Charles, LA.............................................    15.9437
Lakeland-Winter Haven, FL....................................    18.5726
Lancaster, PA................................................    19.8644
Lansing-East Lansing, MI.....................................    20.9650
Laredo, TX...................................................    15.2556
Las Cruces, NM...............................................    18.4298
Las Vegas, NV-AZ.............................................    23.7139
Lawrence, KS.................................................    17.9827
Lawton, OK...................................................    18.0698
Lewiston-Auburn, ME..........................................    19.0090
Lexington, KY................................................    17.6740
Lima, OH.....................................................    18.5932
Lincoln, NE..................................................    19.3291
Little Rock-North Little Rock, AR............................    17.6667
Longview-Marshall, TX........................................    18.0723
Los Angeles-Long Beach, CA...................................    24.9564
Louisville, KY-IN............................................    18.8926
Lubbock, TX..................................................    17.6523
Lynchburg, VA................................................    18.4907
Macon, GA....................................................    17.8909
Madison, WI..................................................    20.8155
Mansfield, OH................................................    17.7305
Mayaguez, PR.................................................     8.6819
McAllen-Edinburg-Mission, TX.................................    17.6361
Medford-Ashland, OR..........................................    20.8190
Melbourne-Titusville-Palm Bay, FL............................    19.1487
Memphis, TN-AR-MS............................................    17.3552
Merced, CA...................................................    20.8449
Miami, FL....................................................    20.8119
Middlesex-Somerset-Hunterdon, NJ.............................    23.1702
Milwaukee-Waukesha, WI.......................................    18.9231
Minneapolis-St. Paul, MN-WI..................................    22.5517
Missoula, MT.................................................    19.0914
Mobile, AL...................................................    17.4040
Modesto, CA..................................................    21.4951
Monmouth-Ocean, NJ...........................................    23.5125
Monroe, LA...................................................    17.0762
Montgomery, AL...............................................    16.2493
Muncie, IN...................................................    19.5589
Myrtle Beach, SC.............................................    16.9930
Naples, FL...................................................    21.1457
Nashville, TN................................................    19.6966
Nassau-Suffolk, NY...........................................    28.1530
New Haven-Bridgeport-Stamford-Waterbury-Danbury, CT..........    25.6149
New London-Norwich, CT.......................................    24.1351
New Orleans, LA..............................................    19.3440
New York, NY.................................................    29.9194
Newark, NJ...................................................    24.6026
Newburgh, NY-PA..............................................    23.1779
Norfolk-Virginia Beach-Newport News, VA-NC...................    17.0290
Oakland, CA..................................................    31.1506
Ocala, FL....................................................    19.0159
Odessa-Midland, TX...........................................    17.9849
Oklahoma City, OK............................................    18.0923
Olympia, WA..................................................    23.9389
Omaha, NE-IA.................................................    20.7181
Orange County, CA............................................    23.8979
Orlando, FL..................................................    20.3876
Owensboro, KY................................................    16.1460
Panama City, FL..............................................    17.6753
Parkersburg-Marietta, WV-OH..................................    16.6559
Pensacola, FL................................................    16.9466
Peoria-Pekin, IL.............................................    16.7415
Philadelphia, PA-NJ..........................................    23.5963
Phoenix-Mesa, AZ.............................................    19.9270
Pine Bluff, AR...............................................    16.4382
Pittsburgh, PA...............................................    20.3368
Pittsfield, MA...............................................    22.4781
Pocatello, ID................................................    18.2669
Ponce, PR....................................................     9.9487
Portland, ME.................................................    19.8655
Portland-Vancouver, OR-WA....................................    23.2244
Providence-Warwick, RI.......................................    22.4405
Provo-Orem, UT...............................................    20.5384
Pueblo, CO...................................................    18.1010
Punta Gorda, FL..............................................    18.7634
Racine, WI...................................................    18.9687
Raleigh-Durham-Chapel Hill, NC...............................    20.3867
Rapid City, SD...............................................    17.0546
Reading, PA..................................................    19.1866
Redding, CA..................................................    24.6374
Reno, NV.....................................................    23.0512
Richland-Kennewick-Pasco, WA.................................    21.3732
Richmond-Petersburg, VA......................................    19.1375
Riverside-San Bernardino, CA.................................    21.4175
Roanoke, VA..................................................    17.6802
Rochester, MN................................................    24.3054
Rochester, NY................................................    20.0636
Rockford, IL.................................................    17.8998
Rocky Mount, NC..............................................    18.7242
Sacramento, CA...............................................    24.5905
Saginaw-Bay City-Midland, MI.................................    19.7109
St. Cloud, MN................................................    19.9167
St. Joseph, MO...............................................    20.5465
St. Louis, MO-IL.............................................    19.0136
Salem, OR....................................................    20.5776
Salinas, CA..................................................    31.4614
Salt Lake City-Ogden, UT.....................................    19.4382
San Angelo, TX...............................................    15.8857
San Antonio, TX..............................................    16.8290
San Diego, CA................................................    25.4828
San Francisco, CA............................................    28.8570
San Jose, CA.................................................    28.7281
San Juan-Bayamon, PR.........................................     9.6051
San Luis Obispo-Atascadero-Paso Robles, CA...................    22.2647
Santa Barbara-Santa Maria-Lompoc, CA.........................    23.2580
Santa Cruz-Watsonville, CA...................................    29.0487
Santa Fe, NM.................................................    19.9519
Santa Rosa, CA...............................................    28.2508
Sarasota-Bradenton, FL.......................................    19.8054
Savannah, GA.................................................    20.9009
Scranton-Wilkes Barre-Hazleton, PA...........................    17.2431
Seattle-Bellevue-Everett, WA.................................    23.9486
Sharon, PA...................................................    18.3824
Sheboygan, WI................................................    17.0899
Sherman-Denison, TX..........................................    17.8053
Shreveport-Bossier City, LA..................................    19.4893

[[Page 41062]]

                                                                        
Sioux City, IA-NE............................................    17.6215
Sioux Falls, SD..............................................    18.5158
South Bend, IN...............................................    20.4831
Spokane, WA..................................................    22.7055
Springfield, IL..............................................    18.1176
Springfield, MO..............................................    16.7688
Springfield, MA..............................................    22.8337
State College, PA............................................    19.6319
Steubenville-Weirton, OH-WV..................................    17.5119
Stockton-Lodi, CA............................................    23.0115
Sumter, SC...................................................    16.8850
Syracuse, NY.................................................    19.5305
Tacoma, WA...................................................    21.5661
Tallahassee, FL..............................................    17.5545
Tampa-St. Petersburg-Clearwater, FL..........................    18.9348
Terre Haute, IN..............................................    18.6798
Texarkana, AR-Texarkana, TX..................................    17.7097
Toledo, OH...................................................    20.7579
Topeka, KS...................................................    20.3862
Trenton, NJ..................................................    21.8355
Tucson, AZ...................................................    18.7576
Tulsa, OK....................................................    17.5841
Tuscaloosa, AL...............................................    15.8762
Tyler, TX....................................................    18.3215
Utica-Rome, NY...............................................    17.4892
Vallejo-Fairfield-Napa, CA...................................    26.6436
Ventura, CA..................................................    22.7551
Victoria, TX.................................................    17.4131
Vineland-Millville-Bridgeton, NJ.............................    21.6923
Visalia-Tulare-Porterville, CA...............................    20.9493
Waco, TX.....................................................    17.3923
Washington, DC-MD-VA-WV......................................    22.4162
Waterloo-Cedar Falls, IA.....................................    16.5347
Wausau, WI...................................................    20.2214
West Palm Beach-Boca Raton, FL...............................    21.2323
Wheeling, OH-WV..............................................    15.8460
Wichita, KS..................................................    18.4872
Wichita Falls, TX............................................    16.2686
Williamsport, PA.............................................    17.7778
Wilmington-Newark, DE-MD.....................................    24.6591
Wilmington, NC...............................................    19.4129
Yakima, WA...................................................    21.4371
Yolo, CA.....................................................    22.0507
York, PA.....................................................    19.5520
Youngstown-Warren, OH........................................    20.3921
Yuba City, CA................................................    22.5751
Yuma, AZ.....................................................    20.8977
------------------------------------------------------------------------


             Table 4E.--Average Hourly Wage for Rural Areas             
------------------------------------------------------------------------
                                                                Average 
                        Nonurban area                            hourly 
                                                                  wage  
------------------------------------------------------------------------
Alabama......................................................    15.1457
Alaska.......................................................    25.8250
Arizona......................................................    16.5996
Arkansas.....................................................    15.0624
California...................................................    20.6476
Colorado.....................................................    17.5278
Connecticut..................................................    25.0854
Delaware.....................................................    18.2993
Florida......................................................    18.4445
Georgia......................................................    16.3888
Hawaii.......................................................    22.6670
Idaho........................................................    17.6129
Illinois.....................................................    16.4463
Indiana......................................................    17.4120
Iowa.........................................................    16.1574
Kansas.......................................................    15.1960
Kentucky.....................................................    16.2977
Louisiana....................................................    15.4880
Maine........................................................    17.5914
Maryland.....................................................    17.7750
Massachusetts................................................    22.5095
Michigan.....................................................    18.4407
Minnesota....................................................    17.8572
Mississippi..................................................    15.1905
Missouri.....................................................    15.4837
Montana......................................................    17.4489
Nebraska.....................................................    15.9437
Nevada.......................................................    19.2311
New Hampshire................................................    21.2761
New Jersey \1\...............................................  .........
New Mexico...................................................    16.8682
New York.....................................................    17.8401
North Carolina...............................................    16.8551
North Dakota.................................................    15.5776
Ohio.........................................................    17.6991
Oklahoma.....................................................    14.8012
Oregon.......................................................    20.5901
Pennsylvania.................................................    18.0013
Puerto Rico..................................................     8.4766
Rhode Island \1\.............................................  .........
South Carolina...............................................    16.7176
South Dakota.................................................    15.5989
Tennessee....................................................    15.5660
Texas........................................................    15.4273
Utah.........................................................    18.4060
Vermont......................................................    19.5637
Virginia.....................................................    16.3017
Washington...................................................    21.7934
West Virginia................................................    16.3620
Wisconsin....................................................    18.0975
Wyoming......................................................    18.2168
------------------------------------------------------------------------
\1\ All counties within the State are classified as urban.              


                Table 4F.--Puerto Rico Wage Index and Capital Geographic Adjustment Factor (GAF)                
----------------------------------------------------------------------------------------------------------------
                                                                                        Wage index--            
                                                                                          reclass.      GAF--   
                            Area                               Wage index      GAF       hospitals     Reclass. 
                                                                                                      hospitals 
----------------------------------------------------------------------------------------------------------------
Aguadilla, PR...............................................       1.0336       1.0229  ...........  ...........
Arecibo, PR.................................................       1.0642       1.0435  ...........  ...........
Caguas, PR..................................................       0.9642       0.9753       0.9642       0.9753
Mayaguez, PR................................................       0.9136       0.9400  ...........  ...........
Ponce, PR...................................................       1.0470       1.0320  ...........  ...........
San Juan-Bayamon, PR........................................       1.0108       1.0074  ...........  ...........
Rural Puerto Rico...........................................       0.8920       0.9247  ...........  ...........
----------------------------------------------------------------------------------------------------------------

BILLING CODE 4120-01-P

[[Page 41063]]

[GRAPHIC] [TIFF OMITTED] TR31JY98.032



[[Page 41064]]

[GRAPHIC] [TIFF OMITTED] TR31JY98.033



[[Page 41065]]

[GRAPHIC] [TIFF OMITTED] TR31JY98.034



[[Page 41066]]

[GRAPHIC] [TIFF OMITTED] TR31JY98.035



[[Page 41067]]

[GRAPHIC] [TIFF OMITTED] TR31JY98.036



[[Page 41068]]

[GRAPHIC] [TIFF OMITTED] TR31JY98.037



[[Page 41069]]

[GRAPHIC] [TIFF OMITTED] TR31JY98.038



[[Page 41070]]

[GRAPHIC] [TIFF OMITTED] TR31JY98.039



[[Page 41071]]

[GRAPHIC] [TIFF OMITTED] TR31JY98.040



[[Page 41072]]

[GRAPHIC] [TIFF OMITTED] TR31JY98.041



[[Page 41073]]

[GRAPHIC] [TIFF OMITTED] TR31JY98.042



[[Page 41074]]

[GRAPHIC] [TIFF OMITTED] TR31JY98.043



[[Page 41075]]

[GRAPHIC] [TIFF OMITTED] TR31JY98.044



[[Page 41076]]

[GRAPHIC] [TIFF OMITTED] TR31JY98.045



[[Page 41077]]

[GRAPHIC] [TIFF OMITTED] TR31JY98.046


BILLING CODE 4120-01-C

[[Page 41078]]



                                         Table 6A.--New Diagnosis Codes                                         
----------------------------------------------------------------------------------------------------------------
  Diagnosis                                                                                                     
    code               Description                   CC               MDC                     DRG               
----------------------------------------------------------------------------------------------------------------
337.3.......  Autonomic dysreflexia.......  N                              1  18, 19                            
438.53......  Other paralytic syndrome,     N                              1  12                                
               bilateral.                                                                                       
482.40......  Pneumonia due to              Y                              4  79, 80, 81                        
               Staphyloccus, unspecified.                                  5  121 \1\                           
                                                                          15  387, 389 \2\                      
                                                                          25  489 \3\                           
482.41......  Pneumonia due to              Y                              4  79, 80, 81                        
               Staphylococcus aureus.                                      5  121 \1\                           
                                                                          15  387, 389 \2\                      
                                                                          25  489 \3\                           
482.49......  Other Staphylococcus          Y                              4  79, 80, 81                        
               pneumonia.                                                  5  121 \1\                           
                                                                          15  387, 389 \2\                      
                                                                          25  489 \3\                           
518.83......  Chronic respiratory failure.  Y                              4  87                                
                                                                           5  121 \1\                           
518.84......  Acute and chronic             Y                              4  87                                
               respiratory failure.                                        5  121 \1\                           
                                                                          22  506, 507                          
519.00......  Unspecified tracheostomy      Y                            Pre  482                               
               complication.                                               4  101, 102                          
519.01......  Infection of tracheostomy...  Y                            Pre  482                               
                                                                           4  101, 102                          
519.02......  Mechanical complication of    Y                            Pre  482                               
               tracheostomy.                                               4  101, 102                          
519.09......  Other tracheostomy            Y                            Pre  482                               
               complication.                                               4  101, 102                          
536.40......  Unspecified gastrostomy       Y                              6  188, 189, 190                     
               complication.                                                                                    
536.41......  Infection of gastrostomy....  Y                              6  188, 189, 190                     
536.42......  Mechanical complication of    Y                              6  188, 189, 190                     
               gastrostomy.                                                                                     
536.49......  Other gastrostomy             Y                              6  188, 189, 190                     
               complication.                                                                                    
564.81......  Neurogenic bowel............  N                              6  182, 183, 184                     
564.89......  Other functional disorders    N                              6  182, 183, 184                     
               of intestine.                                                                                    
569.62......  Mechanical complication of    Y                              6  188, 189, 190                     
               colostomy and enterostomy.                                                                       
659.70......  Abnormality in fetal heart    N                             14  370, 371, 372, 373, 374, 375      
               rate/rhythm, unspecified as                                                                      
               to episode of care or not                                                                        
               applicable.                                                                                      
659.71......  Abnormality in fetal heart    N                             14  370, 371, 372, 373, 374, 375      
               rate/rhythm, delivered,                                                                          
               with or without mention of                                                                       
               antepartum condition.                                                                            
659.73......  Abnormality in fetal heart    N                             14  383, 384                          
               rate/rhythm, antepartum                                                                          
               condition or complication.                                                                       
763.81......  Abnormality in fetal heart    N                             15  390                               
               rate or rhythm before the                                                                        
               onset of labor.                                                                                  
763.82......  Abnormality in fetal heart    N                             15  390                               
               rate or rhythm during labor.                                                                     
763.83......  Abnormality in fetal heart    N                             15  390                               
               rate or rhythm, unspecified                                                                      
               as to time of onset.                                                                             
763.89......  Other specified               N                             15  390                               
               complications of labor and                                                                       
               delivery affecting fetus                                                                         
               and newborn.                                                                                     
780.71......  Chronic fatigue syndrome....  N                             23  463, 464                          
                                                                          25  490                               
780.79......  Other malaise and fatigue...  N                             23  463, 464                          
                                                                          25  490                               
786.03......  Apnea.......................  Y                              4  99, 100                           
                                                                          25  490                               
786.04......  Cheyne-Stokes respiration...  Y                              4  99, 100                           
                                                                          25  490                               
786.05......  Shortness of breath.........  N                              4  99, 100                           
                                                                          25  490                               
786.06......  Tachypnea...................  N                              4  99, 100                           
                                                                          25  490                               
786.07......  Wheezing....................  N                              4  99, 100                           
                                                                          25  490                               
965.61......  Poisoning by propionic acid   N                             21  449, 450, 451                     
               derivatives.                                                                                     
965.69......  Poisoning by other            N                             21  449, 450, 451                     
               antirheumatics.                                                                                  
995.86......  Malignant hyperthermia......  Y                             21  454,455                           
996.55......  Mechanical complications due  Y                             21  452, 453                          
               to artificial skin graft                                                                         
               and decellularized                                                                               
               allodermis.                                                                                      
996.56......  Mechanical complications due  Y                             21  452, 453                          
               to peritoneal dialysis                                                                           
               catheter.                                                                                        
996.68......  Infection and inflammatory    Y                             21  452, 453                          
               reaction due to peritoneal                                                                       
               dialysis catheter.                                                                               
V02.51......  Carrier or suspected carrier  N                             23  467                               
               of Group B streptococcus.                                                                        
V02.52......  Carrier or suspected carrier  N                             23  467                               
               of other streptococcus.                                                                          
V02.59......  Carrier or suspected carrier  N                             23  467                               
               of other specified                                                                               
               bacterial diseases.                                                                              
V10.48......  Personal history of           N                             17  411, 412                          
               malignant neoplasm of                                                                            
               epididymis.                                                                                      
V13.61......  Personal history of           N                             23  467                               
               hypospadias.                                                                                     
V13.69......  Personal history other        N                             23  467                               
               congenital malformation.                                                                         

[[Page 41079]]

                                                                                                                
V16.51......  Family history of malignant   N                             23  467                               
               neoplasm of kidney.                                                                              
V16.59......  Family history of malignant   N                             23  467                               
               neoplasm of other urinary                                                                        
               organs.                                                                                          
V18.61......  Family history of polycystic  N                             23  467                               
               kidney.                                                                                          
V18.69......  Family history of other       N                             23  467                               
               kidney diseases.                                                                                 
V23.81......  Supervision of high-risk      Y                             14  469                               
               pregnancy of elderly                                                                             
               primigravida.                                                                                    
V23.82......  Supervision of high-risk      Y                             14  469                               
               pregnancy of elderly                                                                             
               multigravida.                                                                                    
V23.83......  Supervision of high-risk      Y                             14  469                               
               pregnancy of young                                                                               
               primigravida.                                                                                    
V23.84......  Supervision of high-risk      Y                             14  469                               
               pregnancy of young                                                                               
               multigravida.                                                                                    
V23.89......  Supervision of other high-    Y                             14  469                               
               risk pregnancy.                                                                                  
V26.51......  Tubal ligation status.......  N                             23  467                               
V26.52......  Vasectomy status............  N                             23  467                               
V29.3.......  Observation for suspected     N                             23  467                               
               genetic or metabolic                                                                             
               condition.                                                                                       
V43.83......  Organ or tissue replaced by   N                             23  467                               
               artificial skin.                                                                                 
V44.50......  Unspecified cystostomy        N                             23  467                               
               status.                                                                                          
V44.51......  Cutaneous-vesicostomy status  N                             23  467                               
V44.52......  Appendico-vesicostomy status  N                             23  467                               
V44.59......  Other cystostomy status.....  N                             23  467                               
V56.2.......  Fitting and adjustment of     N                             11  317                               
               peritoneal dialysis                                                                              
               catheter.                                                                                        
V58.62......  Encounter for aftercare for   N                             23  465, 466                          
               long- term (current) use of                                                                      
               antibiotics.                                                                                     
V76.44......  Special screening for         N                             23  467                               
               malignant neoplasm of                                                                            
               prostate.                                                                                        
V76.45......  Special screening for         N                             23  467                               
               malignant neoplasm of                                                                            
               testis.                                                                                          
----------------------------------------------------------------------------------------------------------------
\1\ Classified as a ``major complication'' in this DRG.                                                         
\2\ Classified as a ``major problem'' in these DRGs.                                                            
\3\ HIV major related condition in this DRG.                                                                    


                                         Table 6B.--New Procedure Codes                                         
----------------------------------------------------------------------------------------------------------------
  Procedure                                                                                                     
    code                Description                   OR             MDC                     DRG                
----------------------------------------------------------------------------------------------------------------
36.31.......  Open chest transmyocardial      Y                           5  108                                
               revascularization.                                                                               
36.32.......  Other transmyocardial           Y                           5  108                                
               revascularization.                                                                               
36.39.......  Other heart revascularization.  Y                           5  108                                
37.67.......  Implantation of                 Y                           5  110, 111                           
               cardiomyostimulation system.                                                                     
75.37.......  Amnioinfusion.................  N                                                                 
86.67.......  Dermal regenerative graft.....  Y                           1  7, 8                               
                                                                          3  63                                 
                                                                          5  120                                
                                                                          6  170, 171                           
                                                                          8  217                                
                                                                          9  263, 264, 265, 266                 
                                                                         10  287                                
                                                                         21  439                                
                                                                         22  504, 506, 507                      
                                                                         24  486                                
92.30.......  Stereotactic radiosurgery, not  N \1\                       1  7, 8                               
               otherwise specified.                                      10  292, 293                           
                                                                         17  401, 402, 408                      
92.31.......  Single source photon            N \1\                       1  7, 8                               
               radiosurgery.                                             10  292, 293                           
                                                                         17  401, 402, 408                      
92.32.......  Multi-source photon             N \1\                       1  7, 8                               
               radiosurgery.                                             10  292, 293                           
                                                                         17  401, 402, 408                      
92.33.......  Particulate radiosurgery......  N \1\                       1  7, 8                               
                                                                         10  292, 293                           
                                                                         17  401, 402, 408                      
92.39.......  Stereotactic radiosurgery, not  N \1\                       1  7, 8                               
               elsewhere classified.                                     10  292, 293                           
                                                                         17  401, 402, 408                      
96.29.......  Reduction of intussusception    N                                                                 
               of alimentary tract.                                                                             
99.10.......  Injection or infusion of        N                                                                 
               thrombolytic agent.                                                                              
99.20.......  Injection or infusion of        N                                                                 
               platelet inhibitor.                                                                              
----------------------------------------------------------------------------------------------------------------
\1\ Non-operating room procedure that affects DRG assignment.                                                   


[[Page 41080]]


                                       Table 6C.--Invalid Diagnosis Codes                                       
----------------------------------------------------------------------------------------------------------------
  Diagnosis                                                                                                     
    code               Description                   CC               MDC                     DRG               
----------------------------------------------------------------------------------------------------------------
482.4.......  Pneumonia due to              Y                              4  79, 80, 81                        
               Staphylococcus.                                             5  121 \1\1                          
                                                                          15  387, 389 \2\                      
                                                                          25  489 \3\                           
519.0.......  Tracheostomy complication...  Y                            PRE  482                               
                                                                           4  101, 102                          
564.8.......  Other specified functional    N                              6  182, 183, 184                     
               disorders of intestine.                                                                          
763.8.......  Other specified               N                             15  390                               
               complications of labor and                                                                       
               delivery affecting fetus                                                                         
               and newborn.                                                                                     
780.7.......  Malaise and fatigue.........  N                             23  463, 464                          
                                                                          25  490                               
965.6.......  Poisoning by antirheumatics   N                             21  449, 450, 451                     
               [antiphlogistics].                                                                               
V02.5.......  Carrier or suspected carrier  N                             23  467                               
               of other specified                                                                               
               bacterial diseases.                                                                              
V13.6.......  Personal history of           N                             23  467                               
               congenital malformations.                                                                        
V16.5.......  Family history of malignant   N                             23  467                               
               neoplasm of urinary organs.                                                                      
V18.6.......  Family history of kidney      N                             23  467                               
               diseases.                                                                                        
V23.8.......  Supervision of other high-    Y                             14  469                               
               risk pregnancy.                                                                                  
V44.5.......  Cystostomy status...........  N                             23  467                               
----------------------------------------------------------------------------------------------------------------
\1\ Classified as a ``major complication'' in this DRG.                                                         
\2\ Classified as a ``major problem'' in these DRGs.                                                            
\3\ HIV major related condition in this DRG.                                                                    


                                       Table 6D.--Invalid Procedure Codes                                       
----------------------------------------------------------------------------------------------------------------
  Procedure                                                                                                     
    code               Description                   OR               MDC                     DRG               
----------------------------------------------------------------------------------------------------------------
36.3........  Other heart                   Y                              5  108                               
               revascularization.                                                                               
92.3........  Stereotactic radiosurgery...  N \1\                          1  7,8                               
                                                                          10  292, 293                          
                                                                          17  401, 402, 408                     
----------------------------------------------------------------------------------------------------------------
\1\ Non-operating room procedure that affects DRG assignment.                                                   


                                    Table 6E.--Revised Diagnosis Code Titles                                    
----------------------------------------------------------------------------------------------------------------
  Diagnosis                                                                                                     
    code               Description                   CC               MDC                     DRG               
----------------------------------------------------------------------------------------------------------------
518.81......  Acute respiratory failure...  Y                              4  87                                
                                                                           5  121 \1\                           
                                                                          22  506, 507                          
659.60......  Elderly multigravida          N                             14  370, 371, 372, 373, 374, 375      
               unspecified as to episode                                                                        
               of care or not applicable.                                                                       
659.61......  Elderly multigravida          N                             14  370, 371, 372, 373, 374, 375      
               delivered, with mention of                                                                       
               antepartum condition.                                                                            
659.63......  Elderly multigravida with     N                             14  383, 384                          
               antepartum condition or                                                                          
               complication.                                                                                    
V56.1.......  Fitting and adjustment of     N                             11  317                               
               extracorporeal dialysis                                                                          
               catheter.                                                                                        
V82.4.......  Maternal postnatal screening  N                             23  467                               
               for chromosomal anomalies.                                                                       
----------------------------------------------------------------------------------------------------------------
\1\ Classified as a ``major complication'' in this DRG.                                                         


[[Page 41081]]


             Table 6F.--Additions to the CC Exclusions List             
                            Page 1 of 3 Pages                           
   CCs that are added to the list are in Table 6F--Additions to the CC  
    Exclusions List. Each of the principal diagnoses is shown with an   
asterisk, and the revisions to the CC Exclusions List are provided in an
 indented column immediately following the affected principal diagnosis.
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
*01100    *01123    *01146   *01172   *01195   *01281   *11515     48249
  48240     48240     48240    48240    48240    48240    48240  *48230 
  48241     48241     48241    48241    48241    48241    48241    48240
  48249     48249     48249    48249    48249    48249    48249    48241
*01101    *01124    *01150   *01173   *01196   *01282   *11595     48249
  48240     48240     48240    48240    48240    48240    48240  *48231 
  48241     48241     48241    48241    48241    48241    48241    48240
  48249     48249     48249    48249    48249    48249    48249    48241
*01102    *01125    *01151   *01174   *01200   *01283   *1221      48249
  48240     48240     48240    48240    48240    48240    48240  *48232 
  48241     48241     48241    48241    48241    48241    48241    48240
  48249     48249     48249    48249    48249    48249    48249    48241
*01103    *01126    *01152   *01175   *01201   *01284   *1304      48249
  48240     48240     48240    48240    48240    48240    48240  *48239 
  48241     48241     48241    48241    48241    48241    48241    48240
  48249     48249     48249    48249    48249    48249    48249    48241
*01104    *01130    *01153   *01176   *01202   *01285   *1363      48249
  48240     48240     48240    48240    48240    48240    48240  *48240 
  48241     48241     48241    48241    48241    48241    48241    01100
  48249     48249     48249    48249    48249    48249    48249    01101
*01105    *01131    *01154   *01180   *01203   *01286   *3373      01102
  48240     48240     48240    48240    48240    48240    3350          
                                                                  01103 
  48241     48241     48241    48241    48241    48241    33510    01104
  48249     48249     48249    48249    48249    48249    33511    01105
*01106    *01132    *01155   *01181   *01204   *01790              01106
                                                         33519          
  48240     48240     48240    48240    48240    48240    33520    01110
  48241     48241     48241    48241    48241    48241    33521    01111
  48249     48249     48249    48249    48249    48249    33522    01112
*01110    *01133    *01156   *01182   *01205   *01791     33523    01113
  48240     48240     48240    48240    48240    48240    33524    01114
  48241     48241     48241    48241    48241    48241    33529    01115
  48249     48249     48249    48249    48249    48249    3358     01116
*01111    *01134    *01160   *01183   *01206   *01792     3359     01120
  48240     48240     48240    48240    48240    48240  *4800      01121
  48241     48241     48241    48241    48241    48241    48240    01122
  48249     48249     48249    48249    48249    48249    48241    01123
*01112    *01135    *01161   *01184   *01210   *01793     48249    01124
  48240     48240     48240    48240    48240    48240  *4801      01125
  48241     48241     48241    48241    48241    48241    48240    01126
  48249     48249     48249    48249    48249    48249    48241    01130
*01113    *01136    *01162   *01185   *01211   *01794     48249    01131
  48240     48240     48240    48240    48240    48240  *4802      01132
  48241     48241     48241    48241    48241    48241    48240    01133
  48249     48249     48249    48249    48249    48249    48241    01134
*01114    *01140    *01163   *01186   *01212   *01795     48249    01135
  48240     48240     48240    48240    48240    48240  *4808      01136
  48241     48241     48241    48241    48241    48241    48240    01140
  48249     48249     48249    48249    48249    48249    48241    01141
*01115    *01141    *01164   *01190   *01213   *01796     48249    01142
  48240     48240     48240    48240    48240    48240  *4809      01143
  48241     48241     48241    48241    48241    48241    48240    01144
  48249     48249     48249    48249    48249    48249    48241    01145
*01116    *01142    *01165   *01191   *01214   *0212      48249    01146
  48240     48240     48240    48240    48240    48240  *481       01150
  48241     48241     48241    48241    48241    48241    48240    01151
  48249     48249     48249    48249    48249    48249    48241    01152
*01120    *01143    *01166   *01192   *01215   *0310      48249    01153
  48240     48240     48240    48240    48240    48240  *4820      01154
  48241     48241     48241    48241    48241    48241    48240    01155
  48249     48249     48249    48249    48249    48249    48241    01156
*01121    *01144    *01170   *01193   *01216   *0391      48249    01160
  48240     48240     48240    48240    48240    48240  *4821      01161
  48241     48241     48241    48241    48241    48241    48240    01162
  48249     48249     48249    48249    48249    48249    48241    01163
*01122    *01145    *01171   *01194   *01280   *11505     48249    01164
  48240     48240     48240    48240    48240    48240  *4822      01165
  48241     48241     48241    48241    48241    48241    48240    01166
  48249     48249     48249    48249    48249    48249    48241    01170
------------------------------------------------------------------------


[[Page 41082]]


                            Page 2 of 3 Pages                           
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
  01171     4955      01183    5078     01195    48240    48241    48249
  01172     4956      01184    5080     01196    48241    48249  *5061  
  01173     4957      01185    5081     01200    48249  *4950      48240
  01174     4958      01186    5171     01201  *48283     48240    48241
  01175     4959      01190  *48249     01202    48240    48241    48249
  01176     5060      01191    01100    01203    48241    48249  *5062  
  01180     5061      01192    01101    01204    48249  *4951      48240
  01181     5070      01193    01102    01205  *48284     48240    48241
  01182     5071      01194    01103    01206    48240    48241    48249
  01183     5078      01195    01104    01210    48241    48249  *5063  
  01184     5080      01196    01105    01211    48249  *4952      48240
  01185     5081      01200    01106    01212  *48289     48240    48241
  01186     5171      01201    01110    01213    48240    48241    48249
  01190   *48241      01202    01111    01214    48241    48249  *5064  
  01191     01100     01203    01112    01215    48249  *4953      48240
  01192     01101     01204    01113    01216  *4829      48240    48241
  01193     01102     01205    01114    0310     48240    48241    48249
  01194     01103     01206    01115    11505    48241    48249  *5069  
  01195     01104     01210    01116    11515    48249  *4954      48240
  01196     01105     01211    01120    1304   *4830      48240    48241
  01200     01106     01212    01121    1363     48240    48241    48249
  01201     01110     01213    01122    481      48241    48249  *5070  
  01202     01111     01214    01123    4820     48249  *4955      48240
  01203     01112     01215    01124    4821   *4831      48240    48241
  01204     01113     01216    01125    4822     48240    48241    48249
  01205     01114     0310     01126    48230    48241    48249  *5071  
  01206     01115     11505    01130    48231    48249  *4956      48240
  01210     01116     11515    01131    48232  *4838      48240    48241
  01211     01120     1304     01132    48239    48240    48241    48249
  01212     01121     1363     01133    48240    48241    48249  *5078  
  01213     01122     481      01134    48241    48249  *4957      48240
  01214     01123     4820     01135    48249  *4841      48240    48241
  01215     01124     4821     01136    48281    48240    48241    48249
  01216     01125     4822     01140    48282    48241    48249  *5080  
  0310      01126     48230    01141    48283    48249  *4958      48240
  11505     01130     48231    01142    48284  *4843      48240    48241
  11515     01131     48232    01143    48289    48240    48241    48249
  1304      01132     48239    01144    4829     48241    48249  *5081  
  1363      01133     48240    01145    4830     48249  *4959      48240
  481       01134     48241    01146    4831   *4845      48240    48241
  4820      01135     48249    01150    4838     48240    48241    48249
  4821      01136     48281    01151    4841     48241    48249  *5088  
  4822      01140     48282    01152    4843     48249  *496       48240
  48230     01141     48283    01153    4845   *4846      48240    48241
  48231     01142     48284    01154    4846     48240    48241    48249
  48232     01143     48289    01155    4847     48241    48249  *5089  
  48239     01144     4829     01156    4848     48249  *500       48240
  48240     01145     4830     01160    485    *4847      48240    48241
  48241     01146     4831     01161    486      48240    48241    48249
  48249     01150     4838     01162    4870     48241    48249  *5171  
  48281     01151     4841     01163    4950     48249  *501       48240
  48282     01152     4843     01164    4951   *4848      48240    48241
  48283     01153     4845     01165    4952     48240    48241    48249
  48284     01154     4846     01166    4953     48241    48249  *5178  
  48289     01155     4847     01170    4954     48249  *502       48240
  4829      01156     4848     01171    4955   *485       48240    48241
  4830      01160     485      01172    4956     48240    48241    48249
  4831      01161     486      01173    4957     48241    48249  *51881 
  4838      01162     4870     01174    4958     48249  *503       51883
  4841      01163     4950     01175    4959   *486       48240    51884
  4843      01164     4951     01176    5060     48240    48241    78603
  4845      01165     4952     01180    5061     48241    48249    78604
  4846      01166     4953     01181    5070     48249  *504     *51882 
  4847      01170     4954     01182    5071   *4870      48240    51883
  4848      01171     4955     01183    5078     48240    48241    51884
  485       01172     4956     01184    5080     48241    48249    78603
  486       01173     4957     01185    5081     48249  *505       78604
  4870      01174     4958     01186    5171   *4871      48240  *51883 
  4950      01175     4959     01190  *48281     48240    48241    51881
  4951      01176     5060     01191    48240    48241    48249    51882
  4952      01180     5061     01192    48241    48249  *5060      51883
  4953      01181     5070     01193    48249  *494       48240    51884
  4954      01182     5071     01194  *48282     48240    48241    78603
------------------------------------------------------------------------


[[Page 41083]]


                            Page 3 of 3 Pages                           
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
  78604     53642   *99656     56962    V2384    V2384                  
  7991      53649     99655  *99791     V2389    V2389                  
*51884      56962     99656    53640  *V230      V239                   
  51881     9974      99659    53641    V2381  *V2389                   
  51882   *53642      99660    53642    V2382    V237                   
  51883     53640     99661    53649    V2383    V2381                  
  51884     53641     99662    56962    V2384    V2382                  
  78603     53642     99663    99586    V2389    V2383                  
  78604     53649     99664    99655  *V231      V2384                  
  7991      56962     99665    99656    V2381    V2389                  
*51889      9974      99666    99668    V2382    V239                   
  48240   *53649      99667  *99799     V2383  *V239                    
  48241     53640     99668    53640    V2384    V2381                  
  48249     53641     99669    53641    V2389    V2382                  
*51900      53642     99670    53642  *V232      V2383                  
  51900     53649     99671    53649    V2381    V2384                  
  51901     56962     99672    56962    V2382    V2389                  
  51902     9974      99673    99586    V2383                           
  51909   *56960      99674    99655    V2384                           
*51901      56962     99675    99656    V2389                           
  51900   *56961      99676    99668  *V233                             
  51901     56962     99677  *9980      V2381                           
  51902   *56962      99678    99586    V2382                           
  51909     56960     99679  *99811     V2383                           
*51902      56961   *99659     99586    V2384                           
  51900     56962     99655  *99812     V2389                           
  51901     56969     99656    99586  *V234                             
  51902   *56969      99668  *99813     V2381                           
  51909     56962   *99660     99586    V2382                           
*51909    *74861      99655  *99881     V2383                           
  51900     48240     99656    53640    V2384                           
  51901     48241     99668    53641    V2389                           
  51902     48249   *99668     53642  *V235                             
  51909   *78603      99655    53649    V2381                           
*5191       78603     99656    56962    V2382                           
  51900     78604     99659    99586    V2383                           
  51901   *78604      99660  *99883     V2384                           
  51902     78603     99661    53640    V2389                           
  51909     78604     99662    53641  *V237                             
*5198     *7991       99663    53642    V2381                           
  48240     51883     99664    53649    V2382                           
  48241     51884     99665    56962    V2383                           
  48249     78603     99666    99586    V2384                           
  51883     78604     99667  *99889     V2389                           
  51884   *9584       99668    53640  *V2381                            
  51900     99586     99669    53641    V237                            
  51901   *9954       99670    53642    V2381                           
  51902     99586     99671    53649    V2382                           
  51909   *99586      99672    56962    V2383                           
  78603     99586     99673    99586    V2384                           
  78604   *99652      99674  *9989      V2389                           
*5199       99655     99675    53640    V239                            
  48240   *99655      99676    53641  *V2382                            
  48241     99652     99677    53642    V237                            
  48249     99655     99678    53649    V2381                           
  51883     99660     99679    56962    V2382                           
  51884     99661   *99669     99586    V2383                           
  51900     99662     99655  *V220      V2384                           
  51901     99663     99656    V2381    V2389                           
  51902     99665     99668    V2382    V239                            
  51909     99666   *99670     V2383  *V2383                            
  78603     99667     99655    V2384    V237                            
  78604     99669     99656    V2389    V2381                           
*53640      99670     99668  *V221      V2382                           
  53640     99671   *99679     V2381    V2383                           
  53641     99672     99655    V2382    V2384                           
  53642     99673     99656    V2383    V2389                           
  53649     99674     99668    V2384    V239                            
  56962     99675   *9974      V2389  *V2384                            
  9974      99676     53640  *V222      V237                            
*53641      99677     53641    V2381    V2381                           
  53640     99678     53642    V2382    V2382                           
  53641     99679     53649    V2383    V2383                           
------------------------------------------------------------------------


[[Page 41084]]


             Table 6G.--Deletions to the CC Exclusions List             
[CCs that are deleted from the list are in Table 6G--Deletions to the CC
    Exclusions List. Each of the principal diagnoses is shown with an   
asterisk, and the revisions to the CC Exclusions List are provided in an
indented column immediately following the affected principal diagnosis.]
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
*01100    *01146    *01195   *11515     01143    48282    4824     4824 
  4824      4824      4824     4824     01144    48283  *4870    *5178  
*01101    *01150    *01196   *11595     01145    48284    4824     4824 
  4824      4824      4824     4824     01146    48289  *4871    *51889 
*01102    *01151    *01200   *1221      01150    4829     4824     4824 
  4824      4824      4824     4824     01151    4830   *494     *5190  
*01103    *01152    *01201   *1304      01152    4831     4824     5190 
  4824      4824      4824     4824     01153    4838   *4950    *5191  
*01104    *01153    *01202   *1363      01154    4841     4824     5190 
  4824      4824      4824     4824     01155    4843   *4951    *5198  
*01105    *01154    *01203   *4800      01156    4845     4824     4824 
  4824      4824      4824     4824     01160    4846   *4952      5190 
*01106    *01155    *01204   *4801      01161    4847     4824   *5199  
  4824      4824      4824     4824     01162    4848   *4953      4824 
*01110    *01156    *01205   *4802      01163    485      4824     5190 
  4824      4824      4824     4824     01164    486    *4954    *74861 
*01111    *01160    *01206   *4808      01165    4870     4824     4824 
  4824      4824      4824     4824     01166    4950   *4955    *V220  
*01112    *01161    *01210   *4809      01170    4951     4824     V238 
  4824      4824      4824     4824     01171    4952   *4956    *V221  
*01113    *01162    *01211   *481                4953     4824     V238 
                                       01172                            
  4824      4824      4824     4824     01173    4954   *4957    *V222  
*01114    *01163    *01212   *4820      01174    4955     4824     V238 
  4824      4824      4824     4824     01175    4956   *4958    *V230  
*01115    *01164    *01213   *4821      01176    4957     4824     V238 
  4824      4824      4824     4824     01180    4958   *4959    *V231  
*01116    *01165    *01214   *4822      01181    4959     4824     V238 
  4824      4824      4824     4824     01182    5060   *496     *V232  
*01120    *01166    *01215   *48230     01183    5061     4824     V238 
  4824      4824      4824     4824     01184    5070   *500     *V233  
*01121    *01170    *01216   *48231     01185    5071     4824     V238 
  4824      4824      4824     4824     01186    5078   *501     *V234  
*01122    *01171    *01280   *48232     01190    5080     4824     V238 
  4824      4824      4824     4824     01191    5081   *502     *V235  
*01123    *01172    *01281   *48239     01192    5171     4824     V238 
  4824      4824      4824     4824     01193  *48281   *503     *V237  
*01124    *01173    *01282   *4824      01194    4824     4824     V238 
  4824      4824      4824     01100    01195  *48282   *504     *V238  
*01125    *01174    *01283     01101    01196    4824     4824     V237 
  4824      4824      4824     01102    01200  *48283   *505       V238 
*01126    *01175    *01284     01103    01201    4824     4824     V239 
  4824      4824      4824     01104    01202  *48284   *5060    *V239  
*01130    *01176    *01285     01105    01203    4824     4824     V238 
  4824      4824      4824     01106    01204  *48289   *5061           
*01131    *01180    *01286     01110    01205    4824     4824          
  4824      4824      4824     01111    01206  *4829    *5062           
*01132    *01181    *01790     01112    01210    4824     4824          
  4824      4824      4824     01113    01211  *4830    *5063           
*01133    *01182    *01791     01114    01212    4824     4824          
  4824      4824      4824     01115    01213  *4831    *5064           
*01134    *01183    *01792     01116    01214    4824     4824          
  4824      4824      4824     01120    01215  *4838    *5069           
*01135    *01184    *01793     01121    01216    4824     4824          
  4824      4824      4824     01122    0310   *4841    *5070           
*01136    *01185    *01794     01123    11505    4824     4824          
  4824      4824      4824     01124    11515  *4843    *5071           
*01140    *01186    *01795     01125    1304     4824     4824          
  4824      4824      4824     01126    1363   *4845    *5078           
*01141    *01190    *01796     01130    481      4824     4824          
  4824      4824      4824     01131    4820   *4846    *5080           
*01142    *01191    *0212      01132    4821     4824     4824          
  4824      4824      4824     01133    4822   *4847    *5081           
*01143    *01192    *0310      01134    48230    4824     4824          
  4824      4824      4824     01135    48231  *4848    *5088           
*01144    *01193    *0391      01136    48232    4824     4824          
  4824      4824      4824     01140    48239  *485     *5089           
*01145    *01194    *11505     01141    4824     4824     4824          
  4824      4824      4824     01142    48281  *486     *5171           
------------------------------------------------------------------------


[[Page 41085]]


                                   Table 7A.--Medicare Prospective Payment System Selected Percentile Lengths of Stay                                   
                                                        [FY97 MEDPAR Update 03/98 Grouper V15.0]                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                              Number        Arithmetic         10th            25th            50th            75th            90th     
                   DRG                      discharges       mean LOS       percentile      percentile      percentile      percentile      percentile  
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................           36863          9.6140               2               4               7              12              20
2.......................................            7073         10.0431               3               5               8              13              20
3.......................................               3          9.3333               7               7               9              12              12
4.......................................            6387          7.7417               1               3               5               9              17
5.......................................          101629          3.6388               1               2               2               4               8
6.......................................             359          3.0306               1               1               2               4               7
7.......................................           12693         10.1052               2               4               7              12              20
8.......................................            3051          3.1786               1               1               2               4               7
9.......................................            1712          6.5724               1               3               5               8              13
10......................................           19898          6.8603               2               3               5               8              14
11......................................            2976          4.1398               1               2               3               5               8
12......................................           38546          6.6802               2               3               5               8              12
13......................................            6395          5.4835               2               3               4               6               9
14......................................          374285          6.2936               2               3               5               8              12
15......................................          146334          3.8586               1               2               3               5               7
16......................................           13990          5.9277               2               3               4               7              11
17......................................            3228          3.4291               1               2               3               4               7
18......................................           27696          5.5756               2               3               4               7              10
19......................................            7354          3.8089               1               2               3               5               7
20......................................            6638         10.1788               2               5               8              13              19
21......................................            1386          6.8283               2               3               5               8              14
22......................................            2803          4.6522               2               2               4               6               9
23......................................            6933          4.2573               1               2               3               5               8
24......................................           58307          5.0648               1               2               4               6              10
25......................................           22886          3.4256               1               2               3               4               7
26......................................              35          3.2857               1               1               3               4               7
27......................................            4246          5.4788               1               1               3               7              12
28......................................           14087          5.9295               1               2               4               7              12
29......................................            4349          3.5220               1               1               3               4               7
31......................................            3135          4.4287               1               2               3               5               8
32......................................            1378          2.9594               1               1               2               3               5
34......................................           20202          5.4414               1               3               4               7              11
35......................................            4292          3.5517               1               2               3               4               7
36......................................            5421          1.5379               1               1               1               1               2
37......................................            1697          3.7183               1               1               2               4               8
38......................................             116          2.5948               1               1               2               3               5
39......................................            1908          2.0383               1               1               1               2               4
40......................................            2300          3.1822               1               1               2               4               7
42......................................            4052          2.0908               1               1               1               2               4
43......................................             120          3.4250               1               2               3               5               7
44......................................            1346          5.0498               2               3               4               6               9
45......................................            2428          3.4773               1               2               3               4               6
46......................................            3177          4.6396               1               2               4               6               9
47......................................            1232          3.2873               1               1               3               4               7
48......................................               2          4.5000               4               4               5               5               5
49......................................            2297          5.0004               1               2               4               6               9
50......................................            3026          1.9752               1               1               2               2               3
51......................................             308          2.8182               1               1               1               3               6
52......................................              89          2.7528               1               1               2               3               7
53......................................            3012          3.6597               1               1               2               4               8
54......................................               2          6.0000               5               5               7               7               7
55......................................            1704          2.9607               1               1               2               3               6
56......................................             695          2.8374               1               1               2               3               6
57......................................             611          3.6759               1               1               3               4               7
59......................................             121          2.4215               1               1               2               3               5
60......................................               1          4.0000               4               4               4               4               4
61......................................             280          4.6464               1               1               2               5              10
62......................................               4          1.2500               1               1               1               1               2
63......................................            3733          4.4466               1               2               3               5               9
64......................................            3432          6.6973               1               2               5               8              14
65......................................           29238          2.9721               1               2               2               4               5
66......................................            6848          3.2604               1               2               3               4               6
67......................................             494          3.7854               1               2               3               4               7
68......................................           11573          4.1497               1               2               3               5               7
69......................................            3471          3.3244               1               2               3               4               6
70......................................              37          2.5405               1               1               2               3               4
71......................................             100          3.9300               1               2               3               6               7
72......................................             829          3.7853               1               2               3               5               7
73......................................            6323          4.4058               1               2               3               6               8
74......................................               2          2.5000               2               2               3               3               3

[[Page 41086]]

                                                                                                                                                        
75......................................           41135         10.2396               4               5               8              13              20
76......................................           41950         11.3136               3               5               9              14              21
77......................................            2041          4.8863               1               2               4               7              10
78......................................           31059          7.3075               3               5               7               9              12
79......................................          248239          8.4083               3               4               7              10              15
80......................................            8319          5.8721               2               3               5               7              10
81......................................               7         11.2857               2               3               6               7               8
82......................................           71558          7.1252               2               3               6               9              14
83......................................            7419          5.5741               2               3               4               7              10
84......................................            1322          3.3162               1               2               3               4               6
85......................................           22565          6.6618               2               3               5               8              13
86......................................            1510          3.8801               1               2               3               5               7
87......................................           73527          6.3192               1               3               5               8              12
88......................................          390502          5.4117               2               3               4               7              10
89......................................          471124          6.2766               2               4               5               8              11
90......................................           39143          4.4608               2               3               4               6               8
91......................................              48          3.9375               1               2               3               5               7
92......................................           14606          6.3852               2               3               5               8              12
93......................................            1323          4.3583               1               2               4               6               8
94......................................           13510          6.4760               2               3               5               8              12
95......................................            1408          3.8544               1               2               3               5               7
96......................................           62085          4.8491               2               3               4               6               9
97......................................           25768          3.8219               1               2               3               5               7
98......................................              28          4.9286               1               2               3               5              13
99......................................           26603          3.0405               1               1               2               4               6
100.....................................           10353          2.1232               1               1               2               3               4
101.....................................           20349          4.4392               1               2               3               5               9
102.....................................            4579          2.7917               1               1               2               3               5
103.....................................             515         50.5320               9              14              32              71             124
104.....................................           29432         12.4392               4               7              10              16              23
105.....................................           25718          9.6492               4               6               8              11              17
106.....................................          107341         10.6962               6               7               9              12              17
107.....................................           69437          7.9517               4               5               7               9              13
108.....................................            8142         11.7677               4               6               9              14              22
110.....................................           62676          9.6167               2               5               8              12              18
111.....................................            5616          5.8063               2               4               6               7               9
112.....................................          119137          3.9263               1               1               3               5               8
113.....................................           46975         12.2664               4               6               9              15              24
114.....................................            8543          8.4041               2               4               7              11              16
115.....................................           15131          8.7469               2               4               7              11              17
116.....................................          210530          4.1764               1               2               3               5               8
117.....................................            3747          3.9861               1               1               2               5               9
118.....................................            6529          2.9326               1               1               2               3               6
119.....................................            1640          5.3829               1               1               3               7              13
120.....................................           38162          8.1769               1               2               5              10              18
121.....................................          170973          6.6427               2               4               6               8              12
122.....................................           83711          4.1990               1               2               4               6               7
123.....................................           43626          4.3987               1               1               2               5              10
124.....................................          155144          4.4560               1               2               4               6               9
125.....................................           63029          2.8712               1               1               2               4               6
126.....................................            5445         12.4382               4               6               9              15              25
127.....................................          723327          5.5118               2               3               4               7              10
128.....................................           16139          6.0284               3               4               5               7               9
129.....................................            4482          2.9514               1               1               1               3               7
130.....................................           98650          5.9904               2               3               5               7              10
131.....................................           24713          4.6719               1               3               4               6               8
132.....................................          175262          3.1519               1               2               3               4               6
133.....................................            6682          2.4811               1               1               2               3               5
134.....................................           30563          3.4498               1               2               3               4               6
135.....................................            8271          4.3344               1               2               3               5               8
136.....................................            1117          2.9687               1               1               2               4               5
138.....................................          210196          4.0456               1               2               3               5               8
139.....................................           67634          2.5762               1               1               2               3               5
140.....................................          108283          2.9686               1               1               2               4               5
141.....................................           82219          3.8511               1               2               3               5               7
142.....................................           36801          2.7878               1               1               2               3               5
143.....................................          144774          2.2571               1               1               2               3               4
144.....................................           79437          5.2262               1               2               4               7              10
145.....................................            6398          2.8678               1               1               2               4               6
146.....................................           10433         10.2667               5               7               9              12              17

[[Page 41087]]

                                                                                                                                                        
147.....................................            1790          6.7374               4               5               7               8              10
148.....................................          147867         12.2636               5               7              10              15              22
149.....................................           14480          6.8502               4               5               6               8              10
150.....................................           23924         10.8759               4               6               9              13              19
151.....................................            4176          5.8829               2               3               5               8              10
152.....................................            4736          8.3328               4               5               7              10              14
153.....................................            1616          5.6293               3               4               5               7               8
154.....................................           34592         13.3723               4               7              11              16              25
155.....................................            4766          4.6897               1               2               4               6               9
156.....................................               2         18.0000               6               6              30              30              30
157.....................................            9351          5.4102               1               2               4               7              11
158.....................................            4141          2.6218               1               1               2               3               5
159.....................................           18453          4.9685               1               2               4               6              10
160.....................................            9823          2.6793               1               1               2               3               5
161.....................................           14694          4.0874               1               2               3               5               9
162.....................................            7099          2.0338               1               1               1               2               4
163.....................................               6         10.0000               1               4               9              13              13
164.....................................            5319          8.5336               4               5               7              10              15
165.....................................            1658          4.9566               2               3               5               6               8
166.....................................            3561          5.1106               2               3               4               6               9
167.....................................            2350          2.8400               1               2               2               4               5
168.....................................            1732          4.5704               1               2               3               6               9
169.....................................             853          2.5768               1               1               2               3               5
170.....................................           12888         11.2453               2               5               8              14              23
171.....................................            1013          4.8164               1               2               4               6               9
172.....................................           33258          7.1141               2               3               5               9              14
173.....................................            2164          3.9750               1               1               3               5               8
174.....................................          250195          4.9246               2               3               4               6               9
175.....................................           21767          3.0099               1               2               3               4               5
176.....................................           18457          5.4888               2               3               4               7              10
177.....................................           11202          4.5540               2               2               4               6               8
178.....................................            3523          3.2109               1               2               3               4               6
179.....................................           12572          6.4144               2               3               5               8              12
180.....................................           93855          5.4295               2               3               4               7              10
181.....................................           21459          3.5079               1               2               3               4               6
182.....................................          236477          4.3554               1               2               3               5               8
183.....................................           70321          3.0159               1               1               2               4               6
184.....................................              91          3.2857               1               2               2               4               7
185.....................................            4110          4.4822               1               2               3               6               9
187.....................................             892          3.9608               1               2               3               5               8
188.....................................           75769          5.5554               1               2               4               7              11
189.....................................            8683          3.2034               1               1               2               4               6
190.....................................              62          5.2903               1               2               4               7              11
191.....................................           10738         14.5968               4               7              11              18              29
192.....................................             839          6.7247               2               4               6               8              12
193.....................................            7407         12.4918               5               7              10              15              22
194.....................................             774          6.9225               3               4               6               9              12
195.....................................            7134          9.8004               4               6               8              12              17
196.....................................            1274          5.7245               2               4               5               7              10
197.....................................           25188          8.6282               3               5               7              10              15
198.....................................            6401          4.5894               2               3               4               6               8
199.....................................            2067         10.1751               3               5               8              14              20
200.....................................            1357         11.4952               2               4               8              14              24
201.....................................            1670         14.3072               4               6              11              18              29
202.....................................           28883          6.7510               2               3               5               8              13
203.....................................           29715          6.8468               2               3               5               9              14
204.....................................           53504          6.0856               2               3               5               7              11
205.....................................           23103          6.5500               2               3               5               8              13
206.....................................            1630          4.0865               1               2               3               5               8
207.....................................           35726          5.1383               1               2               4               6              10
208.....................................            9541          2.9005               1               1               2               4               6
209.....................................          364469          5.4343               3               4               5               6               8
210.....................................          142415          7.0179               3               4               6               8              12
211.....................................           26144          5.1433               3               4               5               6               8
212.....................................              13          3.7692               1               2               4               5               6
213.....................................            7546          8.4157               2               4               6              11              16
216.....................................            6154          9.8351               2               4               7              12              19
217.....................................           20823         12.9944               3               5               9              16              27
218.....................................           24004          5.3243               2               3               4               6              10
219.....................................           18448          3.2888               1               2               3               4               5

[[Page 41088]]

                                                                                                                                                        
220.....................................               5          3.2000               1               1               3               4               7
223.....................................           18683          2.6174               1               1               2               3               5
224.....................................            7760          2.0628               1               1               2               3               4
225.....................................            5697          4.3498               1               2               3               5               9
226.....................................            5583          5.9226               1               2               4               7              12
227.....................................            4638          2.7288               1               1               2               3               5
228.....................................            2773          3.4241               1               1               2               4               8
229.....................................            1114          2.3887               1               1               2               3               5
230.....................................            2399          4.5302               1               2               3               5               9
231.....................................           10765          4.5644               1               2               3               5               9
232.....................................             498          3.8273               1               1               2               4               9
233.....................................            4948          7.6326               2               3               5               9              16
234.....................................            2286          3.6374               1               2               3               5               7
235.....................................            5378          5.3103               1               3               4               6              10
236.....................................           39661          5.1485               1               3               4               6               9
237.....................................            1608          3.6486               1               2               3               5               7
238.....................................            7892          8.8692               3               4               7              11              17
239.....................................           59978          6.4285               2               3               5               8              12
240.....................................           13753          6.6862               2               3               5               8              13
241.....................................            2925          4.0021               1               2               3               5               7
242.....................................            2652          6.7266               2               3               5               8              13
243.....................................           82323          4.8596               2               3               4               6               9
244.....................................           12497          5.0070               2               3               4               6               9
245.....................................            4392          3.7368               1               2               3               5               7
246.....................................            1280          3.9313               1               2               3               5               7
247.....................................           12331          3.4951               1               2               3               4               7
248.....................................            8162          4.6837               1               2               4               6               9
249.....................................           10919          3.6445               1               1               3               4               7
250.....................................            3586          4.2284               1               2               3               5               8
251.....................................            2229          2.9484               1               1               2               4               5
252.....................................               1          1.0000               1               1               1               1               1
253.....................................           19548          4.8593               1               3               4               6               9
254.....................................            9373          3.3465               1               2               3               4               6
255.....................................               2          3.5000               1               1               6               6               6
256.....................................            5566          5.1175               1               2               4               6              10
257.....................................           21299          2.9851               1               2               2               3               5
258.....................................           16484          2.1352               1               1               2               3               3
259.....................................            3797          3.0830               1               1               2               3               7
260.....................................            4492          1.5410               1               1               1               2               2
261.....................................            2003          2.2476               1               1               2               3               4
262.....................................             665          4.2391               1               1               3               6               9
263.....................................           27639         11.4184               3               5               8              14              22
264.....................................            3332          7.0624               2               3               5               8              14
265.....................................            4341          6.5312               1               2               4               8              13
266.....................................            2480          3.4161               1               1               2               4               7
267.....................................             254          4.5984               1               2               3               5               9
268.....................................             888          3.5676               1               1               2               4               7
269.....................................            9483          7.8891               2               3               6              10              16
270.....................................            2696          3.1439               1               1               2               4               7
271.....................................           23100          7.1558               3               4               6               9              13
272.....................................            5981          6.4233               2               3               5               8              12
273.....................................            1315          4.8008               1               2               4               6               8
274.....................................            2440          6.7398               1               3               5               8              14
275.....................................             215          3.5163               1               1               3               4               7
276.....................................             944          4.4492               1               2               4               6               8
277.....................................           82207          5.9080               2               3               5               7              10
278.....................................           24763          4.4937               2               3               4               6               8
279.....................................              12          5.0000               2               2               4               7               9
280.....................................           14318          4.3117               1               2               3               5               8
281.....................................            6028          3.1443               1               1               3               4               6
282.....................................               2          2.0000               2               2               2               2               2
283.....................................            5236          4.8010               1               2               4               6               9
284.....................................            1668          3.3171               1               2               3               4               6
285.....................................            5567         11.0223               3               5               8              13              21
286.....................................            2153          6.9833               3               4               5               8              13
287.....................................            6222         11.2252               3               5               8              13              22
288.....................................            1521          5.9382               3               3               5               6               9
289.....................................            5499          3.2366               1               1               2               3               7
290.....................................            8981          2.5171               1               1               2               3               4
291.....................................              67          1.7612               1               1               1               2               3

[[Page 41089]]

                                                                                                                                                        
292.....................................            5072         10.7744               2               4               8              14              21
293.....................................             351          5.4672               1               2               4               7              12
294.....................................           82620          4.9159               1               2               4               6               9
295.....................................            3630          3.9573               1               2               3               5               7
296.....................................          236933          5.3935               2               3               4               7              10
297.....................................           32857          3.6526               1               2               3               4               7
298.....................................              95          3.6526               1               1               2               4               8
299.....................................             979          5.3463               1               2               4               7              10
300.....................................           16904          6.2827               2               3               5               8              12
301.....................................            2411          3.8075               1               2               3               5               7
302.....................................            8040         10.1373               5               6               8              12              18
303.....................................           19774          9.2208               4               5               7              10              16
304.....................................           12948          8.9874               2               4               7              11              18
305.....................................            2570          3.8911               1               2               3               5               7
306.....................................           10714          5.5080               1               2               3               7              12
307.....................................            2368          2.4041               1               1               2               3               4
308.....................................            9227          6.0016               1               2               4               8              13
309.....................................            3565          2.5910               1               1               2               3               5
310.....................................           26862          4.3113               1               2               3               5               9
311.....................................            7848          1.9509               1               1               1               2               4
312.....................................            1744          4.3354               1               1               3               6               9
313.....................................             589          2.3820               1               1               2               3               5
314.....................................               1         10.0000              10              10              10              10              10
315.....................................           28603          8.0449               1               2               5              10              18
316.....................................           93772          6.7982               2               3               5               9              14
317.....................................             803          2.8543               1               1               2               3               6
318.....................................            6238          6.0928               1               3               4               8              12
319.....................................             412          2.9879               1               1               2               4               6
320.....................................          178400          5.5722               2               3               4               7              10
321.....................................           23782          4.0371               2               2               3               5               7
322.....................................              85          4.0588               2               2               3               4               7
323.....................................           17085          3.2128               1               1               2               4               6
324.....................................            7560          1.9376               1               1               1               2               4
325.....................................            7442          3.9614               1               2               3               5               8
326.....................................            2205          2.7728               1               1               2               3               5
327.....................................               9          2.8889               1               1               2               3               4
328.....................................             767          3.7171               1               2               3               5               7
329.....................................              88          2.2500               1               1               1               3               4
331.....................................           44022          5.5767               1               3               4               7              11
332.....................................            4566          3.5572               1               1               3               5               7
333.....................................             320          4.9219               1               2               4               6              11
334.....................................           18718          4.9703               3               3               4               6               8
335.....................................           10403          3.7142               2               3               3               4               5
336.....................................           54368          3.6034               1               2               3               4               7
337.....................................           31918          2.2865               1               1               2               3               4
338.....................................            2785          4.7885               1               2               3               6              10
339.....................................            2000          4.1895               1               1               3               5               9
340.....................................               2          1.0000               1               1               1               1               1
341.....................................            4945          2.9521               1               1               2               3               6
342.....................................            1013          3.4423               1               2               2               4               7
344.....................................            3904          2.6360               1               1               1               3               5
345.....................................            1349          3.6338               1               1               2               4               8
346.....................................            4889          5.8151               1               3               4               7              11
347.....................................             368          3.1141               1               1               2               4               6
348.....................................            3216          4.2463               1               2               3               5               8
349.....................................             636          2.7453               1               1               2               3               5
350.....................................            6146          4.4007               2               2               4               5               8
352.....................................             640          3.6078               1               1               3               4               7
353.....................................            2831          6.9347               3               4               5               8              12
354.....................................           10001          5.7745               3               3               4               6              10
355.....................................            5668          3.4622               2               3               3               4               5
356.....................................           29070          2.6484               1               2               2               3               4
357.....................................            6365          9.0207               3               5               7              11              17
358.....................................           27581          4.3699               2               3               3               5               7
359.....................................           28195          2.9766               2               2               3               3               4
360.....................................           17946          3.1562               1               2               3               4               5
361.....................................             543          3.3204               1               1               2               3               7
363.....................................            3976          3.3154               1               2               2               3               6
364.....................................            1838          3.5620               1               1               2               5               8
365.....................................            2315          6.8877               1               2               5               9              14

[[Page 41090]]

                                                                                                                                                        
366.....................................            4395          6.8066               1               3               5               8              14
367.....................................             510          2.8863               1               1               2               3               6
368.....................................            2907          6.3509               2               3               5               8              12
369.....................................            2621          3.0626               1               1               2               4               6
370.....................................            1207          5.4905               2               3               4               5               9
371.....................................            1184          3.4611               2               3               3               4               5
372.....................................            1004          3.1464               1               2               2               3               5
373.....................................            3985          2.1154               1               1               2               2               3
374.....................................             159          3.0629               1               2               2               3               4
375.....................................               9          5.1111               2               2               3               9              10
376.....................................             222          2.9144               1               2               2               3               6
377.....................................              53          4.4528               1               2               3               6               9
378.....................................             171          2.5906               1               2               2               3               4
379.....................................             338          3.5562               1               1               2               3               7
380.....................................              90          2.1556               1               1               2               3               4
381.....................................             192          2.1198               1               1               1               2               4
382.....................................              42          1.2619               1               1               1               1               2
383.....................................            1490          3.7302               1               2               3               4               8
384.....................................             129          2.6512               1               1               1               3               6
385.....................................               1          2.0000               2               2               2               2               2
389.....................................              10         10.2000               1               7               7              15              19
390.....................................              13          6.0000               2               2               4               5              17
392.....................................            2546         10.3987               4               5               7              12              21
394.....................................            1820          7.0368               1               2               4               8              16
395.....................................           71452          4.7241               1               2               3               6               9
396.....................................              16         17.3750               1               1               4              11              13
397.....................................           18933          5.5143               1               2               4               7              11
398.....................................           18263          6.0488               2               3               5               7              11
399.....................................            1325          3.7170               1               2               3               5               7
400.....................................            7291          9.3665               2               3               6              12              20
401.....................................            6715         11.0067               2               4               8              14              23
402.....................................            1465          3.8826               1               1               3               5               8
403.....................................           39249          8.1435               2               3               6              10              17
404.....................................            3823          4.4499               1               2               3               6               9
406.....................................            3326          9.5391               2               4               7              12              20
407.....................................             636          4.3270               1               2               4               5               8
408.....................................            2692          7.5137               1               2               5               9              16
409.....................................            4682          5.8317               2               3               4               6              11
410.....................................           59539          3.4172               1               2               3               4               6
411.....................................              19          3.5263               1               1               2               2               7
412.....................................              25          2.2800               1               1               2               3               4
413.....................................            7854          7.4318               2               3               6               9              15
414.....................................             677          4.1905               1               2               3               5               8
415.....................................           45551         14.3639               4               7              11              18              28
416.....................................          231746          7.3984               2               4               6               9              14
417.....................................              43          5.8837               2               3               5               7              11
418.....................................           21340          6.1925               2               3               5               8              11
419.....................................           15355          5.0178               2               3               4               6               9
420.....................................            2697          3.9459               1               2               3               5               7
421.....................................           12186          3.9568               1               2               3               5               7
422.....................................              89          3.3258               1               2               2               4               7
423.....................................           10830          7.7667               2               3               6               9              15
424.....................................            1640         14.2976               2               5              10              18              29
425.....................................           15541          4.1344               1               2               3               5               8
426.....................................            4507          4.9022               1               2               3               6              10
427.....................................            1656          4.7977               1               2               3               6              10
428.....................................             963          7.2887               1               2               5               8              15
429.....................................           32953          7.1813               2               3               5               8              14
430.....................................           57380          8.7114               2               4               7              11              17
431.....................................             220          7.2409               1               3               5               8              13
432.....................................             414          5.3116               1               2               3               6              12
433.....................................            6874          3.2098               1               1               2               4               7
434.....................................           21742          5.1845               2               3               4               6               9
435.....................................           14706          4.4104               1               2               4               5               8
436.....................................            3357         13.9896               4               7              13              21              27
437.....................................           12879          9.2165               3               5               8              12              16
439.....................................            1149          7.7346               1               3               5               9              16
440.....................................            5199          8.9683               2               3               6              10              19
441.....................................             578          3.4810               1               1               2               4               7
442.....................................           16431          8.1169               1               3               6              10              17

[[Page 41091]]

                                                                                                                                                        
443.....................................            3185          3.3215               1               1               2               4               7
444.....................................            3471          4.4967               1               2               3               5               8
445.....................................            1261          3.3672               1               2               3               4               6
446.....................................               1          2.0000               2               2               2               2               2
447.....................................            4291          2.5101               1               1               2               3               5
449.....................................           28174          3.7816               1               1               3               5               8
450.....................................            6226          2.0830               1               1               1               2               4
451.....................................               9          2.7778               1               1               1               4               5
452.....................................           23072          5.0396               1               2               4               6              10
453.....................................            3826          2.9260               1               1               2               4               6
454.....................................            3900          4.6767               1               2               3               6               9
455.....................................             772          2.7176               1               1               2               3               5
456.....................................             197          8.4721               1               1               3               9              20
457.....................................             128          3.5781               1               1               1               3               9
458.....................................            1543         15.0194               3               7              12              19              31
459.....................................             487          8.9548               2               3               6              11              19
460.....................................            2357          6.0793               1               3               4               7              12
461.....................................            3071          4.4435               1               1               2               4              11
462.....................................           10468         12.4882               4               6              10              16              23
463.....................................           14079          4.4165               1               2               3               5               8
464.....................................            3582          3.3707               1               2               3               4               6
465.....................................             207          2.9179               1               1               1               3               5
466.....................................            1765          4.0436               1               1               2               4               8
467.....................................            1331          4.4132               1               1               2               4               7
468.....................................           62314         13.4808               3               6              10              17              27
471.....................................           12993          6.0741               3               4               5               7              10
472.....................................             181         27.2983               1               8              19              38              55
473.....................................            8512         12.7849               2               3               7              18              33
475.....................................          110026         11.1951               2               5               9              15              22
476.....................................            5974         11.9093               3               6              10              15              22
477.....................................           28969          8.1503               1               3               6              11              17
478.....................................          124086          7.4574               1               3               5               9              15
479.....................................           18459          3.8438               1               2               3               5               7
480.....................................             415         26.7590               8              11              20              32              55
481.....................................             263         27.8213              16              20              24              33              44
482.....................................            6659         12.7485               4               7              10              15              23
483.....................................           42214         40.2055              14              21              33              50              74
484.....................................             411         14.7591               2               6              11              18              28
485.....................................            3536          9.6649               4               5               7              11              18
486.....................................            2380         12.4319               1               5              10              16              25
487.....................................            4381          7.4170               1               3               6               9              14
488.....................................             874         17.1201               4               7              12              22              35
489.....................................           15056          8.9267               2               4               6              11              19
490.....................................            4923          5.4148               1               2               4               7              11
491.....................................           11099          3.6559               2               2               3               4               6
492.....................................            2359         17.1768               4               5              12              27              36
493.....................................           56592          5.6275               1               2               5               7              11
494.....................................           25335          2.4293               1               1               2               3               5
495.....................................             130         16.7538               7               9              13              19              30
496.....................................             904         10.5564               4               6               8              13              20
497.....................................           22184          6.2841               2               3               5               7              11
498.....................................           12634          3.5001               1               2               3               5               6
499.....................................           36447          4.9602               2               2               4               6               9
500.....................................           36672          2.8703               1               2               2               4               5
501.....................................            1910         10.4806               4               6               8              12              19
502.....................................             471          6.5669               3               4               6               8              10
503.....................................            6366          4.2147               1               2               3               5               8
                                         ----------------                                                                                               
                                                11317977                                                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                   Table 7B.--Medicare Prospective Payment System Selected Percentile Lengths of Stay                                   
                                                        [FY97 MEDPAR Update 03/98 Grouper V16.0]                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                              Number        Arithmetic         10th            25th            50th            75th            90th     
                   DRG                      discharges       mean LOS       percentile      percentile      percentile      percentile      percentile  
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................           36863          9.6140               2               4               7              12              20
2.......................................            7073         10.0431               3               5               8              13              20
3.......................................               3          9.3333               7               7               9              12              12

[[Page 41092]]

                                                                                                                                                        
4.......................................            6387          7.7417               1               3               5               9              17
5.......................................          101629          3.6388               1               2               2               4               8
6.......................................             359          3.0306               1               1               2               4               7
7.......................................           12693         10.1052               2               4               7              12              20
8.......................................            3051          3.1786               1               1               2               4               7
9.......................................            1712          6.5724               1               3               5               8              13
10......................................           19898          6.8603               2               3               5               8              14
11......................................            2976          4.1398               1               2               3               5               8
12......................................           38546          6.6802               2               3               5               8              12
13......................................            6395          5.4835               2               3               4               6               9
14......................................          374285          6.2936               2               3               5               8              12
15......................................          146334          3.8586               1               2               3               5               7
16......................................           13990          5.9277               2               3               4               7              11
17......................................            3228          3.4291               1               2               3               4               7
18......................................           27696          5.5756               2               3               4               7              10
19......................................            7354          3.8089               1               2               3               5               7
20......................................            6638         10.1788               2               5               8              13              19
21......................................            1386          6.8283               2               3               5               8              14
22......................................            2803          4.6522               2               2               4               6               9
23......................................            6933          4.2573               1               2               3               5               8
24......................................           58307          5.0648               1               2               4               6              10
25......................................           22886          3.4256               1               2               3               4               7
26......................................              35          3.2857               1               1               3               4               7
27......................................            4246          5.4788               1               1               3               7              12
28......................................           14087          5.9295               1               2               4               7              12
29......................................            4349          3.5220               1               1               3               4               7
31......................................            3135          4.4287               1               2               3               5               8
32......................................            1378          2.9594               1               1               2               3               5
34......................................           20202          5.4414               1               3               4               7              11
35......................................            4292          3.5517               1               2               3               4               7
36......................................            5421          1.5379               1               1               1               1               2
37......................................            1697          3.7183               1               1               2               4               8
38......................................             116          2.5948               1               1               2               3               5
39......................................            1908          2.0383               1               1               1               2               4
40......................................            2300          3.1822               1               1               2               4               7
42......................................            4052          2.0908               1               1               1               2               4
43......................................             120          3.4250               1               2               3               5               7
44......................................            1346          5.0498               2               3               4               6               9
45......................................            2428          3.4773               1               2               3               4               6
46......................................            3177          4.6396               1               2               4               6               9
47......................................            1232          3.2873               1               1               3               4               7
48......................................               2          4.5000               4               4               5               5               5
49......................................            2297          5.0004               1               2               4               6               9
50......................................            3026          1.9752               1               1               2               2               3
51......................................             308          2.8182               1               1               1               3               6
52......................................              80          2.4125               1               1               2               3               5
53......................................            3021          3.6660               1               1               2               4               8
54......................................               2          6.0000               5               5               7               7               7
55......................................            1704          2.9607               1               1               2               3               6
56......................................             695          2.8374               1               1               2               3               6
57......................................             523          3.5488               1               1               3               4               7
59......................................             121          2.4215               1               1               2               3               5
60......................................               1          4.0000               4               4               4               4               4
61......................................             280          4.6464               1               1               2               5              10
62......................................               4          1.2500               1               1               1               1               2
63......................................            3733          4.4466               1               2               3               5               9
64......................................            3432          6.6973               1               2               5               8              14
65......................................           29238          2.9721               1               2               2               4               5
66......................................            6848          3.2604               1               2               3               4               6
67......................................             494          3.7854               1               2               3               4               7
68......................................           11573          4.1497               1               2               3               5               7
69......................................            3471          3.3244               1               2               3               4               6
70......................................              37          2.5405               1               1               2               3               4
71......................................             100          3.9300               1               2               3               6               7
72......................................             829          3.7853               1               2               3               5               7
73......................................            6323          4.4058               1               2               3               6               8
74......................................               2          2.5000               2               2               3               3               3
75......................................           41135         10.2396               4               5               8              13              20
76......................................           41950         11.3136               3               5               9              14              21
77......................................            2041          4.8863               1               2               4               7              10

[[Page 41093]]

                                                                                                                                                        
78......................................           31059          7.3075               3               5               7               9              12
79......................................          248239          8.4083               3               4               7              10              15
80......................................            8319          5.8721               2               3               5               7              10
81......................................               7         11.2857               2               3               6               7               8
82......................................           71558          7.1252               2               3               6               9              14
83......................................            7419          5.5741               2               3               4               7              10
84......................................            1322          3.3162               1               2               3               4               6
85......................................           22565          6.6618               2               3               5               8              13
86......................................            1510          3.8801               1               2               3               5               7
87......................................           73527          6.3192               1               3               5               8              12
88......................................          390502          5.4117               2               3               4               7              10
89......................................          471124          6.2766               2               4               5               8              11
90......................................           39143          4.4608               2               3               4               6               8
91......................................              48          3.9375               1               2               3               5               7
92......................................           14606          6.3852               2               3               5               8              12
93......................................            1323          4.3583               1               2               4               6               8
94......................................           13510          6.4760               2               3               5               8              12
95......................................            1408          3.8544               1               2               3               5               7
96......................................           62085          4.8491               2               3               4               6               9
97......................................           25768          3.8219               1               2               3               5               7
98......................................              28          4.9286               1               2               3               5              13
99......................................           26603          3.0405               1               1               2               4               6
100.....................................           10353          2.1232               1               1               2               3               4
101.....................................           20349          4.4392               1               2               3               5               9
102.....................................            4579          2.7917               1               1               2               3               5
103.....................................             515         50.5320               9              14              32              71             124
104.....................................           30204         12.5198               4               7              10              16              23
105.....................................           26990          9.7535               4               6               8              11              17
106.....................................            4691         10.8874               5               7               9              13              19
107.....................................          102650         10.6875               6               7               9              12              17
108.....................................            6098         11.2642               4               6               9              14              21
109.....................................           69437          7.9517               4               5               7               9              13
110.....................................           62676          9.6167               2               5               8              12              18
111.....................................            5616          5.8063               2               4               6               7               9
112.....................................          119137          3.9263               1               1               3               5               8
113.....................................           46975         12.2664               4               6               9              15              24
114.....................................            8543          8.4041               2               4               7              11              16
115.....................................           15131          8.7469               2               4               7              11              17
116.....................................          210530          4.1764               1               2               3               5               8
117.....................................            3747          3.9861               1               1               2               5               9
118.....................................            6529          2.9326               1               1               2               3               6
119.....................................            1640          5.3829               1               1               3               7              13
120.....................................           38162          8.1769               1               2               5              10              18
121.....................................          170973          6.6427               2               4               6               8              12
122.....................................           83711          4.1990               1               2               4               6               7
123.....................................           43626          4.3987               1               1               2               5              10
124.....................................          155144          4.4560               1               2               4               6               9
125.....................................           63029          2.8712               1               1               2               4               6
126.....................................            5445         12.4382               4               6               9              15              25
127.....................................          723327          5.5118               2               3               4               7              10
128.....................................           16139          6.0284               3               4               5               7               9
129.....................................            4482          2.9514               1               1               1               3               7
130.....................................           98650          5.9904               2               3               5               7              10
131.....................................           24713          4.6719               1               3               4               6               8
132.....................................          175262          3.1519               1               2               3               4               6
133.....................................            6682          2.4811               1               1               2               3               5
134.....................................           30563          3.4498               1               2               3               4               6
135.....................................            8271          4.3344               1               2               3               5               8
136.....................................            1117          2.9687               1               1               2               4               5
138.....................................          210196          4.0456               1               2               3               5               8
139.....................................           67634          2.5762               1               1               2               3               5
140.....................................          108283          2.9686               1               1               2               4               5
141.....................................           82219          3.8511               1               2               3               5               7
142.....................................           36801          2.7878               1               1               2               3               5
143.....................................          144774          2.2571               1               1               2               3               4
144.....................................           79437          5.2262               1               2               4               7              10
145.....................................            6398          2.8678               1               1               2               4               6
146.....................................           10433         10.2667               5               7               9              12              17
147.....................................            1790          6.7374               4               5               7               8              10
148.....................................          147867         12.2636               5               7              10              15              22

[[Page 41094]]

                                                                                                                                                        
149.....................................           14480          6.8502               4               5               6               8              10
150.....................................           23924         10.8759               4               6               9              13              19
151.....................................            4176          5.8829               2               3               5               8              10
152.....................................            4736          8.3328               4               5               7              10              14
153.....................................            1616          5.6293               3               4               5               7               8
154.....................................           34592         13.3723               4               7              11              16              25
155.....................................            4766          4.6897               1               2               4               6               9
156.....................................               2         18.0000               6               6              30              30              30
157.....................................            9351          5.4102               1               2               4               7              11
158.....................................            4141          2.6218               1               1               2               3               5
159.....................................           18453          4.9685               1               2               4               6              10
160.....................................            9823          2.6793               1               1               2               3               5
161.....................................           14694          4.0874               1               2               3               5               9
162.....................................            7099          2.0338               1               1               1               2               4
163.....................................               6         10.0000               1               4               9              13              13
164.....................................            5319          8.5336               4               5               7              10              15
165.....................................            1658          4.9566               2               3               5               6               8
166.....................................            3561          5.1106               2               3               4               6               9
167.....................................            2350          2.8400               1               2               2               4               5
168.....................................            1790          4.5961               1               2               3               6               9
169.....................................             883          2.5787               1               1               2               3               5
170.....................................           12888         11.2453               2               5               8              14              23
171.....................................            1013          4.8164               1               2               4               6               9
172.....................................           33258          7.1141               2               3               5               9              14
173.....................................            2164          3.9750               1               1               3               5               8
174.....................................          250195          4.9246               2               3               4               6               9
175.....................................           21767          3.0099               1               2               3               4               5
176.....................................           18457          5.4888               2               3               4               7              10
177.....................................           11202          4.5540               2               2               4               6               8
178.....................................            3523          3.2109               1               2               3               4               6
179.....................................           12572          6.4144               2               3               5               8              12
180.....................................           93855          5.4295               2               3               4               7              10
181.....................................           21459          3.5079               1               2               3               4               6
182.....................................          236477          4.3554               1               2               3               5               8
183.....................................           70321          3.0159               1               1               2               4               6
184.....................................              91          3.2857               1               2               2               4               7
185.....................................            4110          4.4822               1               2               3               6               9
187.....................................             892          3.9608               1               2               3               5               8
188.....................................           75769          5.5554               1               2               4               7              11
189.....................................            8683          3.2034               1               1               2               4               6
190.....................................              62          5.2903               1               2               4               7              11
191.....................................           10738         14.5968               4               7              11              18              29
192.....................................             839          6.7247               2               4               6               8              12
193.....................................            7407         12.4918               5               7              10              15              22
194.....................................             774          6.9225               3               4               6               9              12
195.....................................            7134          9.8004               4               6               8              12              17
196.....................................            1274          5.7245               2               4               5               7              10
197.....................................           25188          8.6282               3               5               7              10              15
198.....................................            6401          4.5894               2               3               4               6               8
199.....................................            2067         10.1751               3               5               8              14              20
200.....................................            1357         11.4952               2               4               8              14              24
201.....................................            1670         14.3072               4               6              11              18              29
202.....................................           28883          6.7510               2               3               5               8              13
203.....................................           29715          6.8468               2               3               5               9              14
204.....................................           53504          6.0856               2               3               5               7              11
205.....................................           23103          6.5500               2               3               5               8              13
206.....................................            1630          4.0865               1               2               3               5               8
207.....................................           35726          5.1383               1               2               4               6              10
208.....................................            9541          2.9005               1               1               2               4               6
209.....................................          364469          5.4343               3               4               5               6               8
210.....................................          142415          7.0179               3               4               6               8              12
211.....................................           26144          5.1433               3               4               5               6               8
212.....................................              13          3.7692               1               2               4               5               6
213.....................................            7546          8.4157               2               4               6              11              16
216.....................................            6154          9.8351               2               4               7              12              19
217.....................................           20823         12.9944               3               5               9              16              27
218.....................................           24004          5.3243               2               3               4               6              10
219.....................................           18448          3.2888               1               2               3               4               5
220.....................................               5          3.2000               1               1               3               4               7
223.....................................           18683          2.6174               1               1               2               3               5

[[Page 41095]]

                                                                                                                                                        
224.....................................            7760          2.0628               1               1               2               3               4
225.....................................            5697          4.3498               1               2               3               5               9
226.....................................            5583          5.9226               1               2               4               7              12
227.....................................            4638          2.7288               1               1               2               3               5
228.....................................            2773          3.4241               1               1               2               4               8
229.....................................            1114          2.3887               1               1               2               3               5
230.....................................            2399          4.5302               1               2               3               5               9
231.....................................           10765          4.5644               1               2               3               5               9
232.....................................             498          3.8273               1               1               2               4               9
233.....................................            4948          7.6326               2               3               5               9              16
234.....................................            2286          3.6374               1               2               3               5               7
235.....................................            5378          5.3103               1               3               4               6              10
236.....................................           39661          5.1485               1               3               4               6               9
237.....................................            1608          3.6486               1               2               3               5               7
238.....................................            7892          8.8692               3               4               7              11              17
239.....................................           59978          6.4285               2               3               5               8              12
240.....................................           13753          6.6862               2               3               5               8              13
241.....................................            2925          4.0021               1               2               3               5               7
242.....................................            2652          6.7266               2               3               5               8              13
243.....................................           82323          4.8596               2               3               4               6               9
244.....................................           12497          5.0070               2               3               4               6               9
245.....................................            4392          3.7368               1               2               3               5               7
246.....................................            1280          3.9313               1               2               3               5               7
247.....................................           12331          3.4951               1               2               3               4               7
248.....................................            8162          4.6837               1               2               4               6               9
249.....................................           10919          3.6445               1               1               3               4               7
250.....................................            3586          4.2284               1               2               3               5               8
251.....................................            2229          2.9484               1               1               2               4               5
252.....................................               1          1.0000               1               1               1               1               1
253.....................................           19548          4.8593               1               3               4               6               9
254.....................................            9373          3.3465               1               2               3               4               6
255.....................................               2          3.5000               1               1               6               6               6
256.....................................            5566          5.1175               1               2               4               6              10
257.....................................           21299          2.9851               1               2               2               3               5
258.....................................           16484          2.1352               1               1               2               3               3
259.....................................            3797          3.0830               1               1               2               3               7
260.....................................            4492          1.5410               1               1               1               2               2
261.....................................            2003          2.2476               1               1               2               3               4
262.....................................             665          4.2391               1               1               3               6               9
263.....................................           27639         11.4184               3               5               8              14              22
264.....................................            3332          7.0624               2               3               5               8              14
265.....................................            4341          6.5312               1               2               4               8              13
266.....................................            2480          3.4161               1               1               2               4               7
267.....................................             254          4.5984               1               2               3               5               9
268.....................................             888          3.5676               1               1               2               4               7
269.....................................            9483          7.8891               2               3               6              10              16
270.....................................            2696          3.1439               1               1               2               4               7
271.....................................           23100          7.1558               3               4               6               9              13
272.....................................            5981          6.4233               2               3               5               8              12
273.....................................            1315          4.8008               1               2               4               6               8
274.....................................            2440          6.7398               1               3               5               8              14
275.....................................             215          3.5163               1               1               3               4               7
276.....................................             944          4.4492               1               2               4               6               8
277.....................................           82207          5.9080               2               3               5               7              10
278.....................................           24763          4.4937               2               3               4               6               8
279.....................................              12          5.0000               2               2               4               7               9
280.....................................           14318          4.3117               1               2               3               5               8
281.....................................            6028          3.1443               1               1               3               4               6
282.....................................               2          2.0000               2               2               2               2               2
283.....................................            5236          4.8010               1               2               4               6               9
284.....................................            1668          3.3171               1               2               3               4               6
285.....................................            5567         11.0223               3               5               8              13              21
286.....................................            2153          6.9833               3               4               5               8              13
287.....................................            6222         11.2252               3               5               8              13              22
288.....................................            1521          5.9382               3               3               5               6               9
289.....................................            5499          3.2366               1               1               2               3               7
290.....................................            8981          2.5171               1               1               2               3               4
291.....................................              67          1.7612               1               1               1               2               3
292.....................................            5072         10.7744               2               4               8              14              21
293.....................................             351          5.4672               1               2               4               7              12

[[Page 41096]]

                                                                                                                                                        
294.....................................           82620          4.9159               1               2               4               6               9
295.....................................            3630          3.9573               1               2               3               5               7
296.....................................          236933          5.3935               2               3               4               7              10
297.....................................           32857          3.6526               1               2               3               4               7
298.....................................              95          3.6526               1               1               2               4               8
299.....................................             979          5.3463               1               2               4               7              10
300.....................................           16904          6.2827               2               3               5               8              12
301.....................................            2411          3.8075               1               2               3               5               7
302.....................................            8040         10.1373               5               6               8              12              18
303.....................................           19774          9.2208               4               5               7              10              16
304.....................................           12948          8.9874               2               4               7              11              18
305.....................................            2570          3.8911               1               2               3               5               7
306.....................................           10714          5.5080               1               2               3               7              12
307.....................................            2368          2.4041               1               1               2               3               4
308.....................................            9227          6.0016               1               2               4               8              13
309.....................................            3565          2.5910               1               1               2               3               5
310.....................................           26862          4.3113               1               2               3               5               9
311.....................................            7848          1.9509               1               1               1               2               4
312.....................................            1744          4.3354               1               1               3               6               9
313.....................................             589          2.3820               1               1               2               3               5
314.....................................               1         10.0000              10              10              10              10              10
315.....................................           28603          8.0449               1               2               5              10              18
316.....................................           93772          6.7982               2               3               5               9              14
317.....................................             803          2.8543               1               1               2               3               6
318.....................................            6238          6.0928               1               3               4               8              12
319.....................................             412          2.9879               1               1               2               4               6
320.....................................          178400          5.5722               2               3               4               7              10
321.....................................           23782          4.0371               2               2               3               5               7
322.....................................              85          4.0588               2               2               3               4               7
323.....................................           17085          3.2128               1               1               2               4               6
324.....................................            7560          1.9376               1               1               1               2               4
325.....................................            7442          3.9614               1               2               3               5               8
326.....................................            2205          2.7728               1               1               2               3               5
327.....................................               9          2.8889               1               1               2               3               4
328.....................................             767          3.7171               1               2               3               5               7
329.....................................              88          2.2500               1               1               1               3               4
331.....................................           44022          5.5767               1               3               4               7              11
332.....................................            4566          3.5572               1               1               3               5               7
333.....................................             320          4.9219               1               2               4               6              11
334.....................................           18718          4.9703               3               3               4               6               8
335.....................................           10403          3.7142               2               3               3               4               5
336.....................................           54368          3.6034               1               2               3               4               7
337.....................................           31918          2.2865               1               1               2               3               4
338.....................................            2785          4.7885               1               2               3               6              10
339.....................................            2000          4.1895               1               1               3               5               9
340.....................................               2          1.0000               1               1               1               1               1
341.....................................            4945          2.9521               1               1               2               3               6
342.....................................            1013          3.4423               1               2               2               4               7
344.....................................            3904          2.6360               1               1               1               3               5
345.....................................            1349          3.6338               1               1               2               4               8
346.....................................            4889          5.8151               1               3               4               7              11
347.....................................             368          3.1141               1               1               2               4               6
348.....................................            3216          4.2463               1               2               3               5               8
349.....................................             636          2.7453               1               1               2               3               5
350.....................................            6146          4.4007               2               2               4               5               8
352.....................................             640          3.6078               1               1               3               4               7
353.....................................            2831          6.9347               3               4               5               8              12
354.....................................           10001          5.7745               3               3               4               6              10
355.....................................            5668          3.4622               2               3               3               4               5
356.....................................           29070          2.6484               1               2               2               3               4
357.....................................            6365          9.0207               3               5               7              11              17
358.....................................           27581          4.3699               2               3               3               5               7
359.....................................           28195          2.9766               2               2               3               3               4
360.....................................           17946          3.1562               1               2               3               4               5
361.....................................             543          3.3204               1               1               2               3               7
363.....................................            3976          3.3154               1               2               2               3               6
364.....................................            1838          3.5620               1               1               2               5               8
365.....................................            2315          6.8877               1               2               5               9              14
366.....................................            4395          6.8066               1               3               5               8              14
367.....................................             510          2.8863               1               1               2               3               6

[[Page 41097]]

                                                                                                                                                        
368.....................................            2907          6.3509               2               3               5               8              12
369.....................................            2621          3.0626               1               1               2               4               6
370.....................................            1207          5.4905               2               3               4               5               9
371.....................................            1184          3.4611               2               3               3               4               5
372.....................................            1004          3.1464               1               2               2               3               5
373.....................................            3985          2.1154               1               1               2               2               3
374.....................................             159          3.0629               1               2               2               3               4
375.....................................               9          5.1111               2               2               3               9              10
376.....................................             222          2.9144               1               2               2               3               6
377.....................................              53          4.4528               1               2               3               6               9
378.....................................             171          2.5906               1               2               2               3               4
379.....................................             338          3.5562               1               1               2               3               7
380.....................................              90          2.1556               1               1               2               3               4
381.....................................             192          2.1198               1               1               1               2               4
382.....................................              42          1.2619               1               1               1               1               2
383.....................................            1490          3.7302               1               2               3               4               8
384.....................................             129          2.6512               1               1               1               3               6
385.....................................               1          2.0000               2               2               2               2               2
389.....................................              10         10.2000               1               7               7              15              19
390.....................................              13          6.0000               2               2               4               5              17
392.....................................            2546         10.3987               4               5               7              12              21
394.....................................            1820          7.0368               1               2               4               8              16
395.....................................           71452          4.7241               1               2               3               6               9
396.....................................              16         17.3750               1               1               4              11              13
397.....................................           18933          5.5143               1               2               4               7              11
398.....................................           18263          6.0488               2               3               5               7              11
399.....................................            1325          3.7170               1               2               3               5               7
400.....................................            7291          9.3665               2               3               6              12              20
401.....................................            6715         11.0067               2               4               8              14              23
402.....................................            1465          3.8826               1               1               3               5               8
403.....................................           39249          8.1435               2               3               6              10              17
404.....................................            3823          4.4499               1               2               3               6               9
406.....................................            3326          9.5391               2               4               7              12              20
407.....................................             636          4.3270               1               2               4               5               8
408.....................................            2692          7.5137               1               2               5               9              16
409.....................................            4682          5.8317               2               3               4               6              11
410.....................................           59539          3.4172               1               2               3               4               6
411.....................................              19          3.5263               1               1               2               2               7
412.....................................              25          2.2800               1               1               2               3               4
413.....................................            7854          7.4318               2               3               6               9              15
414.....................................             677          4.1905               1               2               3               5               8
415.....................................           45551         14.3639               4               7              11              18              28
416.....................................          231746          7.3984               2               4               6               9              14
417.....................................              43          5.8837               2               3               5               7              11
418.....................................           21340          6.1925               2               3               5               8              11
419.....................................           15355          5.0178               2               3               4               6               9
420.....................................            2697          3.9459               1               2               3               5               7
421.....................................           12186          3.9568               1               2               3               5               7
422.....................................              89          3.3258               1               2               2               4               7
423.....................................           10830          7.7667               2               3               6               9              15
424.....................................            1640         14.2976               2               5              10              18              29
425.....................................           15541          4.1344               1               2               3               5               8
426.....................................            4507          4.9022               1               2               3               6              10
427.....................................            1656          4.7977               1               2               3               6              10
428.....................................             963          7.2887               1               2               5               8              15
429.....................................           32953          7.1813               2               3               5               8              14
430.....................................           57380          8.7114               2               4               7              11              17
431.....................................             220          7.2409               1               3               5               8              13
432.....................................             414          5.3116               1               2               3               6              12
433.....................................            6874          3.2098               1               1               2               4               7
434.....................................           21742          5.1845               2               3               4               6               9
435.....................................           14706          4.4104               1               2               4               5               8
436.....................................            3357         13.9896               4               7              13              21              27
437.....................................           12879          9.2165               3               5               8              12              16
439.....................................            1149          7.7346               1               3               5               9              16
440.....................................            5199          8.9683               2               3               6              10              19
441.....................................             578          3.4810               1               1               2               4               7
442.....................................           16431          8.1169               1               3               6              10              17
443.....................................            3185          3.3215               1               1               2               4               7
444.....................................            3471          4.4967               1               2               3               5               8

[[Page 41098]]

                                                                                                                                                        
445.....................................            1261          3.3672               1               2               3               4               6
446.....................................               1          2.0000               2               2               2               2               2
447.....................................            4291          2.5101               1               1               2               3               5
449.....................................           28174          3.7816               1               1               3               5               8
450.....................................            6226          2.0830               1               1               1               2               4
451.....................................               9          2.7778               1               1               1               4               5
452.....................................           23072          5.0396               1               2               4               6              10
453.....................................            3826          2.9260               1               1               2               4               6
454.....................................            3900          4.6767               1               2               3               6               9
455.....................................             772          2.7176               1               1               2               3               5
461.....................................            3071          4.4435               1               1               2               4              11
462.....................................           10468         12.4882               4               6              10              16              23
463.....................................           14079          4.4165               1               2               3               5               8
464.....................................            3582          3.3707               1               2               3               4               6
465.....................................             207          2.9179               1               1               1               3               5
466.....................................            1765          4.0436               1               1               2               4               8
467.....................................            1331          4.4132               1               1               2               4               7
468.....................................           62290         13.4801               3               6              10              17              27
471.....................................           12993          6.0741               3               4               5               7              10
473.....................................            8512         12.7849               2               3               7              18              33
475.....................................          110026         11.1951               2               5               9              15              22
476.....................................            5972         11.9089               3               6              10              15              22
477.....................................           28961          8.1501               1               3               6              11              17
478.....................................          124086          7.4574               1               3               5               9              15
479.....................................           18459          3.8438               1               2               3               5               7
480.....................................             415         26.7590               8              11              20              32              55
481.....................................             263         27.8213              16              20              24              33              44
482.....................................            6659         12.7485               4               7              10              15              23
483.....................................           42214         40.2055              14              21              33              50              74
484.....................................             411         14.7591               2               6              11              18              28
485.....................................            3536          9.6649               4               5               7              11              18
486.....................................            2380         12.4319               1               5              10              16              25
487.....................................            4381          7.4170               1               3               6               9              14
488.....................................             874         17.1201               4               7              12              22              35
489.....................................           15056          8.9267               2               4               6              11              19
490.....................................            4923          5.4148               1               2               4               7              11
491.....................................           11099          3.6559               2               2               3               4               6
492.....................................            2359         17.1768               4               5              12              27              36
493.....................................           56592          5.6275               1               2               5               7              11
494.....................................           25335          2.4293               1               1               2               3               5
495.....................................             130         16.7538               7               9              13              19              30
496.....................................             904         10.5564               4               6               8              13              20
497.....................................           22184          6.2841               2               3               5               7              11
498.....................................           12634          3.5001               1               2               3               5               6
499.....................................           36447          4.9602               2               2               4               6               9
500.....................................           36672          2.8703               1               2               2               4               5
501.....................................            1910         10.4806               4               6               8              12              19
502.....................................             471          6.5669               3               4               6               8              10
503.....................................            6366          4.2147               1               2               3               5               8
504.....................................             158         31.8481               9              14              26              39              57
505.....................................             174          5.8218               1               1               1               5              11
506.....................................            1138         16.7926               4               8              13              22              34
507.....................................             395          8.9747               2               4               7              12              17
508.....................................            1227          7.8240               2               3               5              10              16
509.....................................             483          4.9896               1               2               3               6              10
510.....................................            1024          6.9355               2               3               5               8              14
511.....................................             328          4.8323               1               2               3               6               9
                                         ----------------                                                                                               
                                                11317977                                                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 41099]]


 Table 8A.--Statewide Average Operating Cost-To-Charge Ratios for Urban 
              and Rural Hospitals (Case Weighted) July 1998             
------------------------------------------------------------------------
                        State                           Urban     Rural 
------------------------------------------------------------------------
ALABAMA.............................................     0.387     0.442
ALASKA..............................................     0.503     0.733
ARIZONA.............................................     0.374     0.542
ARKANSAS............................................     0.516     0.458
CALIFORNIA..........................................     0.365     0.480
COLORADO............................................     0.467     0.566
CONNECTICUT.........................................     0.546     0.532
DELAWARE............................................     0.506     0.487
DISTRICT OF COLUMBIA................................     0.521  ........
FLORIDA.............................................     0.384     0.394
GEORGIA.............................................     0.498     0.498
HAWAII..............................................     0.434     0.558
IDAHO...............................................     0.563     0.585
ILLINOIS............................................     0.445     0.547
INDIANA.............................................     0.559     0.597
IOWA................................................     0.514     0.641
KANSAS..............................................     0.415     0.641
KENTUCKY............................................     0.496     0.520
LOUISIANA...........................................     0.442     0.495
MAINE...............................................     0.620     0.576
MARYLAND............................................     0.764     0.818
MASSACHUSETTS.......................................     0.541     0.571
MICHIGAN............................................     0.468     0.580
MINNESOTA...........................................     0.532     0.603
MISSISSIPPI.........................................     0.478     0.499
MISSOURI............................................     0.442     0.519
MONTANA.............................................     0.529     0.574
NEBRASKA............................................     0.483     0.640
NEVADA..............................................     0.322     0.585
NEW HAMPSHIRE.......................................     0.574     0.584
NEW JERSEY..........................................     0.437  ........
NEW MEXICO..........................................     0.467     0.511
NEW YORK............................................     0.551     0.623
NORTH CAROLINA......................................     0.522     0.464
NORTH DAKOTA........................................     0.617     0.666
OHIO................................................     0.534     0.569
OKLAHOMA............................................     0.460     0.530
OREGON..............................................     0.554     0.620
PENNSYLVANIA........................................     0.406     0.528
PUERTO RICO.........................................     0.479     0.561
RHODE ISLAND........................................     0.571  ........
SOUTH CAROLINA......................................     0.472     0.478
SOUTH DAKOTA........................................     0.537     0.620
TENNESSEE...........................................     0.482     0.507
TEXAS...............................................     0.428     0.536
UTAH................................................     0.535     0.632
VERMONT.............................................     0.615     0.576
VIRGINIA............................................     0.476     0.499
WASHINGTON..........................................     0.600     0.661
WEST VIRGINIA.......................................     0.591     0.573
WISCONSIN...........................................     0.569     0.641
WYOMING.............................................     0.495     0.698
------------------------------------------------------------------------


    Table 8B.--Statewide Average Capital Cost-To-Charge Ratios (Case    
                           Weighted) July 1998                          
------------------------------------------------------------------------
                             State                                Ratio 
------------------------------------------------------------------------
ALABAMA.......................................................     0.050
ALASKA........................................................     0.066
ARIZONA.......................................................     0.043
ARKANSAS......................................................     0.054
CALIFORNIA....................................................     0.039
COLORADO......................................................     0.053
CONNECTICUT...................................................     0.041
DELAWARE......................................................     0.057
DISTRICT OF COLUMBIA..........................................     0.040
FLORIDA.......................................................     0.046
GEORGIA.......................................................     0.049
HAWAII........................................................     0.045
IDAHO.........................................................     0.054
ILLINOIS......................................................     0.043
INDIANA.......................................................     0.059
IOWA..........................................................     0.054
KANSAS........................................................     0.051
KENTUCKY......................................................     0.051
LOUISIANA.....................................................     0.055
MAINE.........................................................     0.040
MARYLAND......................................................     0.013
MASSACHUSETTS.................................................     0.056
MICHIGAN......................................................     0.046
MINNESOTA.....................................................     0.055
MISSISSIPPI...................................................     0.048
MISSOURI......................................................     0.048
MONTANA.......................................................     0.052
NEBRASKA......................................................     0.057
NEVADA........................................................     0.066
NEW HAMPSHIRE.................................................     0.066
NEW JERSEY....................................................     0.039
NEW MEXICO....................................................     0.047
NEW YORK......................................................     0.053
NORTH CAROLINA................................................     0.047
NORTH DAKOTA..................................................     0.075
OHIO..........................................................     0.053
OKLAHOMA......................................................     0.055
OREGON........................................................     0.055
PENNSYLVANIA..................................................     0.043
PUERTO RICO...................................................     0.054
RHODE ISLAND..................................................     0.033
SOUTH CAROLINA................................................     0.052
SOUTH DAKOTA..................................................     0.061
TENNESSEE.....................................................     0.056
TEXAS.........................................................     0.051
UTAH..........................................................     0.056
VERMONT.......................................................     0.047
VIRGINIA......................................................     0.058
WASHINGTON....................................................     0.066
WEST VIRGINIA.................................................     0.056
WISCONSIN.....................................................     0.052
WYOMING.......................................................     0.056
------------------------------------------------------------------------

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Appendix A--Regulatory Impact Analysis

I. Introduction

    Section 804(2) of Title 5, United States Code (as added by 
section 251 of Public Law 104-121), specifies that a ``major rule'' 
is any rule that the Office of Management and Budget finds is likely 
to result in--
    <bullet> An annual effect on the economy of $100 million or 
more;
    <bullet> A major increase in costs or prices for consumers, 
individual industries, Federal, State, or local government agencies, 
or geographic regions; or
    <bullet> Significant adverse effects on competition, employment, 
investment, productivity, innovation, or on the ability of United 
States-based enterprises to compete with foreign-based enterprises 
in domestic and export markets.
    We estimate that the impact of this final rule will be to 
decrease payments to hospitals by approximately $530 million in FY 
1999. Therefore, this rule is a major rule as defined in Title 5, 
United States Code, section 804(2).
    We have examined the impacts 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 RFA requires agencies to analyze options 
for regulatory relief for small businesses. 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 or less annually.
    Also, section 1102(b) of the Social Security Act requires us to 
prepare a regulatory impact analysis for any final rule that may 
have a significant impact on the operations of a substantial number 
of small rural hospitals. Such an 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.
    It is clear that the changes being made in this document will 
affect both a substantial number of small rural hospitals as well as 
other classes of hospitals, and the effects on some may be 
significant. Therefore, the discussion below, in combination with 
the rest of this final rule, constitutes a combined regulatory 
impact analysis and regulatory flexibility analysis.
    In accordance with the provisions of Executive Order 12866, this 
final rule was reviewed by the Office of Management and Budget.

II. Changes in the Final Rule

    Since we published the proposed rule, the market basket 
estimates for hospitals subject to the prospective payment system 
and hospitals and units excluded from the system have both fallen by 
0.2 percentage points. As a result, the updates are 0.2 percent 
lower than the updates reflected in the impact analysis for the 
proposed rule.
    Also, in the proposed rule, we included discharges to swing beds 
under the expanded transfer definition. In this final rule we are 
not including swing beds from the definition of a postacute care 
setting. The overall payment impact of this change is relatively 
very small (an increase of approximately $4 million).
    With the exception of these two changes, we are generally 
implementing the policy and statutory changes discussed in the 
proposed rule.

III. Limitations of Our Analysis

    As has been the case in previously published regulatory impact 
analyses, the following quantitative analysis presents the projected 
effects of our policy changes, as well as statutory changes 
effective for FY 1999, on various hospital groups. We estimate the 
effects of individual policy changes by estimating payments per case 
while holding all other payment policies constant. We use the best 
data available, but we do not attempt to predict behavioral 
responses to our policy changes, and we do not make adjustments for 
future changes in such variables as admissions, lengths of stay, or 
case mix.
    We received no comments on the methodology used for the impact 
analysis in the proposed rule.

IV. GME Payment to Nonhospital Providers

    In the past, Medicare only paid hospitals for GME costs. 
Therefore, FQHCs, RHCs, and Medicare+Choice organizations may have 
been reluctant to train large numbers of residents since Medicare 
would not reimburse their incurred training costs. This final rule 
specifies that Medicare will reimburse the qualified nonhospital 
provider for Medicare's share of the reasonable costs of the 
training where the qualified nonhospital provider incurs all or 
substantially all of the costs of the training at that site. This 
final rule may facilitate more training of residents in settings 
where many of those residents will ultimately practice after their 
training is completed. Additionally, this could result in an 
increase in the number of physicians practicing in underserved 
areas.
    In addition, hospitals are currently allowed to count residents 
working in nonhospital sites in their FTE count of residents for 
determining indirect and direct graduate medical education payments, 
if the hospital incurs ``all or substantially all of the costs'' of 
the training at the non-hospital site. The regulation defined the 
statutory requirement of ``all or substantially all'' to mean at 
least the residents' salaries and fringe benefits. In this final 
rule, we are defining ``all or substantially all'' of the costs of 
training in the nonhospital site to mean residents' salaries and 
fringe benefits as well as the portion of teaching physicians' 
salaries and fringe benefits that can be allocated to direct GME. We 
believe that this definition will not discourage training in 
nonhospital settings.
    Section 4625 of the Balanced Budget Act, which provides for 
direct graduate medical education payments to nonhospital providers, 
would have minimal impact in the context of total graduate medical 
education costs. We believe that the most significant impact 
resulting from making payment directly to qualified nonhospital 
providers and the redefinition of ``all or substantially all'' will 
be that additional nonhospital sites may participate in training 
residents. We expect that such an impact will result in little if 
any additional cost to Medicare.

V. Hospitals Included in and Excluded From the Prospective Payment 
System

    The prospective payment systems for hospital inpatient operating 
and capital-related costs encompass nearly all general, short-term, 
acute care hospitals that participate in the Medicare program. There 
were 45 Indian Health Service hospitals in our database, which we 
excluded from the analysis due to the special characteristics of the 
prospective payment method for these hospitals. Among other short-
term, acute care hospitals, only the 50 such hospitals in Maryland 
remain excluded from the prospective payment system under the waiver 
at section 1814(b)(3) of the Act. Thus, as of July 1998, we have 
included 4,975 hospitals in our analysis. This represents about 82 
percent of all Medicare-participating hospitals. The majority of 
this impact analysis focuses on this set of hospitals.
    The remaining 18 percent are specialty hospitals that are 
excluded from the prospective payment system and continue to be paid 
on the basis of their reasonable costs (subject to a rate-of-
increase ceiling on their inpatient operating costs per discharge). 
These hospitals include psychiatric, rehabilitation, long-term care, 
children's, and cancer hospitals. The impacts of our final policy 
changes on these hospitals are discussed below.

VI. Impact on Excluded Hospitals and Units

    As of July 1998, there were 1,077 specialty hospitals excluded 
from the prospective payment system and instead paid on a reasonable 
cost basis subject to the rate-of-increase ceiling under 
Sec. 413.40. In addition, there were 2,408 psychiatric and 
rehabilitation units in hospitals otherwise subject to the 
prospective payment system. These excluded units are also paid in 
accordance with Sec. 413.40.
    As required by section 1886(b)(3)(B) of the Act, the update 
factor applicable to the rate-of-increase limit for excluded 
hospitals and units for FY 1999 would be between 0 and 2.4 percent, 
depending on the hospital's costs in relation to its limit.
    The impact on excluded hospitals and units of the update in the 
rate-of-increase limit depends on the cumulative cost increases 
experienced by each excluded hospital or unit since its applicable 
base period. For excluded hospitals and units that have maintained 
their cost increases at a

[[Page 41105]]

level below the percentage increases in the rate-of-increase limits 
since their base period, the major effect will be on the level of 
incentive payments these hospitals and units receive. Conversely, 
for excluded hospitals and units with per-case cost increases above 
the cumulative update in their rate-of-increase limits, the major 
effect will be the amount of excess costs that would not be 
reimbursed.
    We note that, under Sec. 413.40(d)(3), an excluded hospital or 
unit whose costs exceed 110 percent of its rate-of-increase limit 
receives its rate-of-increase limit plus 50 percent of the 
difference between its reasonable costs and 110 percent of the 
limit, not to exceed 110 percent of its limit. In addition, under 
the various provisions set forth in Sec. 413.40, certain excluded 
hospitals and units can obtain payment adjustments for justifiable 
increases in operating costs that exceed the limit. At the same 
time, however, by generally limiting payment increases, we continue 
to provide an incentive for excluded hospitals and units to restrain 
the growth in their spending for patient services.

VII. Quantitative Impact Analysis of the Final Policy Changes Under the 
Prospective Payment System for Operating Costs

A. Basis and Methodology of Estimates

    In this final rule, we are announcing policy changes and payment 
rate updates for the prospective payment systems for operating and 
capital-related costs. We have prepared separate impact analyses of 
the changes to each system. This section deals with changes to the 
operating prospective payment system.
    The data used in developing the quantitative analyses presented 
below are taken from the FY 1997 MedPAR file and the most current 
provider-specific file that is used for payment purposes. Although 
the analyses of the changes to the operating prospective payment 
system do not incorporate cost data, the most recently available 
hospital cost report data were used to categorize hospitals. Our 
analysis has several qualifications. First, we do not make 
adjustments for behavioral changes that hospitals may adopt in 
response to these final policy changes. Second, due to the 
interdependent nature of the prospective payment system, it is very 
difficult to precisely quantify the impact associated with each 
change. Third, we draw upon various sources for the data used to 
categorize hospitals in the tables. In some cases, particularly the 
number of beds, there is a fair degree of variation in the data from 
different sources. We have attempted to construct these variables 
with the best available source overall. For individual hospitals, 
however, some miscategorizations are possible.
    Using cases in the FY 1997 MedPAR file, we simulated payments 
under the operating prospective payment system given various 
combinations of payment parameters. Any short-term, acute care 
hospitals not paid under the general prospective payment systems 
(Indian Health Service hospitals and hospitals in Maryland) are 
excluded from the simulations. Payments under the capital 
prospective payment system, or payments for costs other than 
inpatient operating costs, are not analyzed here. Estimated payment 
impacts of final FY 1999 changes to the capital prospective payment 
system are discussed below in section VIII of this Appendix.
    The final changes discussed separately below are the following:
    <bullet> The effects of implementing the expanded transfer 
definition enacted by section 4407 of the BBA, which counts as a 
transfer any discharge from one of 10 DRGs if upon discharge the 
patient is admitted to an excluded hospital or distinct part unit or 
a skilled nursing facility, or is provided home health care that is 
related to the hospitalization within 3 days of the date of 
discharge.
    <bullet> The effects of the annual reclassification of diagnoses 
and procedures and the recalibration of the DRG relative weights 
required by section 1886(d)(4)(C) of the Act.
    <bullet> The effects of changes in hospitals' wage index values 
reflecting the wage index update (FY 1995 data).
    <bullet> The effects of two changes to the wage index for FY 
1999: (1) Including the Part A costs associated with physicians 
under contract; and (2) removing the overhead costs related to 
departments excluded from the wage data used to calculate the wage 
index (for example, skilled nursing facilities and distinct part 
units).
    <bullet> The effects of geographic reclassifications by the 
Medicare Geographic Classification Review Board (MGCRB) that will be 
effective in FY 1999.
    <bullet> The total change in payments based on FY 1999 policies 
relative to payments based on FY 1998 policies.
    To illustrate the impacts of the FY 1999 changes, our analysis 
begins with a FY 1999 baseline simulation model using: the FY 1998 
GROUPER (version 15.0); the FY 1998 wage index; the transfer 
definition prior to implementation of section 4407 of the BBA; and 
no MGCRB reclassifications. Outlier payments are set at 5.1 percent 
of total DRG payments.
    Each final and statutory policy change is then added 
incrementally to this baseline model, finally arriving at an FY 1999 
model incorporating all of the changes. This allows us to isolate 
the effects of each change.
    Our final comparison illustrates the percent change in payments 
per case from FY 1998 to FY 1999. Four factors have significant 
impacts here. First is the update to the standardized amounts. In 
accordance with section 1886(d)(3)(A)(iv) of the Act, we are 
updating the large urban and the other areas average standardized 
amounts for FY 1999 by the most recently forecasted hospital market 
basket increase for FY 1999 of 2.4 percent minus 1.9 percentage 
points. Similarly, section 1886(b)(3)(C)(ii) of the Act provides 
that the update factor applicable to the hospital-specific rates for 
sole community hospitals (SCHs) and Medicare-dependent, small rural 
hospitals (MDHs) is equal to the market basket increase of 2.4 
percent minus 1.9 percentage points (for an update of 0.5 percent).
    A second significant factor impacting changes in hospitals' 
payments per case from FY 1998 to FY 1999 is a change in MGCRB 
reclassification status from one year to the next. That is, 
hospitals reclassified in FY 1998 that are no longer reclassified in 
FY 1999 may have a negative payment impact going from FY 1998 to FY 
1999; conversely, hospitals not reclassified in FY 1998 that are 
reclassified in FY 1999 may have a positive impact. In some cases, 
these impacts can be quite substantial, so if a relatively small 
number of hospitals in a particular category lose their 
reclassification status, the percentage increase in payments for the 
category may be below the national mean.
    A third significant factor is that we currently estimate that 
actual outlier payments during FY 1998 will be 5.4 percent of actual 
total DRG payments. When the FY 1998 final rule was published, we 
projected FY 1998 outlier payments would be 5.1 percent of total DRG 
payments, and the standardized amounts were reduced correspondingly. 
The effects of the slightly higher than expected outlier payments 
during FY 1998 (as discussed in the Addendum to this final rule) are 
reflected in the analyses below comparing our current estimates of 
FY 1998 payments per case to estimated FY 1999 payments per case.
    Fourth, payments per case in FY 1999 are reduced from FY 1998 
for hospitals that receive the indirect medical education (IME) or 
the disproportionate share (DSH) adjustments. Section 
1886(d)(5)(B)(ii) of the Act provides that the IME adjustment is 
reduced from approximately a 7.0 percent increase for every 10 
percent increase in a hospital's resident-to-bed ratio in FY 1998, 
to a 6.5 percent increase in FY 1999. Similarly, in accordance with 
section 1886(d)(5)(F)(ix) of the Act, the DSH adjustment for FY 1999 
is reduced by 2 percent from what would otherwise have been paid, 
compared to a 1 percent reduction for FY 1998.
    Table I demonstrates the results of our analysis. The table 
categorizes hospitals by various geographic and special payment 
consideration groups to illustrate the varying impacts on different 
types of hospitals. The top row of the table shows the overall 
impact on the 4,975 hospitals included in the analysis. This is 113 
fewer hospitals than were included in the impact analysis in the FY 
1998 final rule with comment period (62 FR 46119).
    The next four rows of Table I contain hospitals categorized 
according to their geographic location (all urban, which is further 
divided into large urban and other urban, or rural). There are 2,810 
hospitals located in urban areas (MSAs or NECMAs) included in our 
analysis. Among these, there are 1,611 hospitals located in large 
urban areas (populations over 1 million), and 1,199 hospitals in 
other urban areas (populations of 1 million or fewer). In addition, 
there are 2,165 hospitals in rural areas. The next two groupings are 
by bed-size categories, shown separately for urban and rural 
hospitals. The final groupings by geographic location are by census 
divisions, also shown separately for urban and rural hospitals.
    The second part of Table I shows hospital groups based on 
hospitals' FY 1999 payment classifications, including any 
reclassifications under section 1886(d)(10) of the Act. For example, 
the rows labeled urban,

[[Page 41106]]

large urban, other urban, and rural show the numbers of hospitals 
paid based on these categorizations (after consideration of 
geographic reclassifications) are 2,894, 1,698, 1,196, and 2,081, 
respectively.
    The next three groupings examine the impacts of the final 
changes on hospitals grouped by whether or not they have residency 
programs (teaching hospitals that receive an IME adjustment), 
receive DSH payments, or some combination of these two adjustments. 
There are 3,880 nonteaching hospitals in our analysis, 854 teaching 
hospitals with fewer than 100 residents, and 241 teaching hospitals 
with 100 or more residents.
    In the DSH categories, hospitals are grouped according to their 
DSH payment status, and whether they are considered urban or rural 
after MGCRB reclassifications. Hospitals in the rural DSH 
categories, therefore, represent hospitals that were not 
reclassified for purposes of the standardized amount or for purposes 
of the DSH adjustment. (They may, however, have been reclassified 
for purposes of the wage index.) The next category groups hospitals 
considered urban after geographic reclassification, in terms of 
whether they receive the IME adjustment, the DSH adjustment, both, 
or neither.
    The next row separately examines hospitals that available data 
show may qualify under section 4401(b) of the BBA for the special 
temporary relief provision, which grants an additional 0.3 percent 
update to the standardized amounts (in addition to the 0.5 percent 
update other hospitals receive during FY 1999), resulting in a 0.8 
percent update for this category of hospitals. To be eligible, a 
hospital must not be an MDH, nor may it receive either IME or DSH 
payments. It must also experience a negative margin on its operating 
prospective payments during FY 1999. We estimated eligible hospitals 
based on whether they had a negative operating margin on their FY 
1995 cost report (latest available data). Finally, to qualify, a 
hospital must be located in a State where the aggregate FY 1995 
operating prospective payments were less than the aggregate 
associated costs for all of the non-IME, non-DSH, non-MDH hospitals 
in the State. There are 344 hospitals in this row.
    The next four rows examine the impacts of the final changes on 
rural hospitals by special payment groups (SCHs, rural referral 
centers (RRCs), and MDHs), as well as rural hospitals not receiving 
a special payment designation. The RRCs (145), SCHs (637), MDHs 
(352), and SCH and RRCs (59) shown here were not reclassified for 
purposes of the standardized amount. There are six SCHs that will be 
reclassified for the standardized amount in FY 1999 that, therefore, 
are not included in these rows. There are seven hospitals that 
continue to be paid under the same rules as SCHs, by virtue of their 
prior designation as essential access community hospitals (EACH). 
These hospitals are categorized in our analysis as SCHs (there are 
also three EACH/RRCs).
    The next two groupings are based on type of ownership and the 
hospital's Medicare utilization expressed as a percent of total 
patient days. These data are taken primarily from the FY 1995 
Medicare cost report files, if available (otherwise FY 1994 data are 
used). Data needed to determine ownership status or Medicare 
utilization percentages were unavailable for 115 hospitals. For the 
most part, these are new hospitals.
    The next series of groupings concern the geographic 
reclassification status of hospitals. The first three groupings 
display hospitals that were reclassified by the MGCRB for both FY 
1998 and FY 1999, or for either of those 2 years, by urban/rural 
status. The next rows illustrate the overall number of FY 1999 
reclassifications, as well as the numbers of reclassified hospitals 
grouped by urban and rural location. The final row in Table I 
contains hospitals located in rural counties but deemed to be urban 
under section 1886(d)(8)(B) of the Act.

                                  Table I.--Impact Analysis of Changes for FY 1999 Operating Prospective Payment System                                 
                                                         [Percent Changes in Payments Per Case]                                                         
                                                                                                                                                        
                                                                                                  Contract                           MGCRB              
                                                      Num. of   Pac tran.   DRG re-    New wage   phys. pt  Allocated   DRG & WI     recl-     All FY 99
                                                     hosps.\1\    prov-    calib.\3\   Data \4\   A Costs    overhead    changes    assifi-     changes 
                                                                ision \2\                           \5\     costs \6\      \7\       cation       \9\   
                                                           (0)        (1)        (2)        (3)        (4)        (5)         (6)        (7)         (8)
(BY GEOGRAPHIC LOCATION):                                                                                                                               
    ALL HOSPITALS..................................      4,975       -0.6        0.1        0.0        0.0        0.0         0.0        0.0        -1.0
    URBAN HOSPITALS................................      2,810       -0.7        0.2       -0.1        0.0       -0.1        -0.2       -0.4        -1.3
        LARGE URBAN................................      1,611       -0.7        0.2       -0.4        0.0       -0.1        -0.5       -0.5        -1.7
        OTHER URBAN................................      1,199       -0.6        0.1        0.4        0.0       -0.1         0.3       -0.4        -0.7
    RURAL HOSPITALS................................      2,165       -0.4        0.1        0.7        0.0        0.4         1.0        2.7         1.3
BED SIZE (URBAN):                                                                                                                                       
    0-99 BEDS......................................        704       -0.8        0.1       -0.2        0.0        0.0        -0.2       -0.6        -0.9
    100-199 BEDS...................................        937       -0.9        0.2       -0.2        0.0       -0.1        -0.2       -0.5        -1.2
    200-299 BEDS...................................        568       -0.7        0.2       -0.2        0.0       -0.1        -0.2       -0.4        -1.2
    300-499 BEDS...................................        449       -0.6        0.1       -0.1        0.0       -0.1        -0.2       -0.5        -1.4
    500 OR MORE BEDS...............................        152       -0.5        0.1        0.1        0.0       -0.2         0.0       -0.3        -1.6
BED SIZE (RURAL):                                                                                                                                       
    0-49 BEDS......................................      1,137       -0.2        0.0        0.7        0.0        0.5         1.0        0.0         1.0
    50-99 BEDS.....................................        634       -0.3        0.0        0.6        0.0        0.4         0.8        1.1         0.8
    100-149 BEDS...................................        229       -0.5        0.1        0.6       -0.1        0.5         1.0        3.6         1.1
                                                           (0)        (1)        (2)        (3)        (4)        (5)         (6)        (7)         (8)
--------------------------------------------------------------------------------------------------------------------------------------------------------
    150-199 BEDS...................................         91       -0.5        0.1        0.8        0.0        0.4         1.1        4.5         2.5
    200 OR MORE BEDS...............................         74       -0.4        0.1        0.8        0.0        0.3         1.1        5.3         1.7
URBAN BY CENSUS DIVISION:                                                                                                                               
    NEW ENGLAND....................................        152       -0.7        0.1       -1.1        0.2       -0.3        -1.2       -0.2        -2.6
    MIDDLE ATLANTIC................................        425       -0.4        0.2        0.2        0.2       -0.1         0.3       -0.4        -0.9
    SOUTH ATLANTIC.................................        414       -0.6        0.2        0.7       -0.2       -0.1         0.5       -0.5        -0.4
    EAST NORTH CENTRAL.............................        476       -0.8        0.1       -0.4       -0.2       -0.3        -0.9       -0.4        -2.2
    EAST SOUTH CENTRAL.............................        162       -0.5        0.2        0.7       -0.2       -0.3         0.2       -0.5        -0.7
    WEST NORTH CENTRAL.............................        189       -0.7        0.1        0.6        0.2        0.2         1.0       -0.5        -0.1
    WEST SOUTH CENTRAL.............................        354       -1.0        0.2       -0.7        0.3       -0.1        -0.4       -0.5        -1.6
    MOUNTAIN.......................................        129       -0.9        0.1       -0.1        0.1       -0.1        -0.2       -0.5        -1.1
    PACIFIC........................................        461       -0.8        0.2       -0.9       -0.2        0.1        -0.9       -0.4        -2.0
    PUERTO RICO....................................         48       -0.8        0.3        0.9       -0.2       -0.3         0.5       -0.6        -0.3
RURAL BY CENSUS DIVISION:                                                                                                                               
    NEW ENGLAND....................................         53       -0.4        0.0        1.0        0.0        0.0         0.9        1.4        -0.3
    MIDDLE ATLANTIC................................         80       -0.2        0.0        0.7        0.4        0.2         1.2        1.7         1.3
    SOUTH ATLANTIC.................................        286       -0.4        0.1        0.6       -0.2        0.3         0.7        3.8         1.8
    EAST NORTH CENTRAL.............................        285       -0.4        0.1        0.8       -0.1        0.3         1.0        2.1         1.3
    EAST SOUTH CENTRAL.............................        269       -0.3        0.1        1.3       -0.2        0.4         1.5        2.7         1.7
    WEST NORTH CENTRAL.............................        500       -0.3       -0.1        0.9        0.0        0.7         1.5        2.3         1.4
    WEST SOUTH CENTRAL.............................        342       -0.5        0.1        0.1        0.1        0.5         0.6        3.5         0.7

[[Page 41107]]

                                                                                                                                                        
                                                           (0)        (1)        (2)        (3)        (4)        (5)         (6)        (7)         (8)
--------------------------------------------------------------------------------------------------------------------------------------------------------
    MOUNTAIN.......................................        204       -0.2        0.0        0.2       -0.1        0.5         0.5        1.8         0.6
    PACIFIC........................................        141       -0.5        0.1        0.3       -0.2        0.5         0.6        2.4         0.7
    PUERTO RICO....................................          5       -0.5        0.0        2.3       -0.2       -0.2         1.8        1.7        -0.2
(BY PAYMENT CATEGORIES):                                                                                                                                
    URBAN HOSPITALS................................      2,894       -0.7        0.2       -0.1        0.0       -0.1        -0.2       -0.4        -1.3
        LARGE URBAN................................      1,698       -0.7        0.2       -0.4        0.0       -0.1        -0.4       -0.3        -1.6
        OTHER URBAN................................      1,196       -0.6        0.1        0.4        0.0       -0.1         0.3       -0.4        -0.6
    RURAL HOSPITALS................................      2,081       -0.4        0.1        0.7        0.0        0.4         1.0        2.4         1.1
TEACHING STATUS:                                                                                                                                        
    NON-TEACHING...................................      3,880       -0.7        0.1        0.1       -0.1        0.1         0.2        0.3        -0.3
    LESS THAN 100 RES..............................        854       -0.7        0.1       -0.1        0.0       -0.1        -0.2       -0.3        -1.1
    100+ RESIDENTS.................................        241       -0.5        0.2       -0.1        0.1       -0.2        -0.1       -0.3        -2.0
DISPROPORTIONATE SHARE HOSPITALS (DSH):                                                                                                                 
    NON-DSH........................................      3,089       -0.6        0.1        0.1        0.0        0.0         0.0        0.3        -0.6
    URBAN DSH:                                                                                                                                          
        100 BEDS OR MORE...........................      1,404       -0.7        0.2       -0.1        0.0       -0.1        -0.1       -0.4        -1.4
        FEWER THAN 100 BEDS........................         88       -0.6        0.2       -0.6       -0.1        0.0        -0.7       -0.4        -1.2
    RURAL DSH:                                                                                                                                          
        SOLE COMMUNITY (SCH).......................        162       -0.2        0.0        0.7       -0.1        0.3         0.8        0.0         1.0
        REFERRAL CENTERS (RRC).....................         53       -0.5        0.2        1.1       -0.1        0.4         1.4        5.6         2.5
                                                           (0)        (1)        (2)        (3)        (4)        (5)         (6)        (7)         (8)
    OTHER RURAL DSH HOSP:                                                                                                                               
        100 BEDS OR MORE...........................         60       -0.6        0.2        0.9       -0.2        0.5         1.3        1.1         0.7
        FEWER THAN 100 BEDS........................        119       -0.2        0.0        1.1       -0.1        0.5         1.4       -0.2         1.3
URBAN TEACHING AND DSH:                                                                                                                                 
    BOTH TEACHING AND DSH..........................        709       -0.7        0.2       -0.1        0.0       -0.1        -0.2       -0.5        -1.6
    TEACHING AND NO DSH............................        331       -0.6        0.1       -0.1        0.0       -0.2        -0.3       -0.1        -1.3
    NO TEACHING AND DSH............................        783       -0.8        0.2        0.0       -0.1        0.0         0.0       -0.2        -0.7
    NO TEACHING AND NO DSH.........................      1,071       -0.7        0.1       -0.1        0.0       -0.1        -0.2       -0.4        -0.9
SPECIAL UPDATE HOSPITALS (UNDER SEC. 4401(b) OF                                                                                                         
 PUBLIC LAW 105-33)................................        344       -0.6        0.1        0.0       -0.1       -0.1        -0.1       -0.2        -0.8
RURAL HOSPITAL TYPES:                                                                                                                                   
    NONSPECIAL STATUS HOSPITALS....................        888       -0.4        0.1        0.9       -0.1        0.6         1.3        1.2         0.7
    RRC............................................        145       -0.6        0.2        0.9        0.0        0.4         1.4        6.4         2.2
    SCH............................................        637       -0.1       -0.1        0.3        0.0        0.2         0.4        0.1         0.4
    MDH............................................        352       -0.2        0.0        0.8        0.0        0.5         1.2        0.5         1.0
    SCH AND RRC....................................         59       -0.2        0.0        0.3       -0.1        0.2         0.3        2.0         1.2
TYPE OF OWNERSHIP:                                                                                                                                      
    VOLUNTARY......................................      2,858       -0.6        0.1        0.0        0.0       -0.1        -0.1       -0.1        -1.0
    PROPRIETARY....................................        671       -0.9        0.2        0.1       -0.1        0.0         0.0        0.2        -1.0
    GOVERNMENT.....................................      1,331       -0.5        0.2        0.1        0.0        0.1         0.2        0.3        -0.5
                                                           (0)        (1)        (2)        (3)        (4)        (5)         (6)        (7)         (8)
    UNKNOWN........................................        115       -0.8        0.2        0.3       -0.2        0.1         0.4       -0.5        -1.0
MEDICARE UTILIZATION AS A PERCENT OF INPATIENT                                                                                                          
 DAYS:                                                                                                                                                  
    0-25...........................................        247       -0.6        0.2       -1.0        0.0        0.0        -0.8       -0.2        -2.0
    25-50..........................................      1,264       -0.7        0.2       -0.2        0.0       -0.1        -0.2       -0.3        -1.5
    50-65..........................................      1,978       -0.6        0.1        0.2        0.0       -0.1         0.1        0.2        -0.6
    OVER 65........................................      1,371       -0.6        0.1        0.2        0.0        0.0         0.3        0.1        -0.2
    UNKNOWN........................................        115       -0.8        0.2        0.3       -0.2        0.1         0.4       -0.5        -1.0
HOSPITALS RECLASSIFIED BY THE MEDICARE GEOGRAPHIC                                                                                                       
 REVIEW BOARD:                                                                                                                                          
    RECLASSIFICATION STATUS DURING FY 98 AND FY 99:                                                                                                     
        RECLASSIFIED DURING BOTH FY98 AND FY99.....        315       -0.5        0.1        0.6       -0.1        0.2         0.7        6.8        -0.5
            URBAN..................................         72       -0.4        0.2        0.4       -0.1       -0.2         0.1        4.9        -1.0
            RURAL..................................        243       -0.5        0.1        0.7       -0.1        0.4         1.1        8.3        -0.1
        RECLASSIFIED DURING FY 99 ONLY.............        170       -0.5        0.1        0.5        0.0        0.3         0.8        5.0         5.4
            URBAN..................................         15       -0.7        0.1       -0.1        0.1        0.1         0.1        4.6         2.3
            RURAL..................................        155       -0.5        0.1        0.7        0.0        0.3         1.0        5.1         6.3
        RECLASSIFIED DURING FY 98 ONLY.............        126       -0.7        0.1        0.3       -0.1       -0.1         0.1       -0.6        -3.6
            URBAN..................................         53       -0.8        0.1        0.2       -0.1       -0.3        -0.1       -0.7        -2.9
                                                           (0)        (1)        (2)        (3)        (4)        (5)         (6)        (7)         (8)
            RURAL..................................         73       -0.3        0.1        0.6       -0.1        0.4         1.0       -0.5        -5.9
FY 99 RECLASSIFICATIONS:                                                                                                                                
    ALL RECLASSIFIED HOSP..........................        485       -0.5        0.1        0.6       -0.1        0.2         0.7        6.2         1.4
        STAND. AMOUNT ONLY.........................         94       -0.6        0.1        0.5        0.0       -0.2         0.3        1.0        -0.7
        WAGE INDEX ONLY............................        281       -0.5        0.1        0.4       -0.1        0.3         0.6        6.9        -1.2
        BOTH.......................................         47       -0.6        0.2        0.9       -0.2       -0.3         0.5        3.7        -2.2
        NONRECLASSIFIED............................      4,526       -0.7        0.1        0.0        0.0       -0.1        -0.1       -0.4        -0.9
    ALL URBAN RECLASS..............................         87       -0.5        0.2        0.3       -0.1       -0.2         0.1        4.8        -0.3
        STAND. AMOUNT ONLY.........................         26       -0.4        0.2        1.3       -0.1       -0.3         0.9        0.8         0.1
        WAGE INDEX ONLY............................         40       -0.5        0.1       -0.3        0.0        0.1        -0.2        7.2         0.0
        BOTH.......................................         21       -0.5        0.2        0.8       -0.2       -0.5         0.1        2.8         1.3

[[Page 41108]]

                                                                                                                                                        
        NONRECLASSIFIED............................      2,696       -0.7        0.2       -0.1        0.0       -0.1        -0.2       -0.6         1.3
    ALL RURAL RECLASS..............................        398       -0.5        0.1        0.7       -0.1        0.4         1.1        7.0         2.4
        STAND. AMOUNT ONLY.........................         55       -0.4        0.1        0.9       -0.1        0.4         1.1        4.8         2.7
        WAGE INDEX ONLY............................        314       -0.5        0.1        0.7        0.0        0.4         1.1        6.9         2.2
        BOTH.......................................         29       -0.5        0.1        0.8       -0.1        0.3         1.1       10.0         3.8
        NONRECLASSIFIED............................      1,767       -0.3        0.0        0.7        0.0        0.4         0.9       -0.4         0.4
OTHER RECLASSIFIED HOSPITALS (SECTION                                                                                                                   
 1886(d)(8)(B))....................................         27       -0.5        0.1       -0.4        0.0       -0.3        -0.6        1.0        1.1 
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Because data necessary to classify some hospitals by category are missing, the total number of hospitals in each category may not equal the national
  total. Discharge data are from FY 1997, and hospital cost report data are from reporting periods beginning in FY 1994 and FY 1995.                    
\2\ This column displays the impact of the change enacted by section 4407 of the BBA, which defines discharges from 1 of 10 DRGs to postacute care as   
  transfers. Under our final policy, 3 of the 10 DRGs will be paid under an alternative methodology where they will receive 50 percent of the full DRG  
  amount on the first day and 50 percent of the current per diem transfer payment amount for each day of the stay. The remaining seven DRGs would be    
  paid using our current transfer payment methodology.                                                                                                  
\3\ This column displays the payment impact of the recalibration of the DRG weights based on FY 1997 MedPAR data and the DRG classification changes, in 
  accordance with section 1886(d)(4)(C) of the Act.                                                                                                     
\4\ This column shows the payment effects of updating the data used to calculate the wage index with data from the FY 1995 cost reports.                
\5\ This column displays the impact of adding contract Part A physician costs to the wage data.                                                         
\6\ This column illustrates the payment impact of removing the overhead costs allocated to departments where the directly assigned costs are already    
  excluded from the wage index calculation (for example, SNFs and distinct part units).                                                                 
\7\ This column displays the combined impact of the reclassification and recalibration of the DRGs, the updated and revised wage data used to calculate 
  the wage index, and the budget neutrality adjustment factor for these two changes, in accordance with sections 1886(d)(4)(C)(iii) and 1886(d)(3)(E) of
  the Act. Thus, it represents the combined impacts shown in columns 2, 3, 4, and 5, and the FY 1999 budget neutrality factor of 0.999006.              
\8\ Shown here are the effects of geographic reclassifications by the Medicare Geographic Classification Review Board (MGCRB). The effects shown here   
  demonstrate the FY 1999 payment impact of going from no reclassifications to the reclassifications scheduled to be in effect for FY 1999.             
  Reclassification for prior years has no bearing on the payment impacts shown here.                                                                    
\9\ This column shows changes in payments from FY 1998 to FY 1999. It incorporates all of the changes displayed in columns 1, 6, and 7 (the changes     
  displayed in columns 2, 3, 4 and 5 are included in column 6). It also displays the impact of the FY 1999 update, changes in hospitals'                
  reclassification status in FY 1999 compared to FY 1998, the difference in outlier payments from FY 1998 to FY 1999, and the reductions to payments    
  through the IME and DSH adjustments taking effect during FY 1999. The sum of these columns may be different from the percentage changes shown here due
  to rounding and interactive effects.                                                                                                                  

B. Impact of the Implementation of the Expanded Transfer Definition 
(Column 1)

    Section 1886(d)(5)(J) of the Act (added by section 4407 of the 
BBA) requires the Secretary to select 10 DRGs for which discharges 
(from any one of these DRGs) to a postacute care provider will be 
treated as a transfer beginning with discharges on or after October 
1, 1998. Column 1 shows the impact of this provision.
    Although the expanded definition encompasses only 10 DRGs, they 
were selected, in accordance with the statute, based upon their 
large and disproportionate volume of cases receiving postacute care. 
Therefore, the overall payment impact of this change is significant 
(a 0.6 percent decrease in payments per case).
    The 10 DRGs that we are including under this provision are 
identified in section IV.A. of the preamble to this final rule. In 
addition to selecting 10 DRGs, the statute authorizes the Secretary 
to develop an alternative transfer payment methodology for DRGs 
where a substantial portion of the costs of the cases occur very 
early in the stay. This is particularly likely to happen in some 
surgical DRGs because of the high cost of the surgical procedure. 
Based on our analysis comparing the costs per case for these cases 
with payments under our current transfer payment methodology, we 
will pay the current transfer per diem for all DRGs except DRGs 209, 
210, and 211. For those three DRGs, the alternative payment 
methodology is 50 percent of the full DRG payment amount, plus 50 
percent of the current per diem transfer payment for each day of the 
stay, up to the full DRG payment.
    To simulate the impact of these final policies, we adjusted 
hospitals' transfer-adjusted discharges and case-mix index values 
(using version 15 of the GROUPER) to reflect the impact of this 
expansion in the transfer definition. The transfer-adjusted 
discharge fraction is calculated one of two ways, depending on the 
transfer payment methodology. Under our current transfer payment 
methodology, and for all but the three DRGs receiving special 
payment consideration, this adjustment is made simply by adding one 
to the length of stay and dividing that amount by the geometric mean 
length of stay for the DRG (with the resulting fraction not to 
exceed 1.0). For example, a transfer after 3 days from a DRG with a 
geometric mean length of stay of 6 days would have a transfer-
adjusted discharge fraction of 0.667 ((3+1)/6).
    For transfers from any one of the three DRGs receiving the 
alternative payment methodology, the transfer-adjusted discharge 
fraction is 0.5 (to reflect that these cases receive half the full 
DRG amount the first day), plus one-half of the result of dividing 
one plus the length of stay prior to transfer by the geometric mean 
length of stay for the DRG. As with the above adjustment, the result 
is equal to the lesser of the transfer-adjusted discharge fraction 
or 1.
    The transfer-adjusted case-mix index values are calculated by 
summing the transfer-adjusted DRG weights and dividing by the 
transfer-adjusted discharges. The transfer-adjusted DRG weights are 
calculated by multiplying the DRG weight by the lesser of 1 or the 
transfer-adjusted discharge fraction for the case, divided by the 
geometric mean length of stay for the DRG. In this way, simulated 
payments per case can be compared before and after the change to the 
transfer policy.
    This change has the greatest impact among urban hospitals (0.7 
percent decrease). Among urban hospitals, hospitals with up to 99 
beds and those with between 100 and 199 beds are most affected, with 
0.8 percent and 0.9 percent reductions in payments, respectively. 
For urban hospitals grouped by census division, the Middle Atlantic 
division has the smallest negative impact, a 0.4 percent decrease. 
The Middle Atlantic division has traditionally had the longest 
average lengths of stay, therefore, it is reasonable that the impact 
is smallest here. Transfer cases with a length of stay more than the 
(geometric) mean length of stay minus one day do not experience any 
payment impact under this provision. (Full payment is reached one 
day prior to the mean length of stay due to the double per diem paid 
for the first day under our current transfer payment methodology.)
    Rural hospitals experience a smaller payment impact overall, 
especially the smallest rural hospitals: those with fewer than 50 
beds (a 0.2 percent decrease). The smallest impacts among rural 
census divisions are in the Middle Atlantic and the Mountain. The 
largest rural impacts are in the West South Central and the Pacific 
divisions, and Puerto Rico, all with 0.5 percent decreases. This 
change is consistent with the shorter lengths of stay in these 
geographic regions.
    The largest negative impact is a 1.0 percent decrease in 
payments observed among urban West South Central hospitals. The 
smallest negative impact occurs in SCHs (0.1 percent decrease). 
Those SCHs paid based on their hospital-specific amount would see no 
impact related to this change, since there is no transfer adjustment 
made to the hospital-specific amount.

[[Page 41109]]

C. Impact of the Changes to the DRG Classifications and Relative 
Weights (Column 2)

    In column 2 of Table I, we present the combined effects of the 
DRG reclassifications and recalibration, as discussed in section II 
of the preamble to this final rule. Section 1886(d)(4)(C)(i) of the 
Act requires us to annually make appropriate classification changes 
and to recalibrate the DRG weights in order to reflect changes in 
treatment patterns, technology, and any other factors that may 
change the relative use of hospital resources.
    We compared aggregate payments using the FY 1998 DRG relative 
weights (GROUPER version 15) to aggregate payments using the final 
FY 1999 DRG relative weights (GROUPER version 16). Overall, payments 
increase by 0.1 percent due to the DRG changes, although this is 
prior to applying the budget neutrality factor for DRG and wage 
index changes (see column 6). Consistent with the minor changes 
reflected in the FY 1999 GROUPER, the redistributional impacts of 
DRG reclassifications and recalibration across hospital groups are 
very small (a 0.2 percent increase for large urban hospitals, and a 
0.1 percent increase for other urban hospitals as well as for rural 
hospitals). Within hospital categories, the net effects for urban 
hospitals are small positive changes for all hospitals (a 0.2 
percent increase for hospitals with between 100 and 299 beds, and a 
0.1 percent increase for smaller or larger urban hospitals). Rural 
hospitals with 100 or more beds experience an increase of 0.1 
percent, for smaller rural hospitals, there is no impact (0.0 
percent change).
    The breakdowns by urban census division show that the increase 
among urban hospitals is spread across all census categories, with 
the largest increase (0.3 percent) for hospitals in Puerto Rico. For 
rural hospitals, there is no impact (that is, a 0.0 percent change) 
for hospitals in the New England, Middle Atlantic, and Mountain 
census divisions. The West North Central division experiences a 0.1 
percent decrease. All other rural census divisions experience a 0.1 
percent increase. The only other hospital category experiencing a 
negative impact is SCHs, with a 0.1 percent decrease.
    This pattern of small increases or no change applies to all 
other hospital categories. Overall, we attribute this change to the 
increasing severity of illness of hospital inpatients. That is, as 
greater numbers of less acutely ill patients are treated outside the 
inpatient setting, the acuity of the remaining hospital inpatients 
increases. Although, in the past, this effect was seen more clearly 
in large urban and very large rural hospitals, which often had more 
outpatient settings available for patient treatment, hospitals in 
all areas now appear to be able to take advantage of this practice. 
Of course, in general, these positive impacts are very minor, with 
virtually no hospital group experiencing more than a 0.2 percent 
increase.

D. Impact of Updating the Wage Data (Column 3)

    Section 1886(d)(3)(E) of the Act requires that, beginning 
October 1, 1993, we annually update the wage data used to calculate 
the wage index. In accordance with this requirement, the wage index 
for FY 1999 is based on data submitted for hospital cost reporting 
periods beginning on or after October 1, 1994 and before October 1, 
1995. As with the previous column, the impact of the new data on 
hospital payments is isolated by holding the other payment 
parameters constant in the two simulations. That is, column 3 shows 
the percentage changes in payments when going from a model using the 
FY 1998 wage index based on FY 1994 wage data before geographic 
reclassifications to a model using the FY 1999 prereclassification 
wage index based on FY 1995 wage data.
    The wage data collected on the FY 1995 cost reports includes, 
for the first time, contract labor costs and hours for top 
management positions as allowable in the wage index calculation. In 
addition, the changes to wage-related costs associated with hospital 
and home office salaries that were discussed in the September 1, 
1994 final rule (59 FR 45355) are reflected in the FY 1995 data. 
These changes are reflected in column 3, as well as other year-to-
year changes in hospitals' labor costs.
    The results indicate that the new wage data have no overall 
impact in hospital payments. Rural hospitals as a category, however, 
benefit from the update. Their payments increase by 0.7 percent. 
These increases are attributable to increases above 5 percent in the 
wage index values for the rural areas of several States.
    Urban hospitals as a group are not significantly affected by the 
updated wage data (a 0.1 percent decrease). The gains of hospitals 
in other urban areas (0.4 percent increase) are offset by decreases 
among hospitals in large urban areas (0.4 percent decrease). The 
negative impact among large urban areas appears to be largely due to 
three large urban MSAs with decreases of greater than 6 percent in 
their wage index values due to the FY 1995 data.
    Among urban census divisions, New England experiences the 
largest decline, 1.1 percent. This is primarily attributable to a 
2.0 percent decline in the Boston MSA's wage index. The negative 
impact in the Pacific division is associated with three MSAs that 
have a 7 percent decline in their wage index. On the other hand, in 
urban Puerto Rico, two MSAs had increases of more than 10 percent.
    The largest increases are in the rural census divisions. Rural 
Puerto Rico experiences the greatest positive impact, 2.3 percent. 
Hospitals in two other census divisions receive positive increases 
of at least 1.0 percent; East South Central at 1.3 percent, and New 
England at 1.0 percent. We believe these positive impacts of the new 
wage data for rural hospitals stem from the expansion of the 
contract labor definition, specifically the inclusion certain 
management categories. On average, the hourly cost of contract labor 
increased for rural hospitals by 5.9 percent. Among urban hospitals, 
the increase was 4.2 percent.

E. Impact of Including Contract Physician Part A Costs (Column 4)

    As discussed in section III.C.1 of the preamble, we began 
collecting separate wage data for both direct and contract physician 
Part A services on the FY 1995 cost report. This change was made in 
order to address any potential inequity of including only salaried 
Part A physician costs in the wage index while some States had laws 
prohibiting their hospitals from employing physicians directly 
(forcing hospitals to contract with physicians for administrative 
services). We are including contract physician Part A costs in the 
wage index calculation.
    Column 4 shows the payment impacts of including these data. 
Although only two States currently maintain the prohibition against 
hospitals directly employing physicians (Texas and California), many 
hospitals in other States reported these costs as well. Thus, the 
impacts of this final change extend well beyond Texas and 
California.
    In general, most hospital categories experience either no 
changes due to this final policy, or small (0.1 percent) increases 
or decreases. Urban hospitals in the West South Central census 
division (which includes Texas) have a 0.3 percent increase. 
Hospitals in the Pacific division (which includes California) have a 
decrease of 0.2 percent overall in their wage index.
    The MSA with the greatest increase due to this change is 
Galveston-Texas City, TX. Although hospitals in this MSA experience 
a drop in their wage index due to the use of FY 1995 data, much of 
that decrease is recovered by a 12 percent increase resulting from 
the inclusion of contract physician Part A costs. Two California 
MSAs experience increases in their wage indexes of at least 1.0 
percent: Stockton-Lodi and Fresno.

F. Impact of Removing Overhead Costs of Excluded Areas (Column 5)

    Prior years' wage index calculations have removed the direct 
wages and hours associated with certain subprovider components 
excluded from the prospective payment system; however, the overhead 
costs associated with these excluded components have not been 
removed. We revised the FY 1995 cost report to allow hospitals to 
report separately overhead salaries and hours, and for the FY 1999 
wage index we are removing the overhead costs and hours allocated to 
areas of the hospital excluded from the wage index calculation.
    Column 5 displays the impacts on FY 1999 payments per case of 
implementing this change. The overall payment impact is 0.0 percent; 
however, the impact diverges along urban and rural lines. Urban 
hospitals lose 0.1 percent as a result of removing these overhead 
costs, while rural hospitals gain 0.4 percent.
    Hospitals in the rural West North Central census division 
experience the largest percentage increase (0.7 percent). All the 
rural Statewide wage indexes increased in this census division, led 
by Minnesota (3.2 percent) and South Dakota (2.4 percent).
    The combined wage index changes in Table I are determined by 
summing the individual impacts in columns 3, 4, and 5. For example, 
the rural West North Central census division gains 0.9 percent from 
the new wage data, and 0.7 percent from removing the overhead costs 
allocated to

[[Page 41110]]

excluded areas. Therefore, the combined impact of the FY 1999 wage 
index for these hospitals is a 1.6 percent increase.
    The following chart compares the shifts in wage index values for 
labor market areas for FY 1999 relative to FY 1998. This chart 
demonstrates the impact of the changes for the FY 1999 wage index 
relative to the FY 1998 wage index. The majority of labor market 
areas (305) experience less than a 5 percent change. A total of 38 
labor market areas experience an increase of more than 5 percent, 
with 9 having an increase greater than 10 percent. A total of 28 
areas (all urban) experience decreases of more than 5 percent, 
although, of those, all decline by less than 10 percent.

------------------------------------------------------------------------
                                                       Number of labor  
                                                        market areas    
   Percentage change in area wage index  values    ---------------------
                                                     FY 1998    FY 1999 
------------------------------------------------------------------------
Increase more than 10 percent.....................          2          9
Increase more than 5 percent and less than 10                           
 percent..........................................         24         29
Increase or decrease less than 5 percent..........        334        305
Decrease more than 5 percent and less than 10                           
 percent..........................................          9         28
Decrease more than 10 percent.....................          1          0
------------------------------------------------------------------------

    Among urban hospitals, 129 would experience an increase of more 
than 5 percent and 23 more than 10 percent. More rural hospitals 
have increases greater than 5 percent (355), but none greater than 
10 percent. On the negative side, 186 urban hospitals but no rural 
hospitals have decreases in their wage index values of at least 5 
percent (none have decreases greater than 10 percent). The following 
chart shows the impact for urban and rural hospitals.

------------------------------------------------------------------------
                                                     Number of hospitals
   Percentage change in area wage index  values    ---------------------
                                                      Urban      Rural  
------------------------------------------------------------------------
Increase more than 10 percent.....................         23          0
Increase more than 5 percent and less than 10                           
 percent..........................................        129        355
Increase or decrease less than 5 percent..........       2472       1810
Decrease more than 5 percent and less than 10                           
 percent..........................................        186          0
Decrease more than 10 percent.....................          0          0
------------------------------------------------------------------------

G. Combined Impact of DRG and Wage Index Changes--Including Budget 
Neutrality Adjustment (Column 6)

    The impact of DRG reclassifications and recalibration on 
aggregate payments is required by section 1886(d)(4)(C)(iii) of the 
Act to be budget neutral. In addition, section 1886(d)(3)(E) of the 
Act specifies that any updates or adjustments to the wage index are 
to be budget neutral. As noted in the Addendum to this final rule, 
we compared aggregate payments using the FY 1998 DRG relative 
weights and wage index to aggregate payments using the FY 1999 DRG 
relative weights and wage index. Based on this comparison, we 
computed a wage and recalibration budget neutrality factor of 
0.999006. In Table I, the combined overall impacts of the effects of 
both the DRG reclassifications and recalibration and the updated 
wage index are shown in column 6. The 0.0 percent impact for All 
Hospitals demonstrates that these changes, in combination with the 
budget neutrality factor, are budget neutral.
    For the most part, the changes in this column are the sum of the 
changes in columns 2, 3, 4, and 5, minus approximately 0.1 percent 
attributable to the budget neutrality factor. There may, of course, 
be some variation of plus or minus 0.1 percent due to rounding.

H. Impact of MGCRB Reclassifications (Column 7)

    Our impact analysis to this point has assumed hospitals are paid 
on the basis of their actual geographic location (with the exception 
of ongoing policies that provide that certain hospitals receive 
payments on bases other than where they are geographically located, 
such as hospitals in rural counties that are deemed urban under 
section 1886(d)(8)(B) of the Act). The changes in column 7 reflect 
the per case payment impact of moving from this baseline to a 
simulation incorporating the MGCRB decisions for FY 1999. As noted 
below, these decisions affect hospitals' standardized amount and 
area wage index assignments. In addition, rural hospitals may be 
reclassified for purposes of receiving a higher DSH adjustment.
    Beginning in 1998, by February 28 of each year, the MGCRB makes 
reclassification determinations that will be effective for the next 
fiscal year, which begins on October 1. (In previous years, these 
determinations were made by March 30.) The MGCRB may approve a 
hospital's reclassification request for the purpose of using the 
other area's standardized amount, wage index value, or both. For FYs 
1999 through 2001, a hospital may reclassify for purposes of 
qualifying for a DSH adjustment or to receive a higher DSH payment.
    The FY 1999 final wage index values incorporate all of the 
MGCRB's reclassification decisions for FY 1999. The wage index 
values also reflect all decisions made by the HCFA Administrator 
through the appeals and review process. The overall effect of 
geographic reclassification is required by section 1886(d)(8)(D) of 
the Act to be budget neutral. Therefore, we applied an adjustment of 
0.993433 to ensure that the effects of reclassification are budget 
neutral. (See section II.A.4 of the Addendum to this final rule.)
    As a group, rural hospitals benefit from geographic 
reclassification. Their payments rise 2.7 percent, while payments to 
urban hospitals decline 0.4 percent. Hospitals in other urban areas 
see a decrease in payments of 0.4 percent, while large urban 
hospitals lose 0.5 percent. Among urban hospital groups (that is, 
bed size, census division, and special payment status), payments 
generally decline.
    A positive impact is evident among all rural hospital groups 
except the smallest hospitals (under 50 beds), which experience no 
payment impact overall. The smallest increase among the rural census 
divisions is 1.4 percent for New England. The largest increase is in 
rural South Atlantic, with an increase of 3.8 percent.
    Among rural hospitals designated as RRCs, 116 hospitals are 
reclassified for purposes of the wage index only, leading to the 6.4 
percent increase in payments among RRCs overall. This positive 
impact on RRCs is also reflected in the category of rural hospitals 
with 200 or more beds, which has a 5.3 percent increase in payments.
    Rural hospitals reclassified for FY 1998 and FY 1999 experience 
a 8.3 percent increase in payments. This may be due to the fact that 
these hospitals have the most to gain from reclassification and have 
been reclassified for a period of years. Rural hospitals 
reclassified for FY 1999 only experience a 5.1 percent increase in 
payments, while rural hospitals reclassified for FY 1998 only 
experience a 0.5 percent decrease in payments. Urban hospitals 
reclassified for FY 1998 but not FY 1999 experience a 0.7 percent 
decline in payments overall. Urban hospitals reclassified for FY 
1999 but not for FY 1998 experience a 4.6 percent increase in 
payments.
    The FY 1999 Reclassification rows of Table I show the changes in 
payments per case for all FY 1999 reclassified and nonreclassified 
hospitals in urban and rural locations for each of the three 
reclassification categories (standardized amount only, wage index 
only, or both). The table illustrates that the largest impact for 
reclassified rural hospitals is for those hospitals reclassified for 
both the standardized amount and the wage index. These hospitals 
receive a 10.0 percent increase in payments. In addition, rural 
hospitals reclassified just for the wage index receive a 6.9 percent 
payment increase. The overall impact on reclassified hospitals is to 
increase their payments per case by an average of 6.2 percent for FY 
1999.
    Among the 27 rural hospitals deemed to be urban under section 
1886(d)(8)(B) of the Act, payments increase 1.0 percent due to MGCRB 
reclassification. This is because, although these hospitals are 
treated as being attached to an urban area in our baseline (their 
redesignation is ongoing, rather than annual like the MGCRB 
reclassifications), they are eligible for MGCRB reclassification. 
For FY 1999, one hospital in this category reclassified to a large 
urban area.
    The reclassification of hospitals primarily affects payment to 
nonreclassified hospitals through changes in the wage index and the 
geographic reclassification budget neutrality adjustment required by 
section 1886(d)(8)(D) of the Act. Among hospitals that are not 
reclassified, the overall impact of hospital reclassifications is an 
average decrease in payments per case of about 0.4 percent. Urban 
nonreclassified hospitals decrease slightly more, experiencing a 0.6 
percent decrease (roughly the amount of the budget neutrality 
offset).
    The number of reclassifications for purposes of the standardized 
amount, or for

[[Page 41111]]

both the standardized amount and the wage index, has decreased from 
149 in FY 1998 to 141 in FY 1999. The number of wage index only 
reclassifications decreased from 284 in FY 1998 to 281 in FY 1999.

I. All Changes (Column 8)

    Column 8 compares our estimate of payments per case, 
incorporating all changes reflected in this final rule for FY 1999 
(including statutory changes), to our estimate of payments per case 
in FY 1998. It includes the effects of the 0.5 percent update to the 
standardized amounts and the hospital-specific rates for SCHs and 
MDHs. It also reflects the 0.3 percentage point difference between 
the projected outlier payments in FY 1999 (5.1 percent of total DRG 
payments) and the current estimate of the percentage of actual 
outlier payments in FY 1998 (5.4 percent), as described in the 
introduction to this Appendix and the Addendum to this final rule.
    Additional changes affecting the difference between FY 1998 and 
FY 1999 payments are the reductions to the IME and DSH adjustments 
enacted by the BBA. These changes initially went into effect during 
FY 1998 and include additional decreases in payment for each of 
several succeeding years. As noted in the introduction to this 
impact analysis, for FY 1999, IME is reduced to approximately a 6.5 
percent rate of increase, and DSH is reduced by 2 percent from what 
hospitals otherwise would receive. We estimate the overall effect of 
these statutory changes to be a 0.5 percent reduction in FY 1999 
payments relative to FY 1998. For hospitals receiving both IME and 
DSH, the impact is estimated to be a 0.9 percent reduction in 
payments per case.
    Column 8 also includes the impacts of FY 1999 MGCRB 
reclassifications compared to the payment impacts of FY 1998 
reclassifications. Therefore, when comparing FY 1999 payments to FY 
1998, the percent changes due to FY 1999 reclassifications shown in 
column 7 need to be offset by the effects of reclassification on 
hospitals' FY 1998 payments (column 7 of Table 1, August 29, 1997 
final rule with comment period; 62 FR 46119). For example, the 
impact of MGCRB reclassifications on rural hospitals' FY 1998 
payments was approximately a 2.2 percent increase, offsetting much 
of the 2.7 percent increase in column 7 for FY 1999. Therefore, the 
net change in FY 1999 payments due to reclassification for rural 
hospitals is actually closer to an increase of 0.5 percent relative 
to FY 1998. However, last year's analysis contained a somewhat 
different set of hospitals, so this might affect the numbers 
slightly.
    There might also be interactive effects among the various 
factors comprising the payment system that we are not able to 
isolate. For these reasons, the values in column 8 may not equal the 
sum of the changes in columns 1, 6, and 7, plus the other impacts 
that we are able to identify.
    The overall payment change from FY 1998 to FY 1999 for all 
hospitals is a 1.0 percent decrease. This reflects the 0.6 percent 
net change in total payments due to the postacute transfer change 
for FY 1999 shown in column 1; the 0.5 percent update for FY 1999, 
the 0.3 percent lower outlier payments in FY 1999 compared to FY 
1998 (5.1 percent compared to 5.4 percent); and the 0.5 percent 
reduction due to lower IME and DSH payments.
    Hospitals in urban areas experience a 1.3 percent drop in 
payments per case compared to FY 1998. Urban hospitals lose 0.9 
percent due to the combined effects of the expanded transfer 
definition and the DRG and wage index changes. The 0.4 percent 
negative impact due to reclassification is offset by an identical 
negative impact for FY 1998. The impact of reducing IME and DSH is a 
0.5 percent reduction in FY 1999 payments per case. Most of this 
negative impact is incurred by hospitals in large urban areas, where 
payments are expected to fall 1.7 percent per case compared to 0.7 
percent per case for hospitals in other urban areas.
    Hospitals in rural areas, meanwhile, experience a 1.3 percent 
payment increase. As discussed previously, this is primarily due to 
a smaller negative impact due to the expanded transfer definition 
(0.4 percent decrease compared to 0.6 percent nationally) and the 
positive effect due to the wage index and DRG changes (1.0 percent 
increase).
    Among census divisions, urban New England displays the largest 
negative impact, 2.6 percent. This outcome is primarily related to 
the 1.1 percent decrease due to the new wage data. Similarly, urban 
East North Central experiences a 2.2 percent drop in payments per 
case, due to a 0.9 percent drop due to the combined wage index and 
DRG changes. The urban Pacific and the urban West South Central also 
experience overall larger payment declines, with 2.0 and 1.6 percent 
decreases, respectively. The urban West North Central has the 
smallest negative change among urban census divisions (0.1 percent), 
stemming primarily from a 1.0 percent increase due to the DRG and 
wage index changes. Hospitals in this census division also are less 
reliant on IME and DSH funding, and are, therefore, impacted less by 
these reductions.
    The only rural census division to experience a negative payment 
impact is New England (0.3 percent decrease). This appears to result 
from a much smaller reclassification effect for rural New England 
hospitals in FY 1999. For FY 1998, the impact of MGCRB 
reclassification for these hospitals was a 2.1 percent increase (see 
62 FR 46119). For FY 1999, the increase is only 1.4 percent. The 
largest increases by a rural census division are in the South 
Atlantic and the East South Central, with 1.8 and 1.7 percent 
increases, respectively. In the South Atlantic, this is primarily 
due to a larger FY 1999 benefit from MGCRB reclassifications. For 
the East South Central, it is largely due to a 1.3 percent increase 
from the FY 1995 wage data.
    Among special categories of rural hospitals, RRCs have the 
largest increase, 2.2 percent. This carries over to other categories 
as well: rural hospitals with between 150 and 200 beds have a 2.5 
percent rise in payments (there are 37 RRCs in this category); and 
RRCs receiving DSH see a 2.5 percent increase.
    The largest negative payment impacts from FY 1998 to FY 1999 are 
among hospitals that were reclassified for FY 1998 and are not 
reclassified for FY 1999. Overall, these hospitals lose 3.6 percent. 
The urban hospitals in this category lose 2.9 percent, while the 
rural hospitals lose 5.9 percent. On the other hand, hospitals 
reclassified for FY 1999 that were not reclassified for FY 1998 
would experience the greatest payment increases: 5.4 percent 
overall; 6.3 percent for 155 rural hospitals; and 2.3 percent for 15 
urban hospitals.

             Table II.--Impact Analysis of Changes for FY 1999 Operating Prospective Payment System             
                                               [Payments per case]                                              
                                                                                                                
                                                                            Average FY   Average FY             
                                                               Number of       1998         1999                
                                                               hospitals   payment per  payment per  All changes
                                                                               case         case                
                                                                      (1)      (2) \1\      (3) \1\          (4)
----------------------------------------------------------------------------------------------------------------
(BY GEOGRAPHIC LOCATION):                                                                                       
    ALL HOSPITALS...........................................        4,975        6,773        6,707         -1.0
    URBAN HOSPITALS.........................................        2,810        7,342        7,246         -1.3
    LARGE URBAN AREAS.......................................        1,611        7,891        7,758         -1.7
    OTHER URBAN AREAS.......................................        1,199        6,589        6,544         -0.7
    RURAL AREAS.............................................        2,165        4,460        4,517          1.3
BED SIZE (URBAN):                                                                                               
    0-99 BEDS...............................................          704        4,931        4,889         -0.9
    100-199 BEDS............................................          937        6,128        6,056         -1.2
    200-299 BEDS............................................          568        6,934        6,851         -1.2

[[Page 41112]]

                                                                                                                
    300-499 BEDS............................................          449        7,846        7,738         -1.4
    500 OR MORE BEDS........................................          152        9,743        9,592         -1.6
BED SIZE (RURAL):                                                                                               
    0-49 BEDS...............................................        1,137        3,665        3,701          1.0
    50-99 BEDS..............................................          634        4,176        4,207          0.8
    100-149 BEDS............................................          229        4,613        4,662          1.1
    150-199 BEDS............................................           91        4,776        4,895          2.5
    200 OR MORE BEDS........................................           74        5,610        5,704          1.7
URBAN BY CENSUS DIV:                                                                                            
    NEW ENGLAND.............................................          152        7,887        7,682         -2.6
    MIDDLE ATLANTIC.........................................          425        8,181        8,107         -0.9
    SOUTH ATLANTIC..........................................          414        6,978        6,948         -0.4
    EAST NORTH CENTRAL......................................          476        7,029        6,873         -2.2
    EAST SOUTH CENTRAL......................................          162        6,569        6,524         -0.7
                                                                      (1)      (2) \1\      (3) \1\          (4)
    WEST NORTH CENTRAL......................................          189        7,001        6,996         -0.1
    WEST SOUTH CENTRAL......................................          354        6,830        6,720         -1.6
    MOUNTAIN................................................          129        7,046        6,971         -1.1
    PACIFIC.................................................          461        8,409        8,245         -2.0
    PUERTO RICO.............................................           48        3,065        3,056         -0.3
RURAL BY CENSUS DIV:                                                                                            
    NEW ENGLAND.............................................           53        5,305        5,287         -0.3
    MIDDLE ATLANTIC.........................................           80        4,818        4,881          1.3
    SOUTH ATLANTIC..........................................          286        4,610        4,694          1.8
    EAST NORTH CENTRAL......................................          285        4,496        4,553          1.3
    EAST SOUTH CENTRAL......................................          269        4,162        4,235          1.7
    WEST NORTH CENTRAL......................................          500        4,178        4,236          1.4
    WEST SOUTH CENTRAL......................................          342        3,991        4,017          0.7
    MOUNTAIN................................................          204        4,750        4,779          0.6
    PACIFIC.................................................          141        5,608        5,647          0.7
    PUERTO RICO.............................................            5        2,374        2,370         -0.2
(BY PAYMENT CATEGORIES):                                                                                        
    URBAN HOSPITALS.........................................        2,894        7,299        7,207         -1.3
    LARGE URBAN AREAS.......................................        1,698        7,798        7,670         -1.6
    OTHER URBAN AREAS.......................................        1,196        6,570        6,530         -0.6
    RURAL AREAS.............................................        2,081        4,444        4,494          1.1
TEACHING STATUS:                                                                                                
    NON-TEACHING............................................        3,880        5,468        5,450         -0.3
    FEWER THAN 100 RESIDENTS................................          854        7,228        7,145         -1.1
    100 OR MORE RESIDENTS...................................          241       10,974       10,755         -2.0
DISPROPORTIONATE SHARE HOSPITALS (DSH):                                                                         
    NON-DSH.................................................        3,089        5,837        5,799         -0.6
    URBAN DSH:                                                                                                  
        100 BEDS OR MORE....................................        1,404        7,951        7,843         -1.4
        FEWER THAN 100 BEDS.................................           88        5,068        5,007         -1.2
                                                                      (1)      (2) \1\      (3) \1\          (4)
    RURAL DSH:                                                                                                  
        SOLE COMMUNITY (SCH)................................          162        4,211        4,251          1.0
        REFERRAL CENTERS (RRC)..............................           53        5,294        5,428          2.5
    OTHER RURAL DSH HOSP:                                                                                       
        100 BEDS OR MORE....................................           60        4,134        4,162          0.7
        FEWER THAN 100 BEDS.................................          119        3,553        3,600          1.3
URBAN TEACHING AND DSH:                                                                                         
    BOTH TEACHING AND DSH...................................          709        8,975        8,828         -1.6
    TEACHING AND NO DSH.....................................          331        7,384        7,291         -1.3
    NO TEACHING AND DSH.....................................          783        6,318        6,271         -0.7
    NO TEACHING AND NO DSH..................................        1,071        5,664        5,612         -0.9
    SPECIAL UPDATE HOSPITALS (UNDER SEC. 4401(b) OF PUBLIC                                                      
     LAW 105-33.............................................          344        5,276        5,236         -0.8
RURAL HOSPITAL TYPES:                                                                                           
    NONSPECIAL STATUS                                                                                           
    HOSPITALS...............................................          888        3,920        3,947          0.7
    RRC.....................................................          145        5,170        5,286          2.2
    SCH.....................................................          637        4,484        4,502          0.4

[[Page 41113]]

                                                                                                                
    MDH.....................................................          352        3,715        3,753          1.0
    SCH AND RRC.............................................           59        5,339        5,402          1.2
TYPE OF OWNERSHIP:                                                                                              
    VOLUNTARY...............................................        2,858        6,956        6,884         -1.0
    PROPRIETARY.............................................          671        6,160        6,096         -1.0
    GOVERNMENT..............................................        1,331        6,243        6,209         -0.5
    UNKNOWN.................................................          115        7,894        7,811         -1.0
MEDICARE UTILIZATION AS A PERCENT OF INPATIENT DAYS:                                                            
    0-25....................................................          247        8,931        8,755         -2.0
    25-50...................................................        1,264        8,254        8,127         -1.5
    50-65...................................................        1,978        6,170        6,134         -0.6
    OVER 65.................................................        1,371        5,253        5,241         -0.2
    UNKNOWN.................................................          115        7,894        7,811         -1.0
HOSPITALS RECLASSIFIED BY THE MEDICARE GEOGRAPHIC REVIEW                                                        
 BOARD:                                                                                                         
    RECLASSIFICATION STATUS DURING FY98 AND FY99:                                                               
        RECLASSIFIED DURING BOTH FY98 AND FY99..............          315        5,971        5,944         -0.5
            URBAN...........................................           72        7,376        7,302         -1.0
            RURAL...........................................          243        5,258        5,254         -0.1
        RECLASSIFIED DURING FY99 ONLY.......................          170        5,149        5,427          5.4
            URBAN...........................................           15        8,019        8,207          2.3
            RURAL...........................................          155        4,668        4,960          6.3
        RECLASSIFIED DURING FY98 ONLY.......................          126        6,310        6,084         -3.6
            URBAN...........................................           53        7,218        7,011         -2.9
            RURAL...........................................           73        4,453        4,188         -5.9
FY 99 RECLASSIFICATIONS:                                                                                        
    ALL RECLASSIFIED HOSP...................................          485        5,683        5,763          1.4
        STAND. AMT. ONLY....................................           94        5,940        5,899         -0.7
        WAGE INDEX ONLY.....................................          281        6,007        5,935         -1.2
        BOTH................................................           47        6,407        6,264         -2.2
        NONRECLASS..........................................        4,526        6,851        6,786         -0.9
    ALL URBAN RECLASS.......................................           87        7,497        7,472         -0.3
        STAND. AMT. ONLY....................................           26        5,630        5,635          0.1
        WAGE INDEX ONLY.....................................           40        8,874        8,872          0.0
        BOTH................................................           21        6,810        6,725         -1.3
        NONRECLASS..........................................        2,696        7,348        7,249         -1.3
    ALL RURAL RECLASS.......................................          398        5,016        5,134          2.4
        STAND. AMT. ONLY....................................           55        4,374        4,494          2.7
        WAGE INDEX ONLY.....................................          314        5,083        5,194          2.2
        BOTH................................................           29        5,039        5,231          3.8
        NONRECLASS..........................................        1,767        4,109        4,127          0.4
    OTHER RECLASSIFIED HOSPITALS (SECTION 1886(d)(8)(B))....           27        4,765        4,714        -1.1 
----------------------------------------------------------------------------------------------------------------
\1\ These payment amounts per case do not reflect any estimates of annual case-mix increase.                    

    Table II presents the projected impact on payments per case of 
the final changes for FY 1999 for urban and rural hospitals and for 
the different categories of hospitals shown in Table I. It compares 
the projected payments per case for FY 1999 with the average 
estimated per case payments for FY 1998, as calculated under our 
models. Thus, this table presents, in terms of the average dollar 
amounts paid per discharge, the combined effects of the changes 
presented in Table I. The percentage changes shown in the last 
column of Table II equal the percentage changes in average payments 
from column 8 of Table I.

VIII. Impact of Changes in the Capital Prospective Payment System

A. General Considerations

    We now have data that were unavailable in previous impact 
analyses for the capital prospective payment system. Specifically, 
we have cost report data available for the fourth year of the 
capital prospective payment system (cost reports beginning in FY 
1995) available through the March 1998 update of the Health Care 
Provider Cost Report Information System (HCRIS). We also have 
updated information on the projected aggregate amount of obligated 
capital approved by the fiscal intermediaries. However, our impact 
analysis of payment changes for capital-related costs is still 
limited by the lack of hospital-specific data on several items. 
These are the hospital's projected new capital costs for each year, 
its projected old capital costs for each year, and the actual 
amounts of obligated capital that will be put in use for patient 
care and recognized as Medicare old capital costs in each year. The 
lack of this information affects our impact analysis in the 
following ways:
    <bullet> Major investment in hospital capital assets (for 
example in building and major fixed equipment) occurs at irregular 
intervals. As a result, there can be significant variation in the 
growth rates of Medicare capital-related costs per case among 
hospitals. We do not have the necessary hospital-specific budget 
data to project the hospital capital growth rate for individual 
hospitals.
    <bullet> Moreover, our policy of recognizing certain obligated 
capital as old capital makes it difficult to project future capital-
related costs for individual hospitals. Under Sec. 412.302(c), a 
hospital is required to notify

[[Page 41114]]

its intermediary that it has obligated capital by the later of 
October 1, 1992, or 90 days after the beginning of the hospital's 
first cost reporting period under the capital prospective payment 
system. The intermediary must then notify the hospital of its 
determination whether the criteria for recognition of obligated 
capital have been met by the later of the end of the hospital's 
first cost reporting period subject to the capital prospective 
payment system or 9 months after the receipt of the hospital's 
notification. The amount that is recognized as old capital is 
limited to the lesser of the actual allowable costs when the asset 
is put in use for patient care or the estimated costs of the capital 
expenditure at the time it was obligated. We have substantial 
information regarding intermediary determinations of projected 
aggregate obligated capital amounts. However, we still do not know 
when these projects will actually be put into use for patient care, 
the actual amount that will be recognized as obligated capital when 
the project is put into use, or the Medicare share of the recognized 
costs. Therefore, we do not know actual obligated capital 
commitments for purposes of the FY 1999 capital cost projections. In 
Appendix B of this final rule, we discuss the assumptions and 
computations that we employ to generate the amount of obligated 
capital commitments for use in the FY 1999 capital cost projections.
    In Table III of this section, we present the redistributive 
effects that are expected to occur between ``hold-harmless'' 
hospitals and ``fully prospective'' hospitals in FY 1999. In 
addition, we have integrated sufficient hospital-specific 
information into our actuarial model to project the impact of the 
final FY 1999 capital payment policies by the standard prospective 
payment system hospital groupings. While we now have actual 
information on the effects of the transition payment methodology and 
interim payments under the capital prospective payment system and 
cost report data for most hospitals, we still need to randomly 
generate numbers for the change in old capital costs, new capital 
costs for each year, and obligated amounts that will be put in use 
for patient care services and recognized as old capital each year. 
We continue to be unable to predict accurately FY 1999 capital costs 
for individual hospitals, but with the most recent data hospitals' 
experience under the capital prospective payment system, there is 
adequate information to estimate the aggregate impact on most 
hospital groupings.

B. Projected Impact Based on the Final FY 1999 Actuarial Model

1. Assumptions

    In this impact analysis, we model dynamically the impact of the 
capital prospective payment system from FY 1998 to FY 1999 using a 
capital cost model. The FY 1999 model, as described in Appendix B of 
this final rule, integrates actual data from individual hospitals 
with randomly generated capital cost amounts. We have capital cost 
data from cost reports beginning in FY 1989 through FY 1995 as 
reported on the March 1998 update of HCRIS, interim payment data for 
hospitals already receiving capital prospective payments through 
PRICER, and data reported by the intermediaries that include the 
hospital-specific rate determinations that have been made through 
April 1, 1998 in the provider-specific file. We used these data to 
determine the final FY 1999 capital rates. However, we do not have 
individual hospital data on old capital changes, new capital 
formation, and actual obligated capital costs. We have data on costs 
for capital in use in FY 1995, and we age that capital by a formula 
described in Appendix B. Therefore, we need to randomly generate 
only new capital acquisitions for any year after FY 1995. All 
Federal rate payment parameters are assigned to the applicable 
hospital.
    For purposes of this impact analysis, the FY 1999 actuarial 
model includes the following assumptions:
    <bullet> Medicare inpatient capital costs per discharge will 
change at the following rates during these periods:

        Average Percentage Change in Capital Costs Per Discharge        
------------------------------------------------------------------------
                                                              Percentage
                         Fiscal year                            change  
------------------------------------------------------------------------
1997........................................................       -3.02
1998........................................................       -0.46
1999........................................................        0.61
------------------------------------------------------------------------

We have reduced our estimate of the growth in Medicare costs per 
discharge from the August 29, 1997 final rule with comment period to 
this final rule based on later cost data. We are now estimating a 
much smaller increase in costs per discharge.
    <bullet> The Medicare case-mix index will increase by 1.0 
percent in FY 1998 and FY 1999.
    <bullet> The Federal capital rate and hospital-specific rate 
were updated in FY 1996 by an analytical framework that considers 
changes in the prices associated with capital-related costs, and 
adjustments to account for forecast error, changes in the case-mix 
index, allowable changes in intensity, and other factors. The final 
FY 1999 update for inflation is 0.10 percent (see section IV of the 
Addendum).

2. Results

    We have used the actuarial model to estimate the change in 
payment for capital-related costs from FY 1998 to FY 1999. Table III 
shows the effect of the capital prospective payment system on low 
capital cost hospitals and high capital cost hospitals. We consider 
a hospital to be a low capital cost hospital if, based on a 
comparison of its initial hospital-specific rate and the applicable 
Federal rate, it will be paid under the fully prospective payment 
methodology. A high capital cost hospital is a hospital that, based 
on its initial hospital-specific rate and the applicable Federal 
rate, will be paid under the hold-harmless payment methodology. 
Based on our actuarial model, the breakdown of hospitals is as 
follows:

                               Capital Transition Payment Methodology for FY 1999                               
----------------------------------------------------------------------------------------------------------------
                                                                                         Percent of   Percent of
                      Type of hospital                         Percent of   Percent of    capital      capital  
                                                               hospitals    discharges     costs       payments 
----------------------------------------------------------------------------------------------------------------
Low Cost Hospital...........................................           66           62           53           58
High Cost Hospital..........................................           34           38           47           42
----------------------------------------------------------------------------------------------------------------

    A low capital cost hospital may request to have its hospital-
specific rate redetermined based on old capital costs in the current 
year, through the later of the hospital's cost reporting period 
beginning in FY 1994 or the first cost reporting period beginning 
after obligated capital comes into use (within the limits 
established in Sec. 412.302(e) for putting obligated capital in to 
use for patient care). If the redetermined hospital-specific rate is 
greater than the adjusted Federal rate, these hospitals will be paid 
under the hold-harmless payment methodology. Regardless of whether 
the hospital became a hold-harmless payment hospital as a result of 
a redetermination, we continue to show these hospitals as low 
capital cost hospitals in Table III.
    Assuming no behavioral changes in capital expenditures, Table 
III displays the percentage change in payments from FY 1998 to FY 
1999 using the above described actuarial model. With the final 
Federal rate, we estimate aggregate Medicare capital payments will 
increase by 2.78 percent in FY 1999.

[[Page 41115]]



                                      Table III.--Impact of Proposed Changes for FY 1999 on Payments per Discharge                                      
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                 Percent
                                                       Number of                  Adjusted   Average  Hospital    Hold    Exceptions    Total    change 
                                                       hospitals    Discharges     Federal   Federal  specific  harmless    payment    payment   over FY
                                                                                   payment   percent   payment   payment                          1998  
--------------------------------------------------------------------------------------------------------------------------------------------------------
FY 1998 Payments per Discharge:                                                                                                                         
    Low Cost Hospitals...............................      3,258       6,777,970   $458.00     72.42    $86.30     $3.85      $8.89    $557.04  ........
        Fully Prospective............................      3,024       6,149,617    441.23     70.00     95.12  ........       7.61     543.95  ........
        100% Federal Rate............................        204         554,222    650.05    100.00  ........     17.77     667.82   ........          
        Hold Harmless................................         30          74,130    413.10     61.17  ........    351.63      49.36     814.09  ........
    High Cost Hospitals..............................      1,643       4,203,327    635.31     95.72  ........     37.11      15.30     687.72  ........
        100% Federal Rate............................      1,415       3,748,353    660.94    100.00  ........  ........      10.62     671.56  ........
        Hold Harmless................................        228         454,974    424.09     61.78  ........    342.86      53.86     820.81  ........
                                                      --------------------------------------------------------------------------------------------------
            Total Hospitals..........................      4,901      10,981,297    525.87     81.61     53.27     16.58      11.35     607.06  ........
FY 1999 Payments per Discharge:                                                                                                                         
    Low Cost Hospitals...............................      3,258       6,626,732    527.01     81.53     58.33      3.13       9.57     598.04      7.36
        Fully Prospective............................      3,024       6,012,484    515.37     80.00     64.29  ........       8.28     587.94      8.09
        100% Federal Rate............................        207         545,059    663.77    100.00  ........  ........      17.97     681.75      2.09
        Hold Harmless................................         27          69,188    460.62     66.21  ........    300.02      55.73     816.37      0.28
    High Cost Hospitals..............................      1,643       4,107,081    656.33     96.98  ........     26.89      20.02     703.24      2.26
        100% Federal Rate............................      1,438       3,730,929    674.49    100.00  ........  ........      14.16     688.65      2.54
        Hold Harmless................................        205         376,151    476.26     68.09  ........    293.59      78.14     847.99      3.31
                                                      --------------------------------------------------------------------------------------------------
            Total Hospitals..........................      4,901      10,733,812    576.49     87.61     36.01     12.22      13.57     638.29      5.15
--------------------------------------------------------------------------------------------------------------------------------------------------------

    We project that low capital cost hospitals paid under the fully 
prospective payment methodology will experience an average increase 
in payments per case of 7.36 percent, and high capital cost 
hospitals will experience an average increase of 2.26 percent.
    For hospitals paid under the fully prospective payment 
methodology, the Federal rate payment percentage will increase from 
70 percent to 80 percent and the hospital-specific rate payment 
percentage will decrease from 30 to 20 percent in FY 1999. The 
Federal rate payment percentage for hospitals paid under the hold-
harmless payment methodology is based on the hospital's ratio of new 
capital costs to total capital costs. The average Federal rate 
payment percentage for high cost hospitals receiving a hold-harmless 
payment for old capital will increase from 61.78 percent to 68.09 
percent. We estimate the percentage of hold-harmless hospitals paid 
based on 100 percent of the Federal rate will increase from 86.3 
percent to 87.6 percent. We estimate that high cost hold-harmless 
hospitals will experience an increase in payments of 3.31 per cent 
from FY 1998 to FY 1999. This is different from our projection in 
the proposed rule, which projected a decrease in payments. This 
change is a result of lower projected capital costs, which means 
some hospitals who otherwise would have been paid hold-harmless will 
now receive 100 percent of the federal rate. Since these are the 
lowest cost hospitals in the hold-harmless grouping, removing these 
hospitals from the mix increased the average projected hold-harmless 
payment and, consequently, the average projected total payment.
    We expect that the average hospital-specific rate payment per 
discharge will decrease from $53.27 in FY 1998 to $36.01 in FY 1999. 
This is partly due to the decrease in the hospital-specific rate 
payment percentage from 30 percent in FY 1998 to 20 percent in FY 
1999.
    We are making no changes in our exceptions policies for FY 1999. 
As a result, the minimum payment levels would be:
    <bullet> 90 percent for sole community hospitals;
    <bullet> 80 percent for urban hospitals with 100 or more beds 
and a disproportionate share patient percentage of 20.2 percent or 
more; or
    <bullet> 70 percent for all other hospitals.
    We estimate that exceptions payments will be 2.13 percent of the 
total capital payments in FY 1999. Since the August 29, 1997 final 
rule with comment period, we have reduced our estimates of capital 
cost per case based on more recent data. Although we still estimate 
that more hospitals will receive exceptions payment in FY 1999 than 
in FY 1998 fewer hospitals will have costs over the exceptions 
threshold then we previously estimated. The projected distribution 
of the eligible hospitals and exception payments is shown in the 
table below:

                  Estimated FY 1999 Exceptions Payments                 
------------------------------------------------------------------------
                                                              Percent of
               Type of hospital                  Number of    exceptions
                                                 hospitals     payments 
------------------------------------------------------------------------
Low Capital Cost..............................          185           44
High Capital Cost.............................          215           56
                                               -------------------------
    Total.....................................          400          100
------------------------------------------------------------------------

C. Cross-Sectional Comparison of Capital Prospective Payment 
Methodologies

    Table IV presents a cross-sectional summary of hospital 
groupings by capital prospective payment methodology. This 
distribution is generated by our actuarial model.

  Table IV.--Distribution by Method of Payment (Hold-Harmless/Fully Prospective) of Hospitals Receiving Capital 
                                                    Payments                                                    
                                                                                                                
                                                                              (2)  Hold-harmless         (3)    
                                                               (1)  Total --------------------------  Percentage
                                                                 No. of     Percentage   Percentage   paid fully
                                                               Hospitals    paid hold-   paid fully  prospective
                                                                             harmless     federal        rate   
                                                                                   (A)          (B)             
----------------------------------------------------------------------------------------------------------------
By Geographic Location:                                                                                         
    All hospitals...........................................        4,901          4.7         33.6         61.7
    Large urban areas (populations over 1 million)..........        1,574          5.4         41.1         53.5
Other urban areas (populations of 1 million of fewer).......        1,178          5.4         41.6         53.0

[[Page 41116]]

                                                                                                                
    Rural areas.............................................        2,149          3.9         23.6         72.5
    Urban hospitals.........................................        2,752          5.4         41.3         53.3
        0-99 beds...........................................          656          5.3         34.8         59.9
        100-199 beds........................................          929          7.3         47.0         45.6
        200-299 beds........................................          567          5.5         41.4         53.1
        300-499 beds........................................          448          1.8         40.8         57.4
        500 or more beds....................................          152          4.6         35.5         59.9
    Rural hospitals.........................................        2,149          3.9         23.6         72.5
        0-49 beds...........................................        1,124          3.6         15.7         80.6
        50-99 beds..........................................          632          4.6         28.5         66.9
        100-149 beds........................................          229          3.1         39.7         57.2
        150-199 beds........................................           90          5.6         26.7         67.8
        200 or more beds....................................           74          1.4         48.6         50.0
By Region:                                                                                                      
    Urban by Region.........................................        2,752          5.4         41.3         53.3
        New England.........................................          151          0.0         27.8         72.2
        Middle Atlantic.....................................          421          5.0         33.3         61.8
        South Atlantic......................................          409          5.1         53.8         41.1
        East North Central..................................          472          4.7         31.4         64.0
        East South Central..................................          157          7.0         52.2         40.8
        West North Central..................................          183          6.6         36.1         57.4
        West South Central..................................          334         12.0         57.2         30.8
        Mountain............................................          125          4.8         52.0         43.2
        Pacific.............................................          452          3.3         37.6         59.1
        Puerto Rico.........................................           48          2.1         27.1         70.8
    Rural by Region.........................................        2,149          3.9         23.6         72.5
        New England.........................................           53          0.0         22.6         77.4
        Middle Atlantic.....................................           79          5.1         24.1         70.9
        South Atlantic......................................          282          2.5         33.0         64.5
        East North Central..................................          283          3.2         19.1         77.7
        East South Central..................................          267          0.7         35.2         64.0
        West North Central..................................          498          3.4         16.3         80.3
        West South Central..................................          339          3.5         28.0         68.4
        Mountain............................................          203         11.3         14.3         74.4
        Pacific.............................................          140          6.4         22.1         71.4
    Large urban areas (populations over 1 million)..........        1,661          5.5         40.9         53.6
    Other urban areas (populations of 1 million of fewer)...        1,175          5.1         41.8         53.1
    Rural areas.............................................        2,065          3.9         23.0         73.1
    Teaching Status:                                                                                            
        Non-teaching........................................        3,809          4.8         33.1         62.1
        Fewer than 100 Residents............................          852          4.9         35.7         59.4
        100 or more Residents...............................          240          2.9         32.9         64.2
    Disproportionate share hospitals (DSH):                                                                     
        Non-DSH.............................................        3,030          5.1         29.2         65.6
        Urban DSH:                                                                                              
            100 or more beds................................        1,398          4.6         44.1         51.3
            Less than 100 beds..............................           82          2.4         26.8         70.7
        Rural DSH:                                                                                              
            Sole Community (SCH/EACH).......................          162          4.3         22.8         72.8
            Referral Center (RRC/EACH)......................           53          3.8         49.1         47.2
            Other Rural:                                                                                        
                100 or more beds............................           60          1.7         40.0         58.3
                Less than 100 beds..........................          116          0.0         28.4         71.6
        Urban teaching and DSH:.............................                                                    
        Both teaching and DSH...............................          707          3.8         36.8         59.4
        Teaching and no DSH.................................          330          6.1         32.1         61.8
        No teaching and DSH.................................          773          5.0         49.0         45.9
        No teaching and no DSH..............................        1,026          6.3         41.5         52.1
    Rural Hospital Types:                                                                                       
        Non special status hospitals........................          875          1.7         24.2         74.1
        RRC/EACH............................................          145          1.4         39.3         59.3
        SCH/EACH............................................          636          8.8         19.5         71.7
        Medicare-dependent hospitals (MDH)..................          350          0.9         18.0         81.1

[[Page 41117]]

                                                                                                                
        SCH, RRC and EACH...................................           59          8.5         30.5         61.0
    Type of Ownership:                                                                                          
        Voluntary...........................................        2,848          4.7         33.1         62.2
        Proprietary.........................................          658          8.2         60.2         31.6
        Government..........................................        1,329          3.2         21.1         75.6
    Medicare Utilization as a Percent of Inpatient Days:                                                        
        0-25................................................          237          3.8         32.1         64.1
        25-50...............................................        1,259          5.3         41.5         53.1
        50-65...............................................        1,972          5.3         33.4         61.4
        Over 65.............................................        1,367          3.7         26.5         69.8
----------------------------------------------------------------------------------------------------------------

    As we explain in Appendix B, we were not able to determine a 
hospital-specific rate for 74 of the 4,975 hospitals in our 
database. Consequently, the payment methodology distribution is 
based on 4,901 hospitals. These data should be fully representative 
of the payment methodologies that will be applicable to hospitals.
    The cross-sectional distribution of hospital by payment 
methodology is presented by: (1) Geographic location, (2) region, 
and (3) payment classification. This provides an indication of the 
percentage of hospitals within a particular hospital grouping that 
will be paid under the fully prospective payment methodology and the 
hold-harmless payment methodology.
    The percentage of hospitals paid fully Federal (100 percent of 
the Federal rate) as hold-harmless hospitals is expected to increase 
to 33.6 percent in FY 1999. We note that the number of hospitals 
paid fully Federal as hold-harmless hospitals has not increased as 
quickly as we predicted in the August 29, 1997 final rule with 
comment period because of revised estimates.
    Table IV indicates that 61.7 percent of hospitals will be paid 
under the fully prospective payment methodology. (This figure, 
unlike the figure of 66 percent for low cost capital hospitals in 
the previous section, takes account of the effects of 
redeterminations. In other words, this figure does not include low 
cost hospitals that, following a hospital-specific rate 
redetermination, are now paid under the hold-harmless methodology.) 
As expected, a relatively higher percentage of rural and 
governmental hospitals (72.5 percent and 75.6 percent, respectively 
by payment classification) are being paid under the fully 
prospective methodology. This is a reflection of their lower than 
average capital costs per case. In contrast, only 31.6 percent of 
proprietary hospitals are being paid under the fully prospective 
methodology. This is a reflection of their higher than average 
capital costs per case. (We found at the time of the August 30, 1991 
final rule (56 FR 43430) that 62.7 percent of proprietary hospitals 
had a capital cost per case above the national average cost per 
case.)

D. Cross-Sectional Analysis of Changes in Aggregate Payments

    We used our FY 1999 actuarial model to estimate the potential 
impact of our final changes for FY 1999 on total capital payments 
per case, using a universe of 4,901 hospitals. The individual 
hospital payment parameters are taken from the best available data, 
including: the April 1, 1998 update to the provider-specific file, 
cost report data, and audit information supplied by intermediaries. 
In Table V we present the results of the cross-sectional analysis 
using the results of our actuarial model and the aggregate impact of 
the FY 1999 payment policies. Columns 3 and 4 show estimates of 
payments per case under our model for FY 1998 and FY 1999. Column 5 
shows the total percentage change in payments from FY 1998 to FY 
1999. Column 6 presents the percentage change in payments that can 
be attributed to Federal rate changes alone.
    Federal rate changes represented in Column 6 include the 1.8 
percent increase in the Federal rate, a 1.0 percent increase in case 
mix, changes in the adjustments to the Federal rate (for example, 
the effect of the new hospital wage index on the geographic 
adjustment factor), and reclassifications by the MGCRB. Column 5 
includes the effects of the Federal rate changes represented in 
Column 6. Column 5 also reflects the effects of all other changes, 
including: the change from 70 percent to 80 percent in the portion 
of the Federal rate for fully prospective hospitals, the hospital-
specific rate update, changes in the proportion of new to total 
capital for hold-harmless hospitals, changes in old capital (for 
example, obligated capital put in use), hospital-specific rate 
redeterminations, and exceptions. The comparisons are provided by: 
(1) Geographic location, (2) region, and (3) payment classification.
    The simulation results show that, on average, capital payments 
per case can be expected to increase 5.1 percent in FY 1999. The 
results show that the effect of the Federal rate changes alone is to 
increase payments by 1.8 percent. In addition to the increase 
attributable to the Federal rate changes, a 3.3 percent increase is 
attributable to the effects of all other changes.
    Our comparison by geographic location shows that urban and rural 
hospitals will experience slightly different rates of increase in 
capital payments per case (4.9 percent and 6.7 percent, 
respectively). This difference is due to the lower rate of increase 
for urban hospitals relative to rural hospitals (1.6 percent and 3.4 
percent, respectively) from the Federal rate changes alone. Urban 
hospitals will gain approximately the same as rural hospitals (3.3 
percent for both) from the effects of all other changes.
    All regions are estimated to receive increases in total capital 
payments per case, partly due to the increased share of payments 
that are based on the Federal rate (from 70 to 80 percent). Changes 
by region vary from a low of 4.0 percent increase (West South 
Central urban region) to a high of 8.6 percent increase (Middle 
Atlantinc Rural Region).
    By type of ownership, government hospitals are projected to have 
the largest rate of increase (6.6 percent, 2.2 percent due to 
Federal rate changes and 4.4 percent from the effects of all other 
changes). Payments to voluntary hospitals will increase 5.2 percent 
(a 1.8 percent increase due to Federal rate changes and a 3.4 
percent increase from the effects of all other changes) and payments 
to proprietary hospitals will increase 3.1 percent (a 1.5 percent 
increase due to Federal rate changes and a 1.6 percent increase from 
the effects of all other changes).
    Section 1886(d)(10) of the Act established the MGCRB. Hospitals 
may apply for reclassification for purposes of the standardized 
amount, wage index, or both and for purposes of DSH, for FY 1999-
2001. Although the Federal capital rate is not affected, a 
hospital's geographic classification for purposes of the operating 
standardized amount does affect a hospital's capital payments as a 
result of the large urban adjustment factor and the disproportionate 
share adjustment for urban hospitals with 100 or more beds. 
Reclassification for wage index purposes affects the geographic 
adjustment factor since that factor is constructed from the hospital 
wage index.

[[Page 41118]]

    To present the effects of the hospitals being reclassified for 
FY 1999 compared to the effects of reclassification for FY 1998, we 
show the average payment percentage increase for hospitals 
reclassified in each fiscal year and in total. For FY 1999 
reclassifications, we indicate those hospitals reclassified for 
standardized amount purposes only, for wage index purposes only, and 
for both purposes. The reclassified groups are compared to all other 
nonreclassified hospitals. These categories are further identified 
by urban and rural designation.
    Hospitals reclassified for FY 1999 as a whole are projected to 
experience a 7.1 percent increase in payments (a 3.8 percent 
increase attributable to Federal rate changes and a 3.3 percent 
increase attributable to the effects of all other changes). Payments 
to nonreclassified hospitals will increase slightly less (6.2 
percent) than reclassified hospitals (7.1 percent) overall. Payments 
to nonreclassified hospitals will increase less than reclassified 
hospitals from the Federal rate changes (1.9 percent compared to 3.8 
percent), but they will gain about the same from the effects of all 
other changes (3.3 percent for both).

                                 Table V.--Comparison of Total Payments Per Case                                
                                 [FY 1998 Payments Compared to FY 1999 Payments]                                
----------------------------------------------------------------------------------------------------------------
                                                                                                       Portion  
                                                 Number of    Average FY   Average FY               attributable
                                                 hospitals    1998 pay-    1999 pay-   All changes   to Federal 
                                                              ments/case   ments/case                rate change
----------------------------------------------------------------------------------------------------------------
By Geographic Location:                                                                                         
    All hospitals.............................        4,901          607          638          5.1           1.8
    Large urban areas (populations over 1                                                                       
     million).................................        1,574          700          733          4.7           1.4
    Other urban areas (populations of 1                                                                         
     million or fewer)........................        1,178          596          628          5.3           1.9
    Rural areas...............................        2,149          406          433          6.7           3.4
    Urban hospitals...........................        2,752          656          688          4.9           1.6
        0-99 beds.............................          656          482          502          4.3           1.5
        100-199 beds..........................          929          581          606          4.4           1.5
        200-299 beds..........................          567          626          655          4.8           1.6
        300-499 beds..........................          448          682          718          5.4           1.6
        500 or more beds......................          152          830          872          5.1           1.6
    Rural hospitals...........................        2,149          406          433          6.7           3.4
        0-49 beds.............................        1,124          323          346          7.2           3.0
        50-99 beds............................          632          389          413          6.2           2.8
        100-149 beds..........................          229          423          450          6.4           3.2
        150-199 beds..........................           90          437          468          7.2           4.2
        200 or more beds......................           74          499          534          7.0           4.1
By Region:                                                                                                      
    Urban by Region...........................        2,752          656          688          4.9           1.6
        New England...........................          151          663          700          5.7           0.9
        Middle Atlantic.......................          421          711          747          5.1           2.0
        South Atlantic........................          409          642          674          5.0           2.3
        East North Central....................          472          615          646          4.9           0.9
        East South Central....................          157          602          626          4.0           1.4
        West North Central....................          183          638          677          6.1           2.6
        West South Central....................          334          664          691          4.0           1.2
        Mountain..............................          125          684          715          4.6           1.5
        Pacific...............................          452          717          752          4.9           1.1
        Puerto Rico...........................           48          272          286          5.5           2.6
    Rural by Region...........................        2,149          406          433          6.7           3.4
        New England...........................           53          474          505          6.3           2.4
        Middle Atlantic.......................           79          427          463          8.6           3.9
        South Atlantic........................          282          437          467          7.0           3.7
        East North Central....................          283          402          431          7.2           3.5
        East South Central....................          267          376          400          6.3           3.5
        West North Central....................          498          387          410          6.0           3.4
        West South Central....................          339          372          394          6.1           2.8
        Mountain..............................          203          421          442          4.9           2.3
        Pacific...............................          140          466          501          7.3           3.0
By Payment Classification:                                                                                      
    All hospitals.............................        4,901          607          638          5.1           1.8
    Large urban areas (populations over 1                                                                       
     million).................................        1,661          693          725          4.7           1.4
    Other urban areas (populations of 1                                                                         
     million or fewer)........................        1,175          594          626          5.4           2.0
    Rural areas...............................        2,065          404          430          6.5           3.2
    Teaching Status:                                                                                            
        Non-teaching..........................        3,809          513          538          4.9           2.0
        Fewer than 100 Residents..............          852          643          678          5.5           1.7
        100 or more Residents.................          240          897          944          5.2           1.5
        Urban DSH:                                                                                              
            100 or more beds..................        1,398          690          725          5.0           1.6
            Less than 100 beds................           82          457          475          3.9           1.0
        Rural DSH:                                                                                              
            Sole Community (SCH/EACH).........          162          362          379          4.7           2.7
            Referral Center (RRC/EACH)........           53          472          507          7.4           4.6
        Other Rural:                                                                                            
            100 or more beds..................           60          378          397          5.1           2.8
            Less than 100 beds................          116          318          339          6.5           3.4

[[Page 41119]]

                                                                                                                
    Urban teaching and DSH:                                                                                     
        Both teaching and DSH.................          707          759          799          5.2           1.6
        Teaching and no DSH...................          330          662          701          5.8           1.6
        No teaching and DSH...................          773          580          607          4.7           1.8
        No teaching and no DSH................        1,026          554          576          3.9           1.6
    Rural Hospital Types:                                                                                       
        Nonspecial status hospitals...........          875          368          391          6.1           2.7
        RRC/EACH..............................          145          469          503          7.3           4.3
        SCH/EACH..............................          636          390          412          5.9           2.3
        Medicare-dependent hospitals (MDH)....          350          323          352          9.0           3.7
        SCH, RRC and EACH.....................           59          499          526          5.5           3.2
    Hospitals Reclassified by the Medicare                                                                      
     Geographic Classification:                                                                                 
        Review Board:                                                                                           
            Reclassification Status During                                                                      
             FY98 and FY99:                                                                                     
                Reclassified During Both FY98                                                                   
                 and FY99.....................          315          541          568          5.0           1.9
            Reclassified During FY99 Only.....          170          466          521         11.8           7.8
            Reclassified During FY98 Only.....          106          598          607          1.6          -1.4
        FY99 Reclassifications:                                                                                 
            All Reclassified Hospitals........          485          515          551          7.1           3.8
            All Nonreclassified Hospitals.....        4,453          613          645          5.2           1.9
            All Urban Reclassified Hospitals..           87          651          695          6.7           2.3
            Urban Nonreclassified Hospitals...        2,638          657          689          4.9           1.6
            All Reclassified Rural Hospitals..          398          464          498          7.4           4.5
            Rural Nonreclassified Hospitals...        1,751          369          392          6.1           2.4
        Other Reclassified Hospitals (Section                                                                   
         1886(D)(8)(B)).......................           27          470          492          4.6           1.3
    Type of Ownership:                                                                                          
        Voluntary.............................        2,848          621          654          5.2           1.8
        Proprietary...........................          658          612          631          3.1           1.5
        Government............................        1,329          530          566          6.6           2.2
    Medicare Utilization as a Percent of                                                                        
     Inpatient Days:                                                                                            
        0-25..................................          237          687          736          7.2           1.2
        25-50.................................        1,259          726          761          4.7           1.5
        50-65.................................        1,972          561          591          5.3           2.0
----------------------------------------------------------------------------------------------------------------

Appendix B--Technical Appendix on the Capital Cost Model and Required 
Adjustments

    Under section 1886(g)(1)(A) of the Act, we set capital 
prospective payment rates for FY 1992 through FY 1995 so that 
aggregate prospective payments for capital costs were projected to 
be 10 percent lower than the amount that would have been payable on 
a reasonable cost basis for capital-related costs in that year. To 
implement this requirement, we developed the capital acquisition 
model to determine the budget neutrality adjustment factor. Even 
though the budget neutrality requirement expired effective with FY 
1996, we must continue to determine the recalibration and geographic 
reclassification budget neutrality adjustment factor, and the 
reduction in the Federal and hospital-specific rates for exceptions 
payments. To determine these factors, we must continue to project 
capital costs and payments.
    We have used the capital acquisition model since the start of 
prospective payments for capital costs. We now have 4 years of cost 
reports under the capital prospective payment system. For FY 1998, 
we developed a new capital cost model to replace the capital 
acquisition model. This revised model makes use of the data from 
these cost reports.
    The following cost reports are used in the capital cost model 
for this final rule: the March 31, 1998 update of the cost reports 
for PPS-IX (cost reporting periods beginning in FY 1992), PPS-X 
(cost reporting periods beginning in FY 1993), PPS-XI (cost 
reporting periods beginning in FY 1994), and PPS-XII (cost reporting 
periods beginning in FY 1995). In addition, to model payments, we 
use the April 1, 1998 update of the provider-specific file, and the 
March 1994 update of the intermediary audit file.
    Since hospitals under alternative payment system waivers (that 
is, hospitals in Maryland) are currently excluded from the capital 
prospective payment system, we excluded these hospitals from our 
model.
    We developed FY 1992 through FY 1998 hospital-specific rates 
using the provider-specific file and the intermediary audit file. 
(We used the cumulative provider-specific file, which includes all 
updates to each hospital's records, and chose the latest record for 
each fiscal year.) We checked the consistency between the provider-
specific file and the intermediary audit file. We ensured that 
increases in the hospital-specific rates were at least as large as 
the published updates (increases) for the hospital-specific rates 
each year. We were able to match hospitals to the files as shown in 
the following table:

------------------------------------------------------------------------
                                                              Number of 
                           Source                             hospitals 
------------------------------------------------------------------------
Provider-Specific File Only................................          118
Provider-Specific and Audit File...........................        4,857
                                                            ------------
    Total..................................................        4,975
------------------------------------------------------------------------

    Ninety-seven of the 4,975 hospitals had unusable or missing data 
or had no cost reports available. We determined from the cost 
reports that 23 of the 97 hospitals were paid under the hold-
harmless methodology. Since the hospital-specific amount is not used 
to determine payments for these hospitals, we were able to include 
these 23 hospitals in the analysis. We used the cost report data of 
4,901 hospitals for the analysis. Seventy-four hospitals could not 
be used in the analysis because of insufficient information. These 
hospitals account for approximately 0.3 percent of admissions, 
therefore, any effects from the elimination of their cost report 
data should be minimal.
    We analyzed changes in capital-related costs (depreciation, 
interest, rent, leases, insurance, and taxes) reported in the cost 
reports. We found a wide variance among hospitals in the growth of 
these costs. For hospitals with more than 100 beds, the distribution 
and mean of these cost increases were different for large changes in 
bed-size

[[Page 41120]]

(greater than +20 percent). We also analyzed changes in the growth 
in old capital and new capital for cost reports that provided this 
information. For old capital, we limited the analysis to decreases 
in old capital. We did this since the opportunity for most hospitals 
to treat ``obligated'' capital put into service as old capital has 
expired. Old capital costs should, therefore, decrease as assets 
become fully depreciated, and as interest costs decrease as the loan 
is amortized.
    The new capital cost model separates the hospitals into three 
mutually exclusive groups. Hold-harmless hospitals with data on old 
capital were placed in the first group. Of the remaining hospitals, 
those hospitals with fewer than 100 beds comprise the second group. 
The third group consists of all hospitals that did not fit into 
either of the groups. Each of these groups displayed unique patterns 
of growth in capital costs. We found that the gamma distribution is 
useful in explaining and describing the patterns of increase in 
capital costs. A gamma distribution is a statistical distribution 
that can be used to describe patterns of growth rates, with greatest 
proportion of rates being at the low end. We use the gamma 
distribution to estimate individual hospital rates of increase as 
follows:
    (1) For hold-harmless hospitals, old capital cost changes were 
fitted to a truncated gamma distribution, that is, a gamma 
distribution covering only the distribution of cost decreases. New 
capital costs changes were fitted to the entire gamma distribution 
allowing for both decreases and increases.
    (2) For hospitals with fewer than 100 beds (small), total 
capital cost changes were fitted to the gamma distribution allowing 
for both decreases and increases.
    (3) Other (large) hospitals were further separated into three 
groups:
    <bullet> Bed-size decreases over 20 percent (decrease).
    <bullet> Bed-size increases over 20 percent (increase).
    <bullet> Other (no-change).
    Capital cost changes for large hospitals were fitted to gamma 
distributions for each bed-size change group, allowing for both 
decreases and increases in capital costs. We analyzed the 
probability distribution of increases and decreases in bed-size for 
large hospitals. We found the probability somewhat dependent on the 
prior year change in bed-size and factored this dependence into the 
analysis. Probabilities of bed-size change were determined. Separate 
sets of probability factors were calculated to reflect the 
dependence on prior year change in bed-size (increase, decrease, and 
no change).
    The gamma distributions were fitted to changes in aggregate 
capital costs for the entire hospital. We checked the relationship 
between aggregate costs and Medicare per discharge costs. For large 
hospitals, there was a small variance, but the variance was larger 
for small hospitals. Since costs are used only for the hold-harmless 
methodology and to determine exceptions, we decided to use the gamma 
distributions fitted to aggregate cost increases for estimating 
distributions of cost per discharge increases.
    Capital costs per discharge calculated from the cost reports 
were increased by random numbers drawn from the gamma distribution 
to project costs in future years. Old and new capital were projected 
separately for hold-harmless hospitals. Aggregate capital per 
discharge costs were projected for all other hospitals. Because the 
distribution of increases in capital costs varies with changes in 
bed-size for large hospitals, we first projected changes in bed-size 
for large hospitals before drawing random numbers from the gamma 
distribution. Bed-size changes were drawn from the uniform 
distribution with the probabilities dependent on the previous year 
bed-size change. The gamma distribution has a shape parameter and a 
scaling parameter. (We used different parameters for each hospital 
group, and for old and new capital.)
    We used discharge counts from the cost reports to calculate 
capital cost per discharge. To estimate total capital costs for FY 
1997 (the MedPR data year) and later, we use the number of 
discharges from the MedPAR data. Some hospitals have considerably 
more discharges in FY 1997 than in the years for which we calculated 
cost per discharge from the cost report data. Consequently, a 
hospital with few cost report discharges would have a high capital 
cost per discharge since fixed costs would be allocated over only a 
few discharges. If discharges increase substantially, the cost per 
discharge would decrease because fixed costs would be allocated over 
more discharges. If the projection of capital cost per discharge is 
not adjusted for increases in discharges, the projection of 
exceptions would be overstated. We address this situation by 
recalculating the cost per discharge with the MedPAR discharges if 
the MedPAR discharges exceed the cost report discharges by more than 
20 percent. We do not adjust for increases of less than 20 percent 
because we have not received all of the FY 1997 discharges, and we 
have removed some discharges from the analysis because they are 
statistical outliers. This adjustment reduces our estimate of 
exceptions payments, and consequently, the reduction to the Federal 
rate for exceptions is smaller. We will continue to monitor our 
modeling of exceptions payments and make adjustments as needed.
    The average national capital cost per discharge generated by 
this model is the combined average of many randomly generated 
increases. This average must equal the projected average national 
capital cost per discharge, which we projected separately (outside 
this model). We adjusted the shape parameter of the gamma 
distributions so that the modeled average capital cost per discharge 
matches our projected capital cost per discharge. The shape 
parameter for old capital was not adjusted since we are modeling the 
aging of ``existing'' assets. This model provides a distribution of 
capital costs among hospitals that is consistent with our aggregate 
capital projections.
    Once each hospital's capital-related costs are generated, the 
model projects capital payments. We use the actual payment 
parameters (for example, the case-mix index and the geographic 
adjustment factor) that are applicable to the specific hospital.
    To project capital payments, the model first assigns the 
applicable payment methodology (fully prospective or hold-harmless) 
to the hospital as determined from the provider-specific file and 
the cost reports. The model simulates Federal rate payments using 
the assigned payment parameters and hospital-specific estimated 
outlier payments. The case-mix index for a hospital is derived from 
the FY 1997 MedPAR file using the FY 1999 DRG relative weights 
published in section V. of the Addendum to this final rule. The 
case-mix index is increased each year after FY 1997 based on 
analysis of past experiences in case-mix increases. Based on 
analysis of recent case-mix increases, we estimate that case-mix 
will increase 1.0 percent in FY 1998 and 1.0 percent in FY 1999. 
(Since we are using FY 1997 cases for our analysis, the FY 1997 
increase in case mix has no effect on projected capital payments.)
    Changes in geographic classification and revisions to the 
hospital wage data used to establish the hospital wage index affect 
the geographic adjustment factor. Changes in the DRG classification 
system and the relative weights affect the case-mix index.
    Section 412.308(c)(4)(ii) requires that the estimated aggregate 
payments for the fiscal year, based on the Federal rate after any 
changes resulting from DRG reclassifications and recalibration and 
the geographic adjustment factor, equal the estimated aggregate 
payments based on the Federal rate that would have been made without 
such changes. For FY 1998, the budget neutrality adjustment factor 
was 1.00015.
    Since we implemented a separate geographic adjustment factor for 
Puerto Rico, we applied separate budget neutrality adjustments for 
the national geographic adjustment factor and the Puerto Rico 
geographic adjustment factor. We applied the same budget neutrality 
factor for DRG reclassifications and recalibration nationally and 
for Puerto Rico. Separate adjustments were unnecessary for FY 1998 
since the geographic adjustment factor for Puerto Rico was 
implemented in 1998.
    To determine the factors for FY 1999, we first determined the 
portions of the Federal national and Puerto Rico rates that would be 
paid for each hospital in FY 1999 based on its applicable payment 
methodology. Using our model, we then compared, separately for the 
national rate and the Puerto Rico rate, estimated aggregate Federal 
rate payments based on the FY 1998 DRG relative weights and the FY 
1998 geographic adjustment factor to estimated aggregate Federal 
rate payments based on the FY 1998 relative weights and the FY 1999 
geographic adjustment factor. In making the comparison, we held the 
FY 1999 Federal rate portion constant and set the other budget 
neutrality adjustment factor and the exceptions reduction factor to 
1.00. We determined that, to achieve budget neutrality for the 
changes in the national geographic adjustment factor, an incremental 
budget neutrality adjustment of 0.99930 for FY 1999 should be 
applied to the previous cumulative FY 1998 adjustment of 1.00015, 
yielding a cumulative adjustment of 0.99945 through FY 1999. Since 
this is the first adjustment for Puerto Rico, the incremental and 
cumulative adjustment for Puerto Rico would be 0.99883 through FY

[[Page 41121]]

1999. We apply these new adjustments, then compare estimated 
aggregate Federal rate payments based on the FY 1998 DRG relative 
weights and the FY 1999 geographic adjustment factors to estimated 
aggregate Federal rate payments based on the FY 1999 DRG relative 
weights and the FY 1999 geographic adjustment factors. The 
incremental adjustment for DRG classifications and changes in 
relative weights would be 1.00336 nationally and for Puerto Rico. 
The cumulative adjustments for DRG classifications and changes in 
relative weights and for changes in the geographic adjustment 
factors through 1999 would be 1.00281 nationally, and 1.00219 for 
Puerto Rico. The following table summarizes the adjustment factors 
for each fiscal year:

                     Budget Neutrality Adjustment for DRG Reclassifications and Recalibration and the Geographic Adjustment Factors                     
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    National                                             Puerto Rico                    
                                             -----------------------------------------------------------------------------------------------------------
                                                       Incremental adjustment                                Incremental adjustment                     
                 Fiscal year                 ------------------------------------------            -----------------------------------------------------
                                              Geographic         DRG                    Cumulative  Geographic         DRG                              
                                              adjustment  reclassifications   Combined              adjustment  reclassifications   Combined  Cumulative
                                                factor    and recalibration                           factor    and recalibration                       
--------------------------------------------------------------------------------------------------------------------------------------------------------
1992........................................  ..........  .................  .........     1.00000  ..........  .................  .........  ..........
1993........................................  ..........  .................    0.99800     0.99800  ..........  .................  .........  ..........
1994........................................  ..........  .................    1.00531     1.00330  ..........  .................  .........  ..........
1995........................................  ..........  .................    0.99980     1.00310  ..........  .................  .........  ..........
1996........................................  ..........  .................    0.99940     1.00250  ..........  .................  .........  ..........
1997........................................  ..........  .................    0.99873     1.00123  ..........  .................  .........  ..........
1998........................................  ..........  .................    0.99892     1.00015  ..........  .................  .........     1.00000
1999........................................     0.99930        1.00336        1.00266     1.00281     0.99883        1.00336        1.00219     1.00219
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The methodology used to determine the recalibration and 
geographic (DRG/GAF) budget neutrality adjustment factor is similar 
to that used in establishing budget neutrality adjustments under the 
prospective payment system for operating costs. One difference is 
that, under the operating prospective payment system, the budget 
neutrality adjustments for the effect of geographic 
reclassifications are determined separately from the effects of 
other changes in the hospital wage index and the DRG relative 
weights. Under the capital prospective payment system, there is a 
single DRG/GAF budget neutrality adjustment factor (the national 
rate and the Puerto Rico rate are determined separately) for changes 
in the geographic adjustment factor (including geographic 
reclassification) and the DRG relative weights. In addition, there 
is no adjustment for the effects that geographic reclassification 
has on the other payment parameters, such as the payments for 
serving low-income patients or the large urban add-on payments.
    In addition to computing the DRG/GAF budget neutrality adjustment 
factor, we used the model to simulate total payments under the 
prospective payment system.
    Additional payments under the exceptions process are accounted for 
through a reduction in the Federal and hospital-specific rates. 
Therefore, we used the model to calculate the exceptions reduction 
factor. This exceptions reduction factor ensures that aggregate 
payments under the capital prospective payment system, including 
exceptions payments, are projected to equal the aggregate payments that 
would have been made under the capital prospective payment system 
without an exceptions process. Since changes in the level of the 
payment rates change the level of payments under the exceptions 
process, the exceptions reduction factor must be determined through 
iteration.
    In the August 30, 1991 final rule (56 FR 43517), we indicated that 
we would publish each year the estimated payment factors generated by 
the model to determine payments for the next 5 years. The table below 
provides the actual factors for fiscal years 1992 through 1999, and the 
estimated factors that would be applicable through FY 2003. We caution 
that these are estimates for fiscal years 2000 and later, and are 
subject to revisions resulting from continued methodological 
refinements, receipt of additional data, and changes in payment policy 
changes. We note that in making these projections, we have assumed that 
the cumulative national DRG/GAF budget neutrality adjustment factor 
will remain at 1.00281 (1.00219 for Puerto Rico) for FY 1999 and later 
because we do not have sufficient information to estimate the change 
that will occur in the factor for years after FY 1999.
    The projections are as follows:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               Federal  
                                                                  Update     Exceptions     Budget      DRG/GAF      Outlier      Federal    rate (after
                         Fiscal year                              factor     reduction    neutrality   adjustment   adjustment      rate       outlier  
                                                                               factor       factor     factor \1\     factor     adjustment   reduction)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1992.........................................................          N/A       0.9813       0.9602                     .9497                    415.59
1993.........................................................         6.07        .9756        .9162        .9980        .9496                    417.29
1994.........................................................         3.04        .9485        .8947       1.0053        .9454    \2\ .9260       378.34
1995.........................................................         3.44        .9734        .8432        .9998        .9414                    376.83
1996.........................................................         1.20        .9849          N/A        .9994        .9536    \3\ .9972       461.96
1997.........................................................         0.70        .9358          N/A        .9987        .9481                    438.92
1998.........................................................         0.90        .9659          N/A        .9989        .9382    \4\ .8222       371.51
1999.........................................................         0.10        .9783          N/A       1.0027        .9392                    378.05
2000.........................................................         0.70        .9763          N/A   \5\ 1.0000    \5\ .9392                    379.92
2001.........................................................         0.70        .9735          N/A       1.0000        .9392                    381.48
2002.........................................................         0.70   \6\ 1.0000          N/A       1.0000        .9392                    394.61
2003.........................................................         0.80   \6\ 1.0000          N/A       1.0000        .9392   \4\ 1.0255      407.92 
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Note: The incremental change over the previous year.                                                                                                
\2\ Note: OBRA 1993 adjustment.                                                                                                                         

[[Page 41122]]

                                                                                                                                                        
\3\ Note: Adjustment for change in the transfer policy.                                                                                                 
\4\ Note: Balanced Budget Act of 1997 adjustment.                                                                                                       
\5\ Note: Future adjustments are, for purposes of this projection, assumed to remain at the same level.                                                 
\6\ Note: We are unable to estimate exceptions payments for the year under the special exceptions provision (Sec.  412.348(g) of the regulations)       
  because the regular exceptions provision (Sec.  412.348(e)) expires.                                                                                  

Appendix C--Recommendation of Update Factors for Operating Cost Rates 
of Payment for Inpatient Hospital Services

I. Background

    Several provisions of the Act address the setting of update 
factors for inpatient services furnished in FY 1999 by hospitals 
subject to the prospective payment system and those excluded from 
the prospective payment system. Section 1886(b)(3)(B)(i)(XIV) of the 
Act sets the FY 1999 percentage increase in the operating cost 
standardized amounts equal to the rate of increase in the hospital 
market basket minus 1.9 percent for prospective payment hospitals in 
all areas. Section 1886(b)(3)(B)(iv) of the Act sets the FY 1999 
percentage increase in the hospital-specific rates applicable to 
sole community and Medicare-dependent, small rural hospitals equal 
to the rate set forth in section 1886(b)(3)(B)(i) of the Act, that 
is, the same update factor as all other hospitals subject to the 
prospective payment system, or the rate of increase in the market 
basket minus 1.9 percentage points. Under section 
1886(b)(3)(B)(ii)(VII) of the Act, the FY 1999 percentage increase 
in the rate of increase limits for hospitals excluded from the 
prospective payment system can range from the rate of increase in 
the excluded hospital market basket to zero, depending on the 
hospital's costs in relation to its limit for the most recent cost 
reporting period for which information is available.
    In accordance with section 1886(d)(3)(A) of the Act, we are 
updating the standardized amounts, the hospital-specific rates, and 
the rate-of-increase limits for hospitals excluded from the 
prospective payment system as provided in section 1886(b)(3)(B) of 
the Act. Based on the second quarter 1998 forecast of the FY 1999 
market basket increase of 2.4 percent for hospitals subject to the 
prospective payment system, the updates in the standardized amounts 
are 0.5 percent for hospitals in both large urban and other areas. 
The update in the hospital-specific rate applicable to sole 
community and Medicare-dependent, small rural hospitals is also 0.5 
percent. The update for hospitals excluded from the prospective 
payment system can be as high as the percentage increase in the 
excluded hospital market basket (currently estimated at 2.4 percent) 
or as low as zero, depending on the hospital's costs in relation to 
its rate-of-increase limit. (See section V of the addendum to this 
final rule.)
    Section 1886(e)(4) of the Act requires that the Secretary, 
taking into consideration the recommendations of the Medicare 
Payment Advisory Commission (MedPAC), recommend update factors for 
each fiscal year that take into account the amounts necessary for 
the efficient and effective delivery of medically appropriate and 
necessary care of high quality. In its March 1, 1998 report, MedPAC 
stated that, although a somewhat lower update could be justified in 
light of changes in the utilization and provision of hospital 
inpatient care, the legislated update of the market basket increase 
minus 1.9 percentage points will provide a reasonable level of 
payments to hospitals.
    Under section 1886(e)(5) of the Act, we are required to publish 
the update factors recommended under section 1886(e)(4) of the Act. 
Accordingly, we published the FY 1999 update factors recommended by 
the Secretary as Appendix D of the May 8, 1998 proposed rule (63 FR 
25704).

II. Secretary's Final Recommendations

    We received two comments concerning our proposed 
recommendations, neither of which took issue with the update 
recommendation itself. Therefore, our final recommendations for the 
operating update for both prospective and excluded hospitals do not 
differ from the proposed, except that the forecast of the market 
basket percentage increase has been revised from 2.6 to 2.4 percent 
for prospective payment hospitals and from 2.5 to 2.4 percent for 
excluded hospitals.
    Comment: The commenters suggested that HCFA's update framework 
take into account the impact of ``Year 2000'' (Y2K) systems'' 
conversions on hospital expenditures.
    Response: The purpose of the hospital input price indexes in the 
hospital market basket is to measure the price escalation associated 
with the inputs needed to provide hospital services, not to measure 
changes in the quantity and quality of inputs used to provide these 
services. The increased costs associated with Y2K systems 
conversions are in the form of 3 factors: (1) Increased quantities 
(such as more workers), (2) increased price levels for higher 
quality workers (with higher wage levels) or other inputs, and (3) 
increased price escalation, holding constant the quantity and 
quality of inputs (such as faster wage and input price escalation 
rates). The third factor of increased escalation for wages and 
prices should be picked up by the hospital input price indexes.
    Since the input price indexes measure the ``pure price'' changes 
associated with the inputs needed to provide hospital services, they 
would reflect the potentially faster rate of price escalation faced 
by hospitals from Y2K. An example would be higher market prices paid 
by hospitals for goods and services purchased from suppliers that 
also incurred higher production costs due to the Y2K conversion. We 
believe that the price proxies used in the hospital input price 
indexes, such as CPIs, PPIs, and ECIs, will reflect any escalating 
prices since all sectors of the economy are faced with additional 
costs of Y2K. This escalation will show up in the monthly or 
quarterly updates of the price proxies from the Bureau of Labor 
Statistics.
    Any change in the mix of inputs caused by Y2K would not be 
picked up in the index until it is rebased. Such a change would 
cause a modification of the weights in the input price index. 
However, any changes in the weights are likely to have a minimal 
effect on the overall percent change in the index. For example, we 
did a sensitivity analysis of this effect by increasing the weight 
for professional and technical wages and benefits by 10 percent with 
a corresponding 10 percent decrease in the non-professional and 
technical wages and benefits. Altering the weights in this manner 
had no impact on the overall percent change in the index.
    Comment: MedPAC commented that HCFA's recommendations differed 
from those of MedPAC in the proposed rule because HCFA did not 
separately account for hospital product change. Hospital product 
change reflects the dramatic change in recent years in the role of 
the hospital inpatient setting in the continuum of care. More 
patients are receiving postacute care after a hospital stay, and the 
average length of acute care stays has declined sharply.
    Response: HCFA recognizes the changes in hospital inpatient care 
delivery noted by MedPAC and for FY 1999, accounted for them in the 
determination of the intensity factor. To the extent that there is a 
mismatch in component designation between HCFA and MedPAC, HCFA is 
willing to work with MedPAC to set more clearly defined and mutually 
agreeable categories for future update recommendations.

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[FR Doc. 98-20459 Filed 7-30-98; 8:45 am]
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