```

[Federal Register Volume 76, Number 88 (Friday, May 6, 2011)]
[Rules and Regulations]
[Pages 26432-26487]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-10562]

[[Page 26431]]

Vol. 76

Friday,

No. 88

May 6, 2011

Part IV

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Part 412

Medicare Program; Inpatient Psychiatric Facilities Prospective Payment 
System--Update for Rate Year Beginning July 1, 2011 (RY 2012); Final 
Rule

Federal Register / Vol. 76 , No. 88 / Friday, May 6, 2011 / Rules and 
Regulations

[[Page 26432]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1346-F]
RIN 0938-AQ23

Medicare Program; Inpatient Psychiatric Facilities Prospective 
Payment System--Update for Rate Year Beginning July 1, 2011 (RY 2012)

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

ACTION: Final rule.

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SUMMARY: This final rule updates the prospective payment rates for 
Medicare inpatient hospital services provided by inpatient psychiatric 
facilities (IPFs) for discharges occurring during the rate year (RY) 
beginning July 1, 2011 through September 30, 2012. The final rule also 
changes the IPF prospective payment system (PPS) payment rate update 
period to a RY that coincides with a fiscal year (FY). In addition, the 
rule implements policy changes affecting the IPF PPS teaching 
adjustment. It also rebases and revises the Rehabilitation, 
Psychiatric, and Long-Term Care (RPL) market basket, and makes some 
clarifications and corrections to terminology and regulations text.

DATES: These regulations are effective on July 1, 2011.

FOR FURTHER INFORMATION CONTACT: 

Dorothy Myrick or Jana Lindquist, (410) 786-4533 (for general 
information).
Mary Carol Barron, (410) 786-7943, or Bridget Dickensheets, (410) 786-
8670, (for information regarding the market basket and labor-related 
share).
Theresa Bean, (410) 786-2287 (for information regarding the regulatory 
impact analysis).

SUPPLEMENTARY INFORMATION: 

Table of Contents

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

I. Background
    A. Annual Requirements for Updating the IPF PPS
    B. Overview of the Legislative Requirements of the IPF PPS
    C. General Overview of the IPF PPS
    D. Transition Period for Implementation of the IPF PPS
II. Provisions of the Proposed Rule and Responses to Public Comments
III. Changing the IPF PPS Payment Rate Update Period From a Rate 
Year to a Fiscal Year
IV. Rebasing and Revising of the Rehabilitation, Psychiatric, and 
Long-Term Care (RPL) Market Basket for Inpatient Psychiatric 
Facilities
    A. Background
    B. Overview of the FY 2008-Based RPL Market Basket
    C. Rebasing and Revising of the RPL Market Basket
    1. Development of Cost Categories and Weights
    a. Medicare Cost Reports
    b. Other Data Sources
    2. Final Cost Category Computation
    3. Selection of Price Proxies
    a. Wages and Salaries
    b. Employee Benefits
    c. Electricity
    d. Fuel, Oil, and Gasoline
    e. Water and Sewage
    f. Professional Liability Insurance
    g. Pharmaceuticals
    h. Food: Direct Purchases
    i. Food: Contract Services
    j. Chemicals
    k. Medical Instruments
    l. Photographic Supplies
    m. Rubber and Plastics
    n. Paper and Printing Products
    o. Apparel
    p. Machinery and Equipment
    q. Miscellaneous Products
    r. Professional Fees: Labor-Related
    s. Administrative and Business Support Services
    t. All Other: Labor-Related Services
    u. Professional Fees: Nonlabor-Related
    v. Financial Services
    w. Telephone Services
    x. Postage
    y. All Other: Nonlabor-Related Services
    4. Methodology for Capital Portion of the RPL Market Basket
    5. RY 2012 Market Basket Update
    6. Labor-Related Share
V. Updates to the IPF PPS for RY Beginning July 1, 2011
    A. Determining the Standardized Budget-Neutral Federal Per Diem 
Base Rate
    1. Standardization of the Federal Per Diem Base Rate and 
Electroconvulsive Therapy (ECT) Rate
    2. Calculation of the Budget Neutrality Adjustment
    a. Outlier Adjustment
    b. Stop-Loss Provision Adjustment
    c. Behavioral Offset
    B. Update of the Federal Per Diem Base Rate and 
Electroconvulsive Therapy Rate
VI. Update of the IPF PPS Adjustment Factors
    A. Overview of the IPF PPS Adjustment Factors
    B. Patient-Level Adjustments
    1. Adjustment for MS-DRG Assignment
    2. Payment for Comorbid Conditions
    3. Patient Age Adjustments
    4. Variable Per Diem Adjustments
    C. Facility-Level Adjustments
    1. Wage Index Adjustment
    a. Background
    b. Wage Index for RY 2012
    c. OMB Bulletins
    2. Adjustment for Rural Location
    3. Teaching Adjustment
    a. Temporary Adjustment to FTE Cap to Reflect Residents Affected 
by Hospital Closure
    b. Temporary Adjustment to FTE Cap to Reflect Residents Affected 
By Residency Program Closure
    4. Cost of Living Adjustment for IPFs Located in Alaska and 
Hawaii
    5. Adjustment for IPFs with a Qualifying Emergency Department 
(ED)
    D. Other Payment Adjustments and Policies
    1. Outlier Payments
    a. Update to the Outlier Fixed Dollar Loss Threshold Amount
    b. Statistical Accuracy of Cost-to-Charge Ratios
    2. Expiration of the Stop-Loss Provision
    3. Future Refinements
VII. Regulations Text Corrections
VIII. Collection of Information Requirements
IX. Regulatory Impact Analysis
Regulations Text
Addenda

Acronyms

    Because of the many terms to which we refer by acronym in this 
final rule, we are listing the acronyms used and their corresponding 
meanings in alphabetical order below:

BBRA Medicare, Medicaid and SCHIP [State Children's Health Insurance 
Program] Balanced Budget Refinement Act of 1999, (Pub. L. 106-113)
CBSA Core-Based Statistical Area
CCR Cost-to-charge ratio
CAH Critical access hospital
DSM-IV-TR Diagnostic and Statistical Manual of Mental Disorders 
Fourth Edition--Text Revision
DRGs Diagnosis-related groups
FY Federal fiscal year (October 1 through September 30)
ICD-9-CM International Classification of Diseases, 9th Revision, 
Clinical Modification
IPFs Inpatient psychiatric facilities
IRFs Inpatient rehabilitation facilities
LTCHs Long-term care hospitals
MedPAR Medicare provider analysis and review file
RPL Rehabilitation, Psychiatric, and Long-Term Care
RY Rate Year (July 1 through June 30)
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, (Pub. L. 97-
248)

I. Background

A. Annual Requirements for Updating the IPF PPS

    In November 2004, we implemented the inpatient psychiatric 
facilities (IPF) prospective payment system (PPS) in a final rule that 
appeared in the November 15, 2004 Federal Register (69 FR 66922). In 
developing the IPF PPS, in order to ensure that the IPF PPS is able to 
account adequately for each IPF's case-mix, we performed an

[[Page 26433]]

extensive regression analysis of the relationship between the per diem 
costs and certain patient and facility characteristics to determine 
those characteristics associated with statistically significant cost 
differences on a per diem basis. For characteristics with statistically 
significant cost differences, we used the regression coefficients of 
those variables to determine the size of the corresponding payment 
adjustments.
    In that final rule, we explained that we believe it is important to 
delay updating the adjustment factors derived from the regression 
analysis until we have IPF PPS data that includes as much information 
as possible regarding the patient-level characteristics of the 
population that each IPF serves. Therefore, we indicated that we did 
not intend to update the regression analysis and recalculate the 
Federal per diem base rate and the patient- and facility-level 
adjustments until we complete that analysis. Until that analysis is 
complete, we stated our intention to publish a notice in the Federal 
Register each spring to update the IPF PPS (71 FR 27041). However, in 
this final rule, we are changing the payment rate update period to a 
rate year (RY) that coincides with a fiscal year (FY) update. 
Therefore, future update notices will be published in the Federal 
Register in the summer. We discuss this change in more detail in 
section III of this final rule.
    Updates to the IPF PPS as specified in 42 CFR Sec.  412.428 include 
the following:
     A description of the methodology and data used to 
calculate the updated Federal per diem base payment amount.
     The rate of increase factor as described in Sec.  
412.424(a)(2)(iii), which is based on the Excluded Hospital With 
Capital market basket under the update methodology of section 
1886(b)(3)(B)(ii) of the Social Security Act (the Act) for each year 
(effective from the implementation period until June 30, 2006).
     For discharges occurring on or after July 1, 2006, the 
rate of increase factor for the Federal portion of the IPF's payment, 
which is based on the Rehabilitation, Psychiatric, and Long-Term Care 
(RPL) market basket.
     The best available hospital wage index and information 
regarding whether an adjustment to the Federal per diem base rate is 
needed to maintain budget neutrality.
     Updates to the fixed dollar loss threshold amount in order 
to maintain the appropriate outlier percentage.
     Description of the International Classification of 
Diseases, 9th Revision, Clinical Modification (ICD-9-CM) coding and 
diagnosis-related groups (DRGs) classification changes discussed in the 
annual update to the hospital inpatient prospective payment system 
(IPPS) regulations.
     Update to the electroconvulsive therapy (ECT) payment by a 
factor specified by CMS.
     Update to the national urban and rural cost-to-charge 
ratio medians and ceilings.
     Update to the cost of living adjustment factors for IPFs 
located in Alaska and Hawaii, if appropriate.
    Our most recent IPF PPS annual update occurred in the April 30, 
2010 Federal Register notice (75 FR 23106) (hereinafter referred to as 
the April 2010 IPF PPS notice) that set forth updates to the IPF PPS 
payment rates for RY 2011. This notice updated the IPF PPS per diem 
payment rates that were published in the May 2009 IPF PPS notice in 
accordance with our established policies.
    Since implementation of the IPF PPS, we have explained that we 
believe it is important to delay updating the adjustment factors 
derived from the regression analysis until we have IPF PPS data that 
include as much information as possible regarding the patient-level 
characteristics of the population that each IPF serves. Since we are 
now approximately 5 years into the system, we believe that we have 
enough data to begin that process. Therefore, we have begun the 
necessary analysis in order to make future refinements. While we did 
not propose to make refinements in this rulemaking, as explained in 
section V.D.3 below, we believe that in the next rulemaking, for FY 
2013, we will be ready to propose potential refinements.

B. Overview of the Legislative Requirements of the IPF PPS

    Section 124 of the Medicare, Medicaid, and SCHIP (State Children's 
Health Insurance Program) Balanced Budget Refinement Act of 1999 (BBRA) 
(Pub. L. 106-113) required implementation of the IPF PPS. Specifically, 
section 124 of the BBRA mandated that the Secretary develop a per diem 
PPS for inpatient hospital services furnished in psychiatric hospitals 
and psychiatric units that includes an adequate patient classification 
system that reflects the differences in patient resource use and costs 
among psychiatric hospitals and psychiatric units.
    Section 405(g)(2) of the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 (MMA) (Pub. L. 108-173) extended the IPF 
PPS to distinct part psychiatric units of critical access hospitals 
(CAHs).
    To implement these provisions, we published various proposed and 
final rules in the Federal Register. For more information regarding 
these rules, see the CMS Web site http://www.cms.hhs.gov/InpatientPsychFacilPPS/.
    Section 3401(f) of the Patient Protection and Affordable Care Act 
(Pub. L. 111-148) as amended by section 10319(e) of that Act and by 
section 1105(d) of the Health Care and Education Reconciliation Act of 
2010 (Pub. L. 111-152) (hereafter referred to as ``The Affordable Care 
Act'') added subsection (s) to section 1886 of the Act.
    Section 1886(s)(1) is titled ``Reference to Establishment and 
Implementation of System'' and it refers to section 124 of the 
Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, 
which relates to the establishment of the IPF PPS.
    Section 1886(s)(2)(A)(i) of the Act requires the application of the 
productivity adjustment described in section 1886(b)(3)(B)(xi)(II) of 
the Act to the IPF PPS for the RY beginning in 2012 and each subsequent 
RY. Section 1886(s)(2)(A)(ii) of the Act requires the application of an 
``other adjustment'' that reduces any update to an IPF PPS base rate by 
percentages specified in section 1886(s)(3) of the Act for rate years 
beginning in 2010 through the RY beginning in 2019. For the RY 
beginning in 2011, the reduction is 0.25 percentage point. We are 
implementing that provision for RY 2012 in this RY 2012 IPF PPS final 
rule.
    Section 1886(s)(4) of the Act requires the establishment of a 
quality data reporting program for the IPF PPS beginning in RY 2014.

C. General Overview of the IPF PPS

    The November 2004 IPF PPS final rule (69 FR 66922) established the 
IPF PPS, as authorized under section 124 of the BBRA and codified at 
subpart N of part 412 of the Medicare regulations. The November 2004 
IPF PPS final rule set forth the per diem Federal rates for the 
implementation year (the 18-month period from January 1, 2005 through 
June 30, 2006), and it provided payment for the inpatient operating and 
capital costs to IPFs for covered psychiatric services they furnish 
(that is, routine, ancillary, and capital costs, but not costs of 
approved educational activities, bad debts, and other services or items 
that are outside the scope of the IPF PPS). Covered psychiatric 
services include services for which benefits are provided under the 
fee-for-service Part A

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(Hospital Insurance Program) Medicare program.
    The IPF PPS established the Federal per diem base rate for each 
patient day in an IPF derived from the national average daily routine 
operating, ancillary, and capital costs in IPFs in FY 2002. The average 
per diem cost was updated to the midpoint of the first year under the 
IPF PPS, standardized to account for the overall positive effects of 
the IPF PPS payment adjustments, and adjusted for budget neutrality.
    The Federal per diem payment under the IPF PPS is comprised of the 
Federal per diem base rate described above and certain patient- and 
facility-level payment adjustments that were found in the regression 
analysis to be associated with statistically significant per diem cost 
differences.
    The patient-level adjustments include age, DRG assignment, 
comorbidities, and variable per diem adjustments to reflect higher per 
diem costs in the early days of an IPF stay. Facility-level adjustments 
include adjustments for the IPF's wage index, rural location, teaching 
status, a cost of living adjustment for IPFs located in Alaska and 
Hawaii, and presence of a qualifying emergency department (ED).
    The IPF PPS provides additional payment policies for: Outlier 
cases; stop-loss protection (which was applicable only during the IPF 
PPS transition period); interrupted stays; and a per treatment 
adjustment for patients who undergo ECT.
    A complete discussion of the regression analysis appears in the 
November 2004 IPF PPS final rule (69 FR 66933 through 66936).
    Section 124 of BBRA does not specify an annual update rate strategy 
for the IPF PPS and is broadly written to give the Secretary discretion 
in establishing an update methodology. Therefore, in the November 2004 
IPF PPS final rule, we implemented the IPF PPS using the following 
update strategy:
     Calculate the final Federal per diem base rate to be 
budget neutral for the 18-month period of January 1, 2005 through June 
30, 2006.
     Use a July 1 through June 30 annual update cycle.
     Allow the IPF PPS first update to be effective for 
discharges on or after July 1, 2006 through June 30, 2007.

D. Transition Period for Implementation of the IPF PPS

    In the November 2004 IPF PPS final rule, we provided for a 3-year 
transition period. During this 3-year transition period, an IPF's total 
payment under the PPS was based on an increasing percentage of the 
Federal rate with a corresponding decreasing percentage of the IPF PPS 
payment that is based on reasonable cost concepts. However, effective 
for cost reporting periods beginning on or after January 1, 2008, IPF 
PPS payments are based on 100 percent of the Federal rate.

II. Provisions of the Proposed Rule and Responses to Public Comments

    On January 27, 2011, we published a proposed rule that appeared in 
the Federal Register (76 FR 4998) entitled, ``Inpatient Psychiatric 
Facilities Prospective Payment System--Update for Rate Year Beginning 
July 1, 2011 (RY 2012).'' The January 2011 proposed rule (hereinafter 
referred to as the RY 2012 IPF PPS proposed rule) set forth the 
proposed annual update to the proposed PPS for IPFs for discharges 
occurring during the RY beginning July 1, 2011.
    In addition to the annual rate update, we proposed to--
     Switch the annual update period for the IPF PPS from a RY 
that begins on July 1 and goes through June 30 to one that coincides 
with a FY, that is, that begins on October 1 and goes through September 
30. For the update period that begins in 2012, that is, FY 2013, we 
would refer to the update period as a FY. In order to make this switch, 
we proposed that RY 2012 be a 15-month period, from July 1, 2011 
through September 30, 2012.
     Rebase and revise the FY 2002-based RPL market basket to a 
FY 2008-based RPL market basket. Apply a 0.25 percentage point 
reduction to the market basket update as required by section 1886(s)(3) 
of the Act.
     Adopt IPF policies similar to such IPPS graduate medical 
education (GME) policies providing for temporary adjustments to an 
IPF's FTE cap to reflect residents added due to the closure of an IPF 
or an IPF's residency training program.
     Update the fixed dollar loss threshold amount in order to 
maintain the appropriate outlier percentage.
     Update the ECT adjustment by a factor specified by CMS.
     Update the national urban and rural cost-to-charge ratio 
medians and ceilings.
     Update the cost of living adjustment factors for IPFs 
located in Alaska and Hawaii, if appropriate.
     Describe the ICD-9-CM and MS-DRG classification changes 
discussed in the annual update to the hospital inpatient prospective 
payment system regulations.
     Use the best available hospital wage index and information 
regarding whether an adjustment to the Federal per diem base rate is 
needed to maintain budget neutrality.
     Retain the 17 percent adjustment for IPFs located in rural 
areas, the 1.31 adjustment for IPFs with a qualifying ED, the 0.5150 
teaching adjustment to the Federal per diem rate, and the MS-DRG 
adjustment factor currently being paid to IPFs for RY 2011.
     Update the MS-DRG listing and comorbidity categories to 
reflect the ICD-9-CM revisions effective October 1, 2010.
    In addition, we proposed to make clarifying changes to the 
regulations text. We noted that these proposed changes would not impact 
policy.
    We provided for a 60 day comment period on the RY 2012 IPF PPS 
proposed rule. We received 12 public comments from hospital 
associations and psychiatric hospitals and units. In general, many of 
the commenters strongly supported our proposed policy changes, 
including changes to the payment rate update cycle and the teaching 
policy. A few commenters expressed concern regarding the proposed 
decrease in the labor-related share. Several commenters recommended 
that we explore the creation of an inpatient rehabilitation and 
psychiatric facilities (RP) market basket. Summaries of the public 
comments received and our responses to those comments are provided in 
the appropriate sections in the preamble of this final rule.

III. Changing the IPF PPS Payment Rate Update Period From a Rate Year 
to a Fiscal Year

    In the RY 2012 IPF PPS proposed rule, we proposed to change the 
current period for the annual updates of the IPF PPS Federal payment 
rates. Specifically, we proposed to revise the IPF PPS payment rate 
update period by switching from a RY that begins on July 1 and goes 
through June 30 to a period that coincides with a FY, that is, October 
1 through September 30. We proposed to refer to the update period as a 
FY beginning with the update period that begins in 2012, that is, FY 
2013. We specified that this change in the annual update period would 
allow us to consolidate Medicare publications by aligning the IPF PPS 
update with the annual update of the ICD-9-CM codes, which are 
effective on October 1 of each year. Currently, in addition to our 
annual proposed and final rulemaking documents, we publish a change 
request transmittal every August updating the ICD-9-CM codes related to 
the DRG and comorbidity adjustments. By proposing to align the IPF PPS 
with the same update period as the ICD-9-CM codes,

[[Page 26435]]

we aimed to eliminate the need to publish a transmittal off-cycle.
    We maintain the same diagnostic coding and DRG classification for 
IPFs that are used under the IPPS for providing the psychiatric care. 
When the IPF PPS was implemented, we adopted the same diagnostic code 
set and DRG patient classification systems (that is, the CMS DRGs) that 
were utilized at the time under the hospital IPPS. Every year, changes 
to the ICD-9-CM coding system are addressed in the IPPS proposed and 
final rules. These changes are effective October 1 of each year and 
must be used by acute care hospitals as well as other providers to 
report diagnostic and procedure information. The IPF PPS has always 
incorporated ICD-9-CM coding changes made in the annual IPPS update. 
This proposed change to the annual payment rate update period would 
allow the annual update to the rates and the ICD-9-CM coding update to 
occur on the same schedule and appear in the same Federal Register 
document.
    Our intent in making the change in the payment rate update schedule 
is to place the IPF PPS on the same update cycle as other PPSs, making 
it administratively efficient. In order to smoothly transition to a 
payment update period that runs from October 1 through September 30, we 
proposed that the RY 2012 period run from July 1, 2011 to September 30, 
2012 such that RY 2012 would be 15 months. As proposed and for this 
final rule, after RY 2012, the rate update period for the IPF PPS 
payment rates and other policy changes will begin on October 1 and go 
through September 30. The next update to the IPF PPS rates after RY 
2012 would be the FY 2013 update cycle, which will begin on October 1, 
2012 and go through September 30, 2013. In addition, we proposed to 
make a change to the regulations at Sec.  412.402 to add the term ``IPF 
Prospective Payment System Rate Year'' which would mean October 1 
through September 30. We proposed that the RY would be referred to as a 
FY. For a discussion of the proposed 15-month market basket update for 
the proposed 2012 RY, we refer readers to the RY 2012 IPF PPS proposed 
rule (76 FR 4998).
    Public comments and our responses on the switch from a RY to a FY 
are summarized below.
    Comment: A few commenters supported moving the payment rate update 
period from a RY to a FY. They supported a 15-month update for RY 2012 
in order to transition to a FY update period.
    Response: We appreciate the commenters' support to move the IPF PPS 
payment rate update period to a period that begins on October 1 and 
goes through the following September, with a 15-month update for RY 
2012 in order to transition to a FY. We are adopting as final, without 
modification, the proposal to revise the IPF PPS payment period to a FY 
with a 15-month update for RY 2012 in order to transition to a FY 
update period.
    Final Rule Action: In summary, for RY 2012, we are revising the IPF 
PPS payment rate update period by switching the RY period from July 1 
through June 30 to a period that coincides with a FY. In order to 
transition to a FY update period, RY 2012 is a 15-month period. We are 
also making a change to Sec.  412.402 to add the term ``IPF Prospective 
Payment System Rate Year'' which means October 1 through September 30 
will be referred to as a Fiscal year.

IV. Rebasing and Revising of the Rehabilitation, Psychiatric, and Long-
Term Care (RPL) Market Basket for Inpatient Psychiatric Facilities

A. Background

    The input price index (that is, the market basket) that was used to 
develop the IPF PPS was the Excluded Hospital with Capital market 
basket. This market basket was based on 1997 Medicare cost report data 
and included data for Medicare participating IPFs, inpatient 
rehabilitation facilities (IRFs), long-term care hospitals (LTCHs), 
cancer hospitals, and children's hospitals. Although ``market basket'' 
technically describes the mix of goods and services used in providing 
hospital care, this term is also commonly used to denote the input 
price index (that is, cost category weights and price proxies combined) 
derived from that market basket. Accordingly, the term ``market 
basket'' as used in this document refers to a hospital input price 
index.
    Beginning with the May 2006 IPF PPS final rule (71 FR 27046 through 
27054), IPF PPS payments were updated using a FY 2002-based market 
basket reflecting the operating and capital cost structures for IRFs, 
IPFs, and LTCHs (hereafter referred to as the Rehabilitation, 
Psychiatric, and Long-Term Care (RPL) market basket).
    We excluded cancer and children's hospitals from the RPL market 
basket because these hospitals are not reimbursed through a PPS; 
rather, their payments are based entirely on reasonable costs subject 
to rate-of-increase limits established under the authority of section 
1886(b) of the Act, which are implemented in regulations at Sec.  
413.40. Moreover, the FY 2002 cost structures for cancer and children's 
hospitals are noticeably different than the cost structures of the 
IRFs, IPFs, and LTCHs. A complete discussion of the FY 2002-based RPL 
market basket appears in the May 2006 IPF PPS final rule (71 FR 27046 
through 27054).
    In the May 1, 2009 IPF PPS notice (74 FR 20362), we expressed our 
interest in exploring the possibility of creating a stand-alone IPF 
market basket that reflects the cost structures of only IPF providers. 
We noted that, of the available options, one would be to join the 
Medicare cost report data from freestanding IPF providers (presently 
incorporated into the FY 2002-based RPL market basket) with data from 
hospital-based IPF providers. We indicated that an examination of the 
Medicare cost report data comparing freestanding and hospital-based 
IPFs revealed considerable differences between the two with respect to 
cost levels and cost structures. At that time, we were unable to fully 
understand the differences between these two types of IPF providers. As 
a result, we felt that further research was required and we solicited 
public comment for additional information that might help us to better 
understand the reasons for the variations in costs and cost structures, 
as indicated by the cost report data, between freestanding and 
hospital-based IPFs (74 FR 20376).
    We summarized the public comments we received and our responses in 
the April 2010 IPF PPS notice (75 FR 23111 through 23113). Despite 
receiving comments from the public on this issue, we remain unable to 
sufficiently understand the observed differences in costs and cost 
structures between hospital-based and freestanding IPFs, and therefore 
we do not feel it is appropriate at this time to incorporate data from 
hospital-based IPFs with those of freestanding IPFs to create a stand-
alone IPF market basket.
    Although we do not feel it would be appropriate to propose a stand-
alone IPF market basket, we are currently exploring the viability of 
creating two separate market baskets from the current RPL, one of which 
would include freestanding IPFs and freestanding IRFs and would be used 
to update payments under both the IPF and IRF payment systems. The 
other would be a stand-alone LTCH market basket. Depending on the 
outcome of our research, we anticipate the possibility of proposing a 
rehabilitation and psychiatric (RP) market basket in the next update 
cycle. In the RY 2012 IPF PPS proposed rule, we welcomed public comment 
on the possibility of using this type of market

[[Page 26436]]

basket to update IPF payments in the future.
    For this update cycle, we proposed to rebase and revise the FY 
2002-based RPL market basket by creating a proposed FY 2008-based RPL 
market basket. For this RY 2012 IPF PPS final rule, we are finalizing 
the FY 2008-based RPL market basket as proposed. In the following 
section, we provide an overview of the market basket and describe the 
methodologies we proposed to use, and are finalizing in this final 
rule, for purposes of determining the operating and capital portions of 
the FY 2008-based RPL market basket.
    Public comments and our responses on the rebasing and revising of 
the RPL market basket for IPFs are summarized below.
    Comment: One commenter, while generally supporting use of the RPL 
market basket at the time of implementation, stated that it has its 
limitations, and recommended that CMS explore the creation of an RP 
market basket. Several commenters supported CMS' efforts to determine 
if a separate market basket for inpatient psychiatric and 
rehabilitation facilities is appropriate.
    Response: CMS will continue its efforts to investigate the 
viability of an alternative market basket to update IPF providers. Any 
possible changes to the market basket used to update IPF payments would 
appear in a future rulemaking and be subject to public comment.
    Comment: Several commenters expressed concern regarding a recent 
trend in facility closures of hospital-based IPFs and stated that 
hospital-based IPF facilities are a vital component in preserving 
access to care for patients suffering from mental illness, particularly 
those who have coexisting physical conditions or experience a crisis 
and enter the emergency department for treatment. Therefore, the 
commenters recommended that CMS continue exploring reasons behind the 
differences in costs and cost structures between freestanding and 
hospital-based providers.
    Response: We are continuing to analyze the Medicare cost report 
data in order to better understand the differences between freestanding 
and hospital-based IPF providers.

B. Overview of the FY 2008-Based RPL Market Basket

    The FY 2008-based RPL market basket is a fixed weight, Laspeyres-
type price index. A Laspeyres price index measures the change in price, 
over time, of the same mix of goods and services purchased in the base 
period. Any changes in the quantity or mix of goods and services (that 
is, intensity) purchased over time are not measured.
    The index itself is constructed in three steps. First, a base 
period is selected (in this final rule, the base period is FY 2008) and 
total base period expenditures are estimated for a set of mutually 
exclusive and exhaustive spending categories with the proportion of 
total costs that each category represents being calculated. These 
proportions are called cost or expenditure weights. Second, each 
expenditure category is matched to an appropriate price or wage 
variable, referred to as a price proxy. In nearly every instance, these 
price proxies are derived from publicly available statistical series 
that are published on a consistent schedule (preferably at least on a 
quarterly basis). Finally, the expenditure weight for each cost 
category is multiplied by the level of its respective price proxy. The 
sum of these products (that is, the expenditure weights multiplied by 
their price levels) for all cost categories yields the composite index 
level of the market basket in a given period. Repeating this step for 
other periods produces a series of market basket levels over time. 
Dividing an index level for a given period by an index level for an 
earlier period produces a rate of growth in the input price index over 
that timeframe.
    As noted above, the market basket is described as a fixed-weight 
index because it represents the change in price over time of a constant 
mix (quantity and intensity) of goods and services needed to furnish 
hospital services. The effects on total expenditures resulting from 
changes in the mix of goods and services purchased subsequent to the 
base period are not measured. For example, a hospital hiring more 
nurses to accommodate the needs of patients would increase the volume 
of goods and services purchased by the hospital, but would not be 
factored into the price change measured by a fixed-weight hospital 
market basket. Only when the index is rebased would changes in the 
quantity and intensity be captured, with those changes being reflected 
in the cost weights. Therefore, we rebase the market basket 
periodically so the cost weights reflect recent changes in the mix of 
goods and services that hospitals purchase (hospital inputs) to furnish 
inpatient care between base periods.

C. Rebasing and Revising of the RPL Market Basket

    In the RY 2012 IPF PPS proposed rule, we proposed to rebase and 
revise the market basket used to update the IPF PPS. We solicited 
public comments on our proposed methodological changes to the RPL 
market basket. We did not receive any specific comments on these 
proposed changes. Therefore, we are finalizing the methodology for 
calculating the rebased and revised FY 2008-based market basket as 
proposed. The methodology is described in more detail below.
    The terms ``rebasing'' and ``revising,'' while often used 
interchangeably, actually denote different activities. ``Rebasing'' 
means moving the base year for the structure of costs of an input price 
index (for example, in this final rule, we are shifting the base year 
cost structure for the RPL market basket from FY 2002 to FY 2008). 
``Revising'' means changing data sources, price proxies, or methods, 
used to derive the input price index.
1. Development of Cost Categories and Weights
a. Medicare Cost Reports
    As proposed, and in this final rule, the FY 2008-based RPL market 
basket consists of several major cost categories derived from the FY 
2008 Medicare cost reports for freestanding IRFs, freestanding IPFs, 
and LTCHs, including wages and salaries, pharmaceuticals, professional 
liability insurance, capital, and a residual. These FY 2008 cost 
reports include providers whose cost reporting periods began on or 
after October 1, 2007 and before October 1, 2008. We choose to use FY 
2008 as the base year because we believe that the Medicare cost reports 
for this year represent the most recent, complete set of Medicare cost 
report data available for IRFs, IPFs, and LTCHs. However, for the FY 
2008 cost reports, IRFs, IPFs, and LTCHs were not required to complete 
the Medicare cost report worksheet for benefits and contract labor 
(Worksheet S-3, part II). As a result, less than 30 percent of 
providers reported data for these categories, and we do not expect 
these FY 2008 data to improve over time. Furthermore, the issue of 
incomplete Medicare cost report data for benefits and contract labor 
also existed when we finalized the FY 2002-based RPL market basket, 
since, at that time, IRFs, IPFs and LTCHs were not required to submit 
data for Worksheet S-3, part II in the FY 2002 cost reporting year. Due 
to the incomplete benefits and contract labor data for IRFs, IPFs, and 
LTCHs, for these cost weights, rather than using IRF/IPF/LTCH cost 
report data, we instead used FY 2008 IPPS hospital cost report data 
(similar to the method that was used for the FY 2002-

[[Page 26437]]

based RPL market basket). Additional detail is provided later in this 
section.
    Since our goal is to measure cost shares that are reflective of 
case mix and practice patterns associated with providing services to 
Medicare beneficiaries, we limited our selection of Medicare cost 
reports to those from hospitals that have a Medicare average length of 
stay (LOS) that is within a comparable range of their total facility 
average LOS. We believe this provides a more accurate reflection of the 
structure of costs for Medicare covered days. We used the cost reports 
of IRFs and LTCHs with Medicare average LOS within 15 percent (that is, 
15 percent higher or lower) of the total facility average LOS for the 
hospital. This is the same edit applied to derive the FY 2002-based RPL 
market basket and generally includes those LTCHs and IRFs with Medicare 
LOS within approximately 5 days of the facility average LOS of the 
hospital.
    We used a less stringent measure of Medicare LOS for IPFs. For this 
provider-type, and in order to produce a robust sample size, we used 
those facilities' Medicare cost reports whose average LOS is within 30 
or 50 percent (depending on the total facility average LOS) of the 
total facility average LOS. This is the same edit applied to derive the 
FY 2002-based RPL market basket.
    We applied these LOS edits to first obtain a set of cost reports 
for facilities that have a Medicare LOS within a comparable range of 
their total facility LOS. Using this set of Medicare cost reports, we 
then calculated cost weights for four cost categories directly from the 
FY 2008 Medicare cost reports for freestanding IRFs, freestanding IPFs, 
and LTCHs (found in Table 1 below). These Medicare cost report cost 
weights were then supplemented with information obtained from other 
data sources (explained in more detail below) to derive the final FY 
2008-based RPL market basket cost weights.

   Table 1--Major Cost Categories and Their Respective Cost Weights as
         Calculated Directly From FY 2008 Medicare Cost Reports
------------------------------------------------------------------------
                                                               FY 2008-
                                                               based RPL
                    Major cost categories                       market
                                                                basket
                                                               (percent)
------------------------------------------------------------------------
Wages and salaries..........................................      47.371
Professional Liability Insurance (Malpractice)..............       0.764
Pharmaceuticals.............................................       6.514
Capital.....................................................       8.392
All other...................................................      36.959
------------------------------------------------------------------------

b. Other Data Sources
    In addition to the IRF, IPF and LTCH Medicare cost reports for 
freestanding IRFs and freestanding IPFs, and LTCHs, the other data 
sources we used to develop the FY 2008-based RPL market basket cost 
weights were the FY 2008 IPPS Medicare cost reports and the 2002 
Benchmark Input-Output (I-O) Tables created by the Bureau of Economic 
Analysis (BEA), U.S. Department of Commerce. The FY 2008 Medicare cost 
reports include providers whose cost reporting periods began on or 
after October 1, 2007 and before October 1, 2008.
    As noted above, the FY 2008-based RPL cost weights for benefits and 
contract labor were derived using FY 2008-based IPPS Medicare cost 
reports. We used these Medicare cost reports to calculate cost weights 
for Wages and Salaries, Benefits, and Contract Labor for IPPS hospitals 
for FY 2008. For the Benefits cost weight for the FY 2008-based RPL 
market basket, the ratio of the FY 2008 IPPS Benefits cost weight to 
the FY 2008 IPPS Wages and Salaries cost weight was applied to the RPL 
Wages and Salaries cost weight. Similarly, the ratio of the FY 2008 
IPPS Contract Labor cost weight to the FY 2008 IPPS Wages and Salaries 
cost weight was applied to the RPL Wages and Salaries cost weight to 
derive a Contract Labor cost weight for the FY 2008-based RPL market 
basket.
    The All Other cost category is divided into other hospital 
expenditure category shares using the 2002 BEA Benchmark I-O data 
following the removal of the portions of the All Other cost category 
provided in Table 1 that are attributable to Benefits and Contract 
Labor. The BEA Benchmark I-O data are scheduled for publication every 5 
years. The most recent data available are for 2002. BEA also produces 
Annual I-O estimates; however, the 2002 Benchmark I-O data represent a 
much more comprehensive and complete set of data that are derived from 
the 2002 Economic Census. The Annual I-O is simply an update of the 
Benchmark I-O tables. For the FY 2002-based RPL market basket, we used 
the 1997 Benchmark I-O data. Therefore, we used the 2002 Benchmark I-O 
data in the FY 2008-based RPL market basket, and instead of using the 
less detailed Annual I-O data, we aged the 2002 Benchmark I-O data 
forward to 2008. The methodology we used to age the data forward 
involves applying the annual price changes from the respective price 
proxies to the appropriate cost categories. We repeated this practice 
for each year.
    The All Other cost category expenditure shares are determined as 
being equal to each category's proportion to total ``all other'' in the 
aged 2002 Benchmark I-O data. For instance, if the cost for telephone 
services represented 10 percent of the sum of the ``all other'' 
Benchmark I-O hospital expenditures, then telephone services would 
represent 10 percent of the RPL market basket's All Other cost 
category.
2. Final Cost Category Computation
    As stated previously, for this rebasing we used the FY 2008 
Medicare cost reports for IRFs, IPFs, and LTCHs to derive four major 
cost categories. The FY 2008-based RPL market basket includes two 
additional cost categories that were not broken out separately in the 
FY 2002-based RPL market basket: ``Administrative and Business Support 
Services'' and ``Financial Services''. The inclusion of these two 
additional cost categories, which are derived using the Benchmark I-O 
data, is consistent with the addition of these two cost categories to 
the FY 2006-based IPPS market basket (74 FR 43845). We chose to break 
out both categories so we can better match their respective expenses 
with more appropriate price proxies. Also, the FY 2008-based RPL market 
basket excludes one cost category: Photo Supplies. The 2002 Benchmark 
I-O weight for this category is considerably smaller than the 1997 
Benchmark I-O weight, presently accounting for less than one-tenth of 
one percentage point of the RPL market basket. Therefore, we included 
the photo supplies costs in the Chemical cost category weight with 
other similar chemical products.
    We did not change our definition of the labor-related share. 
However, we renamed our aggregate cost categories from ``labor-
intensive'' and ``nonlabor-intensive'' services to ``labor-related'' 
and ``nonlabor-related'' services. This is consistent with the FY 2006-
based IPPS market basket (74 FR 43845). As discussed in more detail 
below and similar to the FY 2002-based RPL market basket, we classify a 
cost category as labor-related and include it in the labor-related 
share if the cost

[[Page 26438]]

category is defined as being labor-intensive and its cost varies with 
the local labor market. In previous regulations, we grouped cost 
categories that met both of these criteria into labor-intensive 
services. We believe the new labels more accurately reflect the 
concepts that they are intended to convey. Therefore, we did not change 
our definition of the labor-related share because we continue to 
classify a cost category as labor-related if the costs are labor-
intensive and vary with the local labor market.
3. Selection of Price Proxies
    After computing the FY 2008 cost weights for the rebased RPL market 
basket, it was necessary to select appropriate wage and price proxies 
to reflect the rate of price change for each expenditure category. With 
the exception of the proxy for Professional Liability Insurance, all of 
the proxies for the operating portion of the FY 2008-based RPL market 
basket are based on Bureau of Labor Statistics (BLS) data and are 
grouped into one of the following BLS categories:
    Producer Price Indexes--Producer Price Indexes (PPIs) measure price 
changes for goods sold in markets other than the retail market. PPIs 
are preferable price proxies for goods and services that hospitals 
purchase as inputs because these PPIs better reflect the actual price 
changes faced by hospitals. For example, we use a special PPI for 
prescription drugs, rather than the Consumer Price Index (CPI) for 
prescription drugs, because hospitals generally purchase drugs directly 
from a wholesaler. The PPIs that we use measure price changes at the 
final stage of production.
    Consumer Price Indexes--Consumer Price Indexes (CPIs) measure 
change in the prices of final goods and services bought by the typical 
consumer. Because they may not represent the price faced by a producer, 
we used CPIs only if an appropriate PPI was not available, or if the 
expenditures were more similar to those faced by retail consumers in 
general rather than by purchasers of goods at the wholesale level. For 
example, the CPI for food purchased away from home is used as a proxy 
for contracted food services.
    Employment Cost Indexes--Employment Cost Indexes (ECIs) measure the 
rate of change in employee wage rates and employer costs for employee 
benefits per hour worked. These indexes are fixed-weight indexes and 
strictly measure the change in wage rates and employee benefits per 
hour. Appropriately, they are not affected by shifts in employment mix.
    We evaluated the price proxies using the criteria of reliability, 
timeliness, availability, and relevance. Reliability indicates that the 
index is based on valid statistical methods and has low sampling 
variability. Timeliness implies that the proxy is published regularly, 
preferably at least once a quarter. Availability means that the proxy 
is publicly available. Finally, relevance means that the proxy is 
applicable and representative of the cost category weight to which it 
is applied. The CPIs, PPIs, and ECIs selected meet these criteria.
    Table 2 sets forth the final FY 2008-based RPL market basket 
including cost categories, and their respective weights and price 
proxies. For comparison purposes, the corresponding FY 2002-based RPL 
market basket cost weights are listed, as well. For example, Wages and 
Salaries are 49.447 percent of total costs in the FY 2008-based RPL 
market basket compared to 52.895 percent for the FY 2002-based RPL 
market basket. Employee Benefits are 12.831 percent in the FY 2008-
based RPL market basket compared to 12.982 percent for the FY 2002-
based RPL market basket. As a result, compensation costs (Wages and 
Salaries plus Employee Benefits) for the FY 2008-based RPL market 
basket are 62.278 percent of total costs compared to 65.877 percent for 
the FY 2002-based RPL market basket.
    Following Table 2 is a summary outlining the choice of the proxies 
used for the operating portion of the FY 2008-based RPL market basket. 
The price proxies used for the capital portion are described in more 
detail in the capital methodology section (see section IV.c.4 of this 
final rule).
    We note that the proxies for the operating portion of the FY 2008-
based RPL market basket are the same as those used for the FY 2006-
based IPPS operating market basket. Because these proxies meet our 
criteria of reliability, timeliness, availability, and relevance, we 
believe they are the best measures of price changes for the cost 
categories. For further discussion on the FY 2006-based IPPS market 
basket, see the IPPS final rule published in the Federal Register on 
August 27, 2009 (74 FR 43843).

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

[[Page 26439]]

 
        (7.) Rubber and Plastics...............       1.052       1.131  PPI for Rubber & Plastic Products.
        (8.) Paper and Printing Products.......       1.000       1.021  PPI for Converted Paper & Paperboard
                                                                          Products.
        (9.) Apparel...........................       0.207       0.210  PPI for Apparel.
        (10.) Machinery and Equipment..........       0.297       0.106  PPI for Machinery & Equipment.
        (11.) Miscellaneous Products...........       1.963       0.346  PPI for Finished Goods less Food and
                                                                          Energy.
    B. All Other Services......................       8.833      11.414  .......................................
        (1.) Labor-related Services............       5.111       4.681  .......................................
        (a.) Professional Fees: Labor-                2.892       2.114  ECI for Compensation for Professional
         related.\3\.                                                     and Related Occupations.
        (b.) Administrative and Business                n/a       0.422  ECI for Compensation for Office and
         Support Services.\4\                                             Administrative Services.
        (c.) All Other: Labor-Related Services        2.219       2.145  ECI for Compensation for Private
         \4\.                                                             Service Occupations.
        (2.) Nonlabor-Related Services.........       3.722       6.733  .......................................
        (a.) Professional Fees: Nonlabor-               n/a       4.211  ECI for Compensation for Professional
         Related \3\.                                                     and Related Occupations.
        (b.) Financial Services \5\............         n/a       0.853  ECI for Compensation for Financial
                                                                          Activities.
        (c.) Telephone Services................       0.240       0.416  CPI-U for Telephone Services.
        (d.) Postage...........................       0.682       0.630  CPI-U for Postage.
        (e.) All Other: Nonlabor-Related              2.800       0.623  CPI-U for All Items less Food and
         Services \5\.                                                    Energy.
5. Capital-Related Costs.......................      10.149       8.392  .......................................
    A. Depreciation............................       6.187       5.519  .......................................
        (1.) Fixed Assets......................       4.250       3.286  BEA chained price index for
                                                                          nonresidential construction for
                                                                          hospitals and special care facilities--
                                                                          vintage weighted (26 years).
        (2.) Movable Equipment.................       1.937       2.233  PPI for Machinery and Equipment--
                                                                          vintage weighted (11 years).
    B. Interest Costs..........................       2.775       1.954  .......................................
        (1.) Government/Nonprofit..............       2.081       0.653  Average yield on domestic municipal
                                                                          bonds (Bond Buyer 20 bonds)--vintage-
                                                                          weighted (26 years).
        (2.) For Profit........................       0.694       1.301  Average yield on Moody's Aaa bonds--
                                                                          vintage-weighted (26 years).
    C. Other Capital-Related Costs.............       1.187       0.919  CPI-U for Residential Rent.
                                                ----------------------------------------------------------------
            Total..............................     100.000     100.000  .......................................
----------------------------------------------------------------------------------------------------------------
Note: Detail may not add to total due to rounding.
\1\ Contract Labor is distributed to Wages and Salaries and Employee Benefits based on the share of total
  compensation that each category represents.
\2\ To proxy the Chemicals cost category, we used a blended PPI composed of the PPI for Industrial Gases, the
  PPI for Other Basic Inorganic Chemical Manufacturing, the PPI for Other Basic Organic Chemical Manufacturing,
  and the PPI for Soap and Cleaning Compound Manufacturing. For more detail about this proxy, see section
  IV.C.3.j. of the preamble of this final rule.
\3\ The Professional Fees: Labor-related and Professional Fees: Nonlabor-related cost categories were included
  in one cost category called Professional Fees in the FY 2002-based RPL market basket. For more detail about
  how these new categories were derived, we refer readers to sections IV.C.6. of the preamble of this final
  rule, on the labor-related share.
\4\ The Administrative and Business Support Services cost category was contained within All Other: Labor-
  intensive Services cost category in the FY 2002-based RPL market basket. The All Other: Labor-intensive
  Services cost category is renamed the All Other: Labor-related Services cost category for the FY 2008-based
  RPL market basket.
\5\ The Financial Services cost category was contained within the All Other: Non-labor Intensive Services cost
  category in the FY 2002-based RPL market basket. The All Other: Non-labor Intensive Services cost category is
  renamed the All Other: Nonlabor-related Services cost category for the FY 2008-based RPL market basket.

a. Wages and Salaries
    We use the ECI for Wages and Salaries for Hospital Workers (All 
Civilian) (BLS series code CIU1026220000000I) to measure the price 
growth of this cost category. This same proxy was used in the FY 2002-
based RPL market basket.
b. Employee Benefits
    We use the ECI for Employee Benefits for Hospital Workers (All 
Civilian) to measure the price growth of this cost category. This same 
proxy was used in the FY 2002-based RPL market basket.
c. Electricity
    We use the PPI for Commercial Electric Power (BLS series code 
WPU0542) to measure the price growth of this cost category. This same 
proxy was used in the FY 2002-based RPL market basket.
d. Fuel, Oil, and Gasoline
    For the FY 2002-based RPL market basket, this category only 
included expenses classified under North American Industry 
Classification System (NAICS) 21 (Mining). We proxied this category 
using the PPI for Commercial Natural Gas (BLS series code WPU0552). For 
the FY 2008-based market basket, we added costs to this category that 
had previously been grouped in other categories. The added costs 
include petroleum-related expenses under NAICS 324110 (previously 
captured in the miscellaneous category), as well as petrochemical 
manufacturing classified under NAICS 325110 (previously captured in the 
chemicals category). These added costs represent 80 percent

[[Page 26440]]

of the hospital industry's fuel, oil, and gasoline expenses (or 80 
percent of this category). Because the majority of the industry's fuel, 
oil, and gasoline expenses originate from petroleum refineries (NAICS 
324110), we use the PPI for Petroleum Refineries (BLS series code 
PCU324110324110) as the proxy for this cost category.
e. Water and Sewage
    We use the CPI for Water and Sewerage Maintenance (All Urban 
Consumers) (BLS series code CUUR0000SEHG01) to measure the price growth 
of this cost category. This same proxy was used in the FY 2002-based 
RPL market basket.
f. Professional Liability Insurance
    We proxy price changes in hospital professional liability insurance 
premiums (PLI) using percentage changes as estimated by the CMS 
Hospital Professional Liability Index. To generate these estimates, we 
collect commercial insurance premiums for a fixed level of coverage 
while holding nonprice factors constant (such as a change in the level 
of coverage). This method is also used to proxy PLI price changes in 
the Medicare Economic Index (75 FR 73268). This same proxy was used in 
the FY 2002-based RPL market basket.
g. Pharmaceuticals
    We use the PPI for Pharmaceuticals for Human Use, Prescription (BLS 
series code WPUSI07003) to measure the price growth of this cost 
category. We note that we are not making a change to the PPI that is 
used to proxy this cost category. There was a recent change to the BLS 
naming convention for this series; however this is the same proxy that 
was used in the FY 2002-based RPL market basket.
h. Food: Direct Purchases
    We use the PPI for Processed Foods and Feeds (BLS series code 
WPU02) to measure the price growth of this cost category. This same 
proxy was used in the FY 2002-based RPL market basket.
i. Food: Contract Services
    We use the CPI for Food Away From Home (All Urban Consumers) (BLS 
series code CUUR0000SEFV) to measure the price growth of this cost 
category. This same proxy was used in the FY 2002-based RPL market 
basket.
j. Chemicals
    We use a blended PPI composed of the PPI for Industrial Gas 
Manufacturing (NAICS 325120) (BLS series code PCU325120325120P), the 
PPI for Other Basic Inorganic Chemical Manufacturing (NAICS 325180) 
(BLS series code PCU32518-32518-), the PPI for Other Basic Organic 
Chemical Manufacturing (NAICS 325190) (BLS series code PCU32519-32519-
), and the PPI for Soap and Cleaning Compound Manufacturing (NAICS 
325610) (BLS series code PCU32561-32561-). Using the 2002 Benchmark I-O 
data, we found that these NAICS industries accounted for approximately 
90 percent of the hospital industry's chemical expenses.
    Therefore, we use this blended index because we believe its 
composition better reflects the composition of the purchasing patterns 
of hospitals than does the PPI for Industrial Chemicals (BLS series 
code WPU061), the proxy used in the FY 2002-based RPL market basket. 
Table 3 below shows the weights for each of the four PPIs used to 
create the blended PPI, which we determined using the 2002 Benchmark I-
O data.

                  Table 3--Blended Chemical PPI Weights
------------------------------------------------------------------------
                                           Weights  (in
                  Name                       percent)          NAICS
------------------------------------------------------------------------
PPI for Industrial Gas Manufacturing....              35          325120
PPI for Other Basic Inorganic Chemical                25          325180
 Manufacturing..........................
PPI for Other Basic Organic Chemical                  30          325190
 Manufacturing..........................
PPI for Soap and Cleaning Compound                    10          325610
 Manufacturing..........................
------------------------------------------------------------------------

k. Medical Instruments
    We use the PPI for Medical, Surgical, and Personal Aid Devices (BLS 
series code WPU156) to measure the price growth of this cost category. 
In the 1997 Benchmark I-O data, approximately half of the expenses 
classified in this category were for surgical and medical instruments. 
Therefore, we used the PPI for Surgical and Medical Instruments and 
Equipment (BLS series code WPU1562) to proxy this category in the FY 
2002-based RPL market basket. The 2002 Benchmark I-O data show that 
surgical and medical instruments now represent only 33 percent of these 
expenses and that the largest expense category is surgical appliance 
and supplies manufacturing (corresponding to BLS series code WPU1563). 
Due to this reallocation of costs over time, we use as the price proxy 
for this cost category the more aggregated PPI for Medical, Surgical, 
and Personal Aid Devices.
l. Photographic Supplies
    We eliminated the cost category specific to photographic supplies 
for the FY 2008-based RPL market basket. These costs are now included 
in the Chemicals cost category because the costs are presently reported 
as all other chemical products. Notably, although we are eliminating 
the specific cost category, these costs are still accounted for within 
the RPL market basket.
m. Rubber and Plastics
    We use the PPI for Rubber and Plastic Products (BLS series code 
WPU07) to measure price growth of this cost category. This same proxy 
was used in the FY 2002-based RPL market basket.
n. Paper and Printing Products
    We use the PPI for Converted Paper and Paperboard Products (BLS 
series code WPU0915) to measure the price growth of this cost category. 
This same proxy was used in the FY 2002-based RPL market basket.
o. Apparel
    We use the PPI for Apparel (BLS series code WPU0381) to measure the 
price growth of this cost category. This same proxy was used in the FY 
2002-based RPL market basket.
p. Machinery and Equipment
    We use the PPI for Machinery and Equipment (BLS series code WPU11) 
to measure the price growth of this cost category. This same proxy was 
used in the FY 2002-based RPL market basket.
q. Miscellaneous Products
    We use the PPI for Finished Goods Less Food and Energy (BLS series 
code WPUSOP3500) to measure the price growth of this cost category. 
Using this index removes the double-counting of food and energy prices, 
which are already captured elsewhere in the market basket. This same 
proxy was used in the FY 2002-based RPL market basket.

[[Page 26441]]

r. Professional Fees: Labor-Related
    We use the ECI for Compensation for Professional and Related 
Occupations (Private Industry) (BLS series code CIS2020000120000I) to 
measure the price growth of this category. It includes occupations such 
as legal, accounting, and engineering services. This same proxy was 
used in the FY 2002-based RPL market basket.
s. Administrative and Business Support Services
    We use the ECI for Compensation for Office and Administrative 
Support Services (Private Industry) (BLS series code CIU2010000220000I) 
to measure the price growth of this category. Previously these costs 
were included in the All Other: Labor-intensive category (now renamed 
the All Other: Labor-related Services category), and were proxied by 
the ECI for Compensation for Service Occupations. We believe that this 
compensation index better reflects the changing price of labor 
associated with the provision of administrative services and its 
incorporation represents a technical improvement to the market basket.
t. All Other: Labor-Related Services
    We use the ECI for Compensation for Service Occupations (Private 
Industry) (BLS series code CIU2010000300000I) to measure the price 
growth of this cost category. This same proxy was used in the FY 2002-
based RPL market basket.
u. Professional Fees: Nonlabor-Related
    We use the ECI for Compensation for Professional and Related 
Occupations (Private Industry) (BLS series code CIS2020000120000I) to 
measure the price growth of this category. This is the same price proxy 
that we are using for the Professional Fees: Labor-related cost 
category.
v. Financial Services
    We use the ECI for Compensation for Financial Activities (Private 
Industry) (BLS series code CIU201520A000000I) to measure the price 
growth of this cost category. Previously these costs were included in 
the All Other: Nonlabor-intensive category (now renamed the All Other: 
Nonlabor-related Services category), and were proxied by the CPI for 
All Items. We believe that this compensation index better reflects the 
changing price of labor associated with the provision of financial 
services and its incorporation represents a technical improvement to 
the market basket.
w. Telephone Services
    We use the CPI for Telephone Services (BLS series code 
CUUR0000SEED) to measure the price growth of this cost category. This 
same proxy was used in the FY 2002-based RPL market basket.
x. Postage
    We use the CPI for Postage (BLS series code CUUR0000SEEC01) to 
measure the price growth of this cost category. This same proxy was 
used in the FY 2002-based RPL market basket.
y. All Other: Nonlabor-Related Services
    We use the CPI for All Items Less Food and Energy (BLS series code 
CUUR0000SA0L1E) to measure the price growth of this cost category. 
Previously these costs were proxied by the CPI for All Items in the FY 
2002-based RPL market basket. We believe that using the CPI for All 
Items Less Food and Energy removes the double counting of changes in 
food and energy prices, as they are already captured elsewhere in the 
market basket. Consequently, we believe that the incorporation of this 
proxy represents a technical improvement to the market basket.
4. Methodology for Capital Portion of the RPL Market Basket
    In the FY 2002-based RPL market basket, we did not have IRF, IPF, 
and LTCH 2002 Medicare cost report data for the capital cost weights, 
due to a change in the 2002 reporting requirements. Therefore, we used 
these hospitals' 2001 expenditure data for the capital cost categories 
of depreciation, interest, and other capital expenses, and aged the 
data to a 2002 base year using relevant price proxies.
    For the FY 2008-based RPL market basket, we calculated weights for 
the RPL market basket capital costs using the same set of FY 2008 
Medicare cost reports used to develop the operating share for IRFs, 
IPFs, and LTCHs. To calculate the total capital cost weight, we first 
apply the same LOS edits as applied prior to calculating the operating 
cost weights as described above in section IV.C.3. The resulting 
capital weight for the FY 2008 base year is 8.392 percent.
    Lease expenses are unique in that they are not broken out as a 
separate cost category in the RPL market basket, but rather are 
proportionally distributed amongst the cost categories of Depreciation, 
Interest, and Other, reflecting the assumption that the underlying cost 
structure of leases is similar to that of capital costs in general. As 
was done in the FY 2002-based RPL market basket, we first assumed 10 
percent of lease expenses represents overhead and assigned those costs 
to the Other Capital-Related Costs category accordingly. The remaining 
lease expenses were distributed across the three cost categories based 
on the respective weights of depreciation, interest, and other capital 
not including lease expenses.
    Depreciation contains two subcategories: (1) Building & Fixed 
Equipment; and (2) Movable Equipment. The apportionment between 
building & fixed equipment and movable equipment was determined using 
the FY 2008 Medicare cost reports for freestanding IRFs, IPFs, and 
LTCHs. This methodology was also used to compute the apportionment used 
in the FY 2002-based RPL market basket (70 FR 47912).
    The total Interest expense cost category is split between 
government/nonprofit interest and for-profit interest. The FY 2002-
based RPL market basket allocated 75 percent of the total Interest cost 
weight to government/nonprofit interest and proxied that category by 
the average yield on domestic municipal bonds. The remaining 25 percent 
of the Interest cost weight was allocated to for-profit interest and 
was proxied by the average yield on Moody's Aaa bonds (70 FR 47912). 
This was based on the FY 2002-based IPPS capital input price index (70 
FR 23406) due to insufficient Medicare cost report data for IPFs, IRFs, 
and LTCHs. For the FY 2008-based RPL market basket, we derived the 
split using the relative FY 2008 Medicare cost report data on interest 
expenses for government/nonprofit and for-profit IRFs, IPFs, and LTCHs. 
Based on these data, we calculated a 33/67 split between government/
nonprofit and for-profit interest. We believe it is important that this 
split reflects the latest relative cost structure of interest expenses 
for RPL providers. As stated above, we first apply the LOS edits (as 
described in section IV.C.3.) prior to calculating this split. 
Therefore, we are using Medicare cost reports that are reflective of 
case mix and practice patterns associated with providing services to 
Medicare beneficiaries. Using data specific to government/nonprofit and 
for-profit IRFs, IPFs, and LTCHs as well as the application of these 
LOS edits are the primary reasons for the difference in this split 
relative to the FY 2002-based RPL market basket.
    Because capital is acquired and paid for over time, capital 
expenses in any given year are determined by both past and present 
purchases of physical and financial capital. The vintage-weighted 
capital portion of the FY 2008-based RPL market basket is intended to 
capture the long-term consumption of capital, using vintage weights for

[[Page 26442]]

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

[[Page 26443]]

year period. This calculation was done for each year in the 11-year 
period and for each of the thirty-five 11-year periods. We used the 
average of each year across the thirty-five 11-year periods to 
determine the average movable equipment vintage weights for the FY 
2008-based RPL market basket.
    For the interest vintage weights, the nominal annual capital 
purchase amounts for total equipment (building & fixed, and movable) 
were used to capture the value of the debt instrument. Because we have 
determined that hospital debt instruments have an expected life of 26 
years, the vintage weights for interest are deemed to represent the 
average purchase pattern of total equipment over 26-year periods. With 
nominal total equipment purchase estimates available from 2008 back to 
1963, twenty 26-year periods were averaged to determine the average 
vintage weights for interest that are representative of average capital 
purchase patterns over time. Vintage weights for each 26-year period 
are calculated by dividing the nominal total capital purchase amount 
for any given year by the total amount of purchases in the 26-year 
period. This calculation is done for each year in the 26-year period 
and for each of the twenty 26-year periods. We used the average of each 
year across the twenty 26-year periods to determine the average 
interest vintage weights for the FY 2008-based RPL market basket. The 
vintage weights for the capital portion of the FY 2002-based RPL market 
basket and the FY 2008-based RPL market basket are presented in Table 
4.

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

    After the capital cost category weights were computed, it was 
necessary to select appropriate price proxies to reflect the rate-of-
increase for each expenditure category. As proposed, and in this final 
rule, we use the same price proxies for the capital portion of the FY 
2008-based RPL market basket that were used in the FY 2002-based RPL 
market basket, with the exception of the Boeckh Construction Index. We 
replaced the Boeckh Construction Index with BEA's chained price index 
for nonresidential construction for hospitals and special care 
facilities. The BEA index represents construction of facilities such as 
hospitals, nursing homes, hospices, and rehabilitation centers. 
Although these price indices move similarly over time, we believe that 
it is more technically appropriate to use an index that is more 
specific to the hospital industry. We believe these are the most 
appropriate proxies for hospital capital costs that meet our selection 
criteria of relevance, timeliness, availability, and reliability.
    The price proxies (prior to any vintage weighting) for each of the 
capital cost categories are the same as those used for the FY 2006-
based Capital Input Price Index as described in the IPPS FY 2010 final 
rule (74 FR at 43857).
5. RY 2012 Market Basket Update
    As proposed, and in this final rule, for RY 2012 (that is, 
beginning July 1, 2011 through September 30, 2012), we derived a 15-
month estimate of the FY 2008-based RPL market basket based on the best 
available data. To determine a 15-month market basket update for RY 
2012, we calculate the 5-quarter moving average index level for July 1, 
2011 through September 30, 2012 and the 4-quarter moving average index 
level for July 1, 2010 through June 30, 2011. The percent change in 
these two values represents the 15-month market basket update.
    Consistent with historical practice, we estimate the RPL market 
basket update for the IPF PPS based on IHS Global Insight's forecast 
using the most recent available data. IHS Global Insight, Inc.

[[Page 26444]]

is a nationally recognized economic and financial forecasting firm that 
contracts with CMS to forecast the components of the market baskets. In 
the RY 2012 IPF PPS proposed rule, we proposed a market basket update 
based on the 4th quarter 2010 forecast with history through the 3rd 
quarter of 2010. We also proposed that if more recent data subsequently 
became available (for example, a more recent estimate of the market 
basket) we would use such data, if appropriate, to determine the RY 
2012 update in the final rule. Based on IHS Global Insight's 1st 
quarter 2011 forecast with history through the 4th quarter of 2010, the 
projected 15-month market basket update for the 15-month RY 2012 (July 
1, 2011 through September 30, 2012) is 3.2 percent.
    The most recent estimate of the FY 2008-based RPL market basket 
update for July 1, 2011 through June 30, 2012, based on IHS Global 
Insight's 1st quarter 2011 forecast with history through the 4th 
quarter of 2010, is 2.8 percent. We determined this 12-month market 
basket update by calculating the 4-quarter moving average index level 
for July 1, 2011 through June 30, 2012 and the 4-quarter moving average 
index level for July 1, 2010 through June 30, 2011. The percent change 
in these two values represents the 12-month market basket update. 
Consistent with our historical practice of using market basket 
estimates based on the most recent available data, if we were not 
extending the 2012 IPF PPS RY by 3 months, the market basket update for 
a 12-month RY 2012 would be 2.8 percent, based on the most recent 
estimate of the 12-month RPL market basket update for July 1, 2011 
through June 30, 2012.
    Using the FY 2002-based RPL market basket and IHS Global Insight's 
1st quarter 2011 forecast for the market basket components, the 15-
month RY 2012 update would be 3.3 percent. The 12-month RY 2012 update 
would be 2.9 percent.
    As proposed, for this RY 2012 IPF PPS final rule we have determined 
the RY 2012 update based on the most recent market basket estimate for 
the 15-month period. The current estimates of the FY 2002-based and FY 
2008-based RPL market baskets are based on IHS Global Insight's first 
quarter 2011 forecast with historical data through fourth quarter 2010. 
Table 5 below compares the FY 2008-based RPL market basket and the FY 
2002-based RPL market basket percent changes.

   Table 5--FY 2002-Based and FY 2008-Based RPL Market Basket Percent
                    Changes, RY 2006 Through FY 2014
------------------------------------------------------------------------
                                  FY 2002-based  RPL  FY 2008-based  RPL
  Rate year (RY) or fiscal year      market basket       market basket
              (FY)                   index percent       index percent
                                        change              change
------------------------------------------------------------------------
Historical data:
    RY 2006 \1\.................                 3.8                 3.7
    RY 2007 \1\.................                 3.5                 3.5
    RY 2008 \1\.................                 3.5                 3.6
    RY 2009 \1\.................                 3.1                 3.3
    RY 2010 \1\.................                 2.2                 2.1
                                 ---------------------------------------
        Average 2006-2010.......                 3.2                 3.2
Forecast:
    RY 2011 \1\.................                 2.4                 2.5
    RY 2012 \2\.................                 3.3                 3.2
    FY 2013 \3\.................                 2.9                 2.9
    FY 2014 \3\.................                 3.0                 3.0
                                 ---------------------------------------
        Average 2011-2014.......                 2.9                 2.9
------------------------------------------------------------------------
\1\ RY 2006 through RY 2011 represent 12-month updates, which include
  July 1 through June 30.
\2\ RY 2012 represents a 15-month update, which includes July 1, 2011
  through September 30, 2012.
\3\ FY 2013 through FY 2014 represent 12-month updates, which include
  October 1 through September 30.
Note that these market basket percent changes do not include any further
  adjustments as may be statutorily required.
Source: IHS Global Insight, Inc. 1st quarter 2011 forecast.

    The 15-month RY 2012 market basket update using the FY 2008-based 
RPL market basket is 0.1 percentage point lower than the market basket 
update using the FY 2002-based RPL market basket. This is due to 
slightly offsetting factors. The lower total compensation weight in the 
FY 2008-based RPL market basket (62.278 percent) relative to the FY 
2002-based RPL market basket (65.877 percent), absent other factors, 
would have resulted in a slightly lower market basket update using the 
FY 2008-based RPL market basket. This impact, however, is partially 
offset by the larger weight associated with the Professional Fees 
category. In both market baskets, these expenditures are proxied by the 
ECI for Compensation for Professional and Related Services. The weight 
for Professional Fees in the FY 2002-based RPL market basket is 2.892 
percent compared to 6.325 percent in the FY 2008-based RPL market 
basket.
    We did not receive any public comments on the market basket updates 
in the RY 2012 IPF PPS proposed rule.
6. Labor-Related Share
    As described in section VI.C.1. of this final rule, due to the 
variations in costs and geographic wage levels, we proposed that 
payment rates under the IPF PPS continue to be adjusted by a geographic 
wage index. This wage index would apply to the labor-related portion of 
the Federal per diem base rate, hereafter referred to as the labor-
related share.
    The labor-related share is determined by identifying the national 
average proportion of total costs that are related to, influenced by, 
or vary with the local labor market. As proposed, and for this final 
rule, we continue to classify a cost category as labor-related if the 
costs are labor-intensive and vary with the local labor market. Given 
this, based on our definition of the labor-related share, we proposed 
to include in the labor-related share the sum of the relative 
importance of Wages and Salaries, Employee Benefits, Professional Fees: 
Labor-related, Administrative and Business Support Services, All Other: 
Labor-

[[Page 26445]]

related Services (previously referred to in the FY 2002-based RPL 
market basket as labor-intensive), and a portion of the Capital-Related 
cost weight.
    Consistent with previous rebasings, the All Other: Labor-related 
Services cost category is mostly comprised of building maintenance and 
security services (including, but not limited to, commercial and 
industrial machinery and equipment repair, nonresidential maintenance 
and repair, and investigation and security services). Because these 
services tend to be labor-intensive and are mostly performed at the 
hospital facility (and, therefore, unlikely to be purchased in the 
national market), we believe that they meet our definition of labor-
related services.
    As stated in the April 2010 IPF PPS notice (75 FR 23110), the 
labor-related share was defined as the sum of the relative importance 
of Wages and Salaries, Fringe Benefits, Professional Fees, Labor-
intensive Services, and a portion of the capital share from an 
appropriate market basket. Therefore, to determine the labor-related 
share for the IPF PPS for RY 2011, we used the FY 2002-based RPL market 
basket cost weights relative importance to determine the labor-related 
share for the IPF PPS.
    For the proposed FY 2008-based RPL market basket rebasing, the 
proposed inclusion of the Administrative and Business Support Services 
cost category into the labor-related share remained consistent with the 
current labor-related share because this cost category was previously 
included in the Labor-intensive cost category. As previously stated, we 
established a separate Administrative and Business Support Service cost 
category so that we can use the ECI for Compensation for Office and 
Administrative Support Services to more precisely proxy these specific 
expenses.
    For the FY 2002-based RPL market basket, we assumed that all 
nonmedical professional services (including accounting and auditing 
services, engineering services, legal services, and management and 
consulting services) were purchased in the local labor market and, 
therefore, all of their associated fees varied with the local labor 
market. As a result, we previously included 100 percent of these costs 
in the labor-related share. In an effort to more accurately determine 
the share of professional fees that should be included in the labor-
related share, we surveyed hospitals regarding the proportion of those 
fees that go to companies that are located beyond their own local labor 
market (the results are discussed below).
    We continue to look for ways to refine our market basket approach 
to more accurately account for the proportion of costs influenced by 
the local labor market. To that end, we conducted a survey of hospitals 
to empirically determine the proportion of contracted professional 
services purchased by the industry that are attributable to local firms 
and the proportion that are purchased from national firms. We notified 
the public of our intent to conduct this survey on December 9, 2005 (70 
FR 73250) and received no comments (71 FR 8588).
    With approval from the Office of Management and Budget (OMB), we 
contacted a sample of IPPS hospitals and received responses to our 
survey from 108 hospitals. We believe that these data serve as an 
appropriate proxy for the purchasing patterns of professional services 
for IPFs as they are also institutional providers of health care 
services. Using data on FTEs to allocate responding hospitals across 
strata (region of the country and urban/rural status), we calculated 
poststratification weights. Based on these weighted results, we 
determined that hospitals purchase, on average, the following portions 
of contracted professional services outside of their local labor 
market:
     34 percent of accounting and auditing services.
     30 percent of engineering services.
     33 percent of legal services.
     42 percent of management consulting services.
    We applied each of these percentages to its respective Benchmark I-
O cost category underlying the professional fees cost category. This is 
the methodology that we used to separate the FY 2008-based RPL market 
basket professional fees category into Professional Fees: Labor-related 
and Professional Fees: Nonlabor-related cost categories. In addition to 
the professional services listed above, we also classified expenses 
under NAICS 55, Management of Companies and Enterprises, into the 
Professional Fees cost category as was done in previous rebasings. The 
NAICS 55 data are mostly comprised of corporate, subsidiary, and 
regional managing offices, or otherwise referred to as home offices. 
Formerly, all of the expenses within this category were considered to 
vary with, or be influenced by, the local labor market and were thus 
included in the labor-related share. Because many hospitals are not 
located in the same geographic area as their home office, we analyzed 
data from a variety of sources in order to determine what proportion of 
these costs should be appropriately included in the labor-related 
share.
    Using data primarily from the Medicare cost reports and a CMS 
database of Home Office Medicare Records (HOMER) (a database that 
provides city and state information (addresses) for home offices), we 
were able to determine that 19 percent of the total number of 
freestanding IRFs, freestanding IPFs, and LTCHs that had home offices 
had those home offices located in their respective local labor 
markets--defined as being in the same Metropolitan Statistical Area 
(MSA).
    The Medicare cost report requires hospitals to report their home 
office provider numbers. Using the HOMER database to determine the home 
office location for each home office provider number, we compared the 
location of the provider with the location of the hospital's home 
office. We then placed providers into one of the following three 
groups:
     Group 1--Provider and home office are located in different 
States.
     Group 2--Provider and home office are located in the same 
State and same city.
     Group 3--Provider and home office are located in the same 
State and different city.
    We found that 63 percent of the providers with home offices were 
classified into Group 1 (that is, different State) and, thus, these 
providers were determined to not be located in the same local labor 
market as their home office. Although there were a very limited number 
of exceptions (that is, providers located in different States but the 
same MSA as their home office), the 63 percent estimate was unchanged.
    We found that 9 percent of all providers with home offices were 
classified into Group 2 (that is, same State and same city and, 
therefore, the same MSA). Consequently, these providers were determined 
to be located in the same local labor market as their home offices.
    We found that 27 percent of all providers with home offices were 
classified into Group 3 (that is, same State and different city). Using 
data from the Census Bureau to determine the specific MSA for both the 
provider and its home office, we found that 10 percent of all providers 
with home offices were identified as being in the same State, a 
different city, but the same MSA.
    Pooling these results, we were able to determine that approximately 
19 percent of providers with home offices had home offices located 
within their local labor market (that is, 9 percent of providers with 
home offices had their

[[Page 26446]]

home offices in the same State and city (and, thus, the same MSA), and 
10 percent of providers with home offices had their home offices in the 
same State, a different city, but the same MSA). We proposed to 
apportion the NAICS 55 expense data by this percentage. Thus, we 
proposed to classify 19 percent of these costs into the Professional 
Fees: Labor-related cost category and the remaining 81 percent into the 
Professional Fees: Nonlabor-related Services cost category.
    We received several comments on our proposal to revise the labor-
related share. These comments and our responses are provided below.
    Comment: One commenter recommended that CMS move forward with this 
proposal, and stated a belief that the labor-related share has been 
overstated in the past, resulting in reduced payments to facilities in 
areas with low wage indices.
    Response: We thank the commenter for this comment. We believe 
comments on prior years' labor-related shares would have been addressed 
in those rulemakings.
    Comment: Several commenters objected to the proposed change in the 
treatment of professional fees in the calculation of the labor-related 
share, and recommended maintaining the current methodology. One 
commenter questioned the sample size (108 hospitals) for estimating the 
allocation of professional fees. Several commenters believed that 
professional services, whether purchased within or outside the local 
labor market, are substitutes for hospital-employed staff and should be 
included as labor costs.
    Response: We disagree with the request to reject the proposed 
change in the calculation of the labor-related share. A method that 
distributes professional fees based on empirical research and data 
represents a technical improvement to the construction of the market 
basket, where previously all professional fees were assumed to vary 
with the local labor market. In response to the concern about the 
sample of 108 hospitals, we provided more detail on that survey 
conducted below. We note that these same survey results were used in 
the IPPS market basket rebasing for the FY 2010 IPPS final rule (74 FR 
43853).
    The survey's methods unfolded in the following manner: Through an 
independent contractor, a small sample of 12 hospitals were initially 
pre-tested in order to ensure the understandability of the survey 
questions. The survey prompted sample institutions to select from 
multiple choice answers the proportions of their professional fees that 
are purchased from firms located outside of their respective local 
labor market. The multiple choice answers for each type of professional 
service included the following options: 0 percent of fees; 1-20 percent 
of fees; 21-40 percent of fees; 41-60 percent of fees; 61-80 percent of 
fees; 81-99 percent of fees; and 100 percent of fees. All respondents 
were assured that the information they provided would be kept strictly 
confidential.
    Understanding that larger, urban-based hospitals (and those located 
in areas with area wage indexes greater than 1.0) are most likely to be 
impacted by the survey's results, we used data on full-time equivalents 
(FTEs) to represent the sizes of hospitals and selected hospitals with 
probability proportional to their sizes across strata when drawing the 
full sample. Strata were formed by Census Region and Urban/Rural 
Status. The distributions of the hospital population, as well as 
weighted distributions for the responders, by Urban/Rural Status 
(including data on hospital size) and Census Region were as follows:

------------------------------------------------------------------------
                                     All hospitals        Responding
                                        percent        hospitals percent
                                    distribution &      distribution &
                                   average FTE size    average FTE size
------------------------------------------------------------------------
Total...........................            100%/994          100%/1,156
Total Rurals....................             30%/388             25%/449
Total Urbans....................           70%/1,255           75%/1,460
Total Northeast Region..........           15%/1,442           20%/1,078
Total Mid-West Region...........           23%/1,062           24%/1,656
Total South Region..............             42%/843             37%/944
Total West Region...............             20%/899           19%/1,081
------------------------------------------------------------------------

    Sample weights were calculated as the inverse of the selection 
probability and were subsequently adjusted for nonresponse bias by 
strata and post-stratified to derive final weights. This type of 
application represents a common survey approach and is based on valid 
and widely-accepted statistical techniques.
    For the estimates of the nationwide proportion of nonmedical 
professional services fees purchased outside of the local labor market, 
we first examined the data on multiple levels. First, we found that 
fewer than 30 percent of the responding hospitals paid 100 percent of 
their professional fees to vendors located within their local labor 
market. Conversely, we found that roughly 20 percent of responding 
hospitals reported 81 percent or more of their professional services 
fees are paid to vendors located outside of their local labor market.
    In determining the specific and appropriate proportions of 
professional fees to consider labor-related and nonlabor-related, we 
generated weighted averages from the data in the following manner:
     For any multiple choice answer where the standard error 
associated with the weighted counts for that answer was less than 30 
percent, we multiplied the weighted counts associated with that answer 
by the midpoint of the range within that answer. For example, for 
Accounting and Auditing services, if a weighted count of 500 hospitals 
responded that they pay ``1 to 20 percent'' of their professional fees 
for these services to firms located outside of their local labor 
market, we would multiply 500 times 10 percent. We repeat this for each 
possible multiple choice answer.
     For any multiple choice answer where the standard error 
associated with the weighted counts for that answer exceeded 30 
percent, we multiplied the weighted hospital counts by the low point of 
the range. Using a similar example as above, if a weighted count of 300 
hospitals responded that they pay ``1 to 20 percent'' of their 
professional fees for these services to firms located outside of their 
local labor market, and the standard error on that estimate was greater 
than 30 percent, we would multiply 300 times 1 percent.
     After applying one of these two techniques to each answer, 
dependent on its associated standard error, we took a weighted average 
of the results to determine the final proportion to be excluded from 
the labor-related share

[[Page 26447]]

for each of the four types of professional services surveyed.
    Given the information provided above, we believe that the estimates 
based on this survey are valid. In response to the commenters' 
statement that professional services should be included as labor-
related costs no matter where they are purchased, we again note that 
the purpose of the labor-related share is to determine the national 
average proportion of total costs that are related to, influenced by, 
or vary with the local labor market. We define the labor-related share 
as not only those expenses that are labor-intensive but those that also 
vary with, or are influenced by, the local labor market. By application 
of this definition, it is relevant where these professional services 
are purchased. To the extent these services are not purchased in the 
local labor market, they are not included in the labor-related share.
    After consideration of the public comments received, in this final 
rule we are finalizing our methodology for calculating the labor-
related share for RY 2012. Using the same methodology that was proposed 
in the RY 2012 IPF PPS proposed rule, we calculated a labor-related 
share for RY 2012 using the most recent data available at the time of 
this final rule. This estimate of the RY 2012 labor-related share is 
based on IHS Global Insight Inc.'s first quarter 2011 forecast, which 
is the same forecast used to derive the RY 2012 market basket update.
    Table 6 below shows the RY 2012 relative importance labor-related 
share using the FY 2008-based RPL market basket and the FY 2002-based 
RPL market basket.

Table 6--Comparison of the RY 2011 (12-Month) Relative Importance Labor-Related Share Based on the FY 2002-Based
 RPL Market Basket and the RY 2012 (15-Month) Relative Importance Labor-Related Share Based on the FY 2008-Based
                                                RPL Market Basket
----------------------------------------------------------------------------------------------------------------
                                                                                                 Final RY 2012
                                                                           RY 2011 relative        relative
                                                                           importance labor-   importance labor-
                                                                           related share \1\   related share \2\
----------------------------------------------------------------------------------------------------------------
Wages and Salaries......................................................              52.600              49.049
Employee Benefits.......................................................              13.935              13.036
Professional Fees: Labor-Related........................................               2.853               2.073
Administrative and Business Support Services............................  ..................               0.416
All Other: Labor-Related Services.......................................               2.118               2.094
                                                                         ---------------------------------------
    Subtotal............................................................              71.506              66.668
Labor-Related Portion of Capital Costs (46%)............................               3.894               3.649
                                                                         ---------------------------------------
    Total Labor-Related Share...........................................              75.400              70.317
----------------------------------------------------------------------------------------------------------------
\1\ Published in the RY 2011 IPF PPS notice (75FR 23110-23111) and based on the IHS Global Insight, Inc. first
  quarter 2010 forecast of the 2002-based RPL market basket.
\2\ Based on IHS Global Insight, Inc. first quarter 2011 forecast of the 2008-based RPL market basket.

    The labor-related share for RY 2012 is the sum of the RY 2012 
relative importance of each labor-related cost category, and would 
reflect the different rates of price change for these cost categories 
between the base year (FY 2008) and RY 2012. The sum of the relative 
importance for RY 2012 for operating costs (Wages and Salaries, 
Employee Benefits, Professional Fees: Labor-Related, Administrative and 
Business Support Services, and All Other: Labor-related Services) is 
66.668 percent, as shown in Table 6 above. The portion of Capital that 
is influenced by the local labor market is estimated to be 46 percent, 
which is the same percentage applied to the FY 2002-based RPL market 
basket. Since the relative importance for Capital-Related Costs is 
7.932 percent of the FY 2008-based RPL market basket in RY 2012, we 
take 46 percent of 7.932 percent to determine the labor-related share 
of Capital for RY 2012. The result is 3.649 percent, which we add to 
66.668 percent for the operating cost amount to determine the total 
labor-related share for RY 2012. Therefore, the labor-related share for 
the IPF PPS in RY 2012 is 70.317 percent. This labor-related share is 
determined using the same methodology as employed in calculating all 
previous IPF labor-related shares (69 FR 66952). The wage index and the 
labor-related share are reflected in budget neutrality adjustments.

V. Updates to the IPF PPS for RY Beginning July 1, 2011

    The IPF PPS is based on a standardized Federal per diem base rate 
calculated from IPF average per diem costs and adjusted for budget-
neutrality in the implementation year. The Federal per diem base rate 
is used as the standard payment per day under the IPF PPS and is 
adjusted by the patient- and facility-level adjustments that are 
applicable to the IPF stay. A detailed explanation of how we calculated 
the average per diem cost appears in the November 2004 IPF PPS final 
rule (69 FR 66926).

A. Determining the Standardized Budget-Neutral Federal Per Diem Base 
Rate

    Section 124(a)(1) of the BBRA requires that we implement the IPF 
PPS in a budget neutral manner. In other words, the amount of total 
payments under the IPF PPS, including any payment adjustments, must be 
projected to be equal to the amount of total payments that would have 
been made if the IPF PPS were not implemented. Therefore, we calculated 
the budget-neutrality factor by setting the total estimated IPF PPS 
payments to be equal to the total estimated payments that would have 
been made under the Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA) (Pub. L. 97-248) methodology had the IPF PPS not been 
implemented.
    Under the IPF PPS methodology, we calculated the final Federal per 
diem base rate to be budget neutral during the IPF PPS implementation 
period (that is, the 18-month period from January 1, 2005 through June 
30, 2006) using a July 1 update cycle. We updated the average cost per 
day to the midpoint of the IPF PPS implementation period (that is, 
October 1, 2005), and this amount was used in the payment model to 
establish the budget-neutrality adjustment.
    A step-by-step description of the methodology used to estimate 
payments under the TEFRA payment system

[[Page 26448]]

appears in the November 2004 IPF PPS final rule (69 FR 66926).
1. Standardization of the Federal Per Diem Base Rate and 
Electroconvulsive Therapy (ECT) Rate
    In the November 2004 IPF PPS final rule, we describe how we 
standardized the IPF PPS Federal per diem base rate in order to account 
for the overall positive effects of the IPF PPS payment adjustment 
factors. To standardize the IPF PPS payments, we compared the IPF PPS 
payment amounts calculated from the FY 2002 Medicare Provider Analysis 
and Review (MedPAR) file to the projected TEFRA payments from the FY 
2002 cost report file updated to the midpoint of the IPF PPS 
implementation period (that is, October 2005). The standardization 
factor was calculated by dividing total estimated payments under the 
TEFRA payment system by estimated payments under the IPF PPS. The 
standardization factor was calculated to be 0.8367.
    As described in detail in the May 2006 IPF PPS final rule (71 FR 
27045), in reviewing the methodology used to simulate the IPF PPS 
payments used for the November 2004 IPF PPS final rule, we discovered 
that due to a computer code error, total IPF PPS payments were 
underestimated by about 1.36 percent. Since the IPF PPS payment total 
should have been larger than the estimated figure, the standardization 
factor should have been smaller (0.8254 vs. 0.8367). In turn, the 
Federal per diem base rate and the ECT rate should have been reduced by 
0.8254 instead of 0.8367.
    To resolve this issue, in RY 2007, we amended the Federal per diem 
base rate and the ECT payment rate prospectively. Using the 
standardization factor of 0.8254, the average cost per day was 
effectively reduced by 17.46 percent (100 percent minus 82.54 percent = 
17.46 percent).
2. Calculation of the Budget Neutrality Adjustment
    To compute the budget neutrality adjustment for the IPF PPS, we 
separately identified each component of the adjustment, that is, the 
outlier adjustment, stop-loss adjustment, and behavioral offset.
    A complete discussion of how we calculate each component of the 
budget neutrality adjustment appears in the November 2004 IPF PPS final 
rule (69 FR 66932 through 66933) and in the May 2006 IPF PPS final rule 
(71 FR 27044 through 27046).
a. Outlier Adjustment
    Since the IPF PPS payment amount for each IPF includes applicable 
outlier amounts, we reduced the standardized Federal per diem base rate 
to account for aggregate IPF PPS payments estimated to be made as 
outlier payments. The outlier adjustment was calculated to be 2 
percent. As a result, the standardized Federal per diem base rate was 
reduced by 2 percent to account for projected outlier payments.
b. Stop-Loss Provision Adjustment
    As explained in the November 2004 IPF PPS final rule, we provided a 
stop-loss payment during the transition from cost-based reimbursement 
to the per diem payment system to ensure that an IPF's total PPS 
payments were no less than a minimum percentage of their TEFRA payment, 
had the IPF PPS not been implemented. We reduced the standardized 
Federal per diem base rate by the percentage of aggregate IPF PPS 
payments estimated to be made for stop-loss payments. As a result, the 
standardized Federal per diem base rate was reduced by 0.39 percent to 
account for stop-loss payments. Since the transition was completed in 
RY 2009, the stop-loss provision is no longer applicable, and for cost 
reporting periods beginning on or after January 1, 2008, IPFs were paid 
100 percent PPS.
c. Behavioral Offset
    As explained in the November 2004 IPF PPS final rule, 
implementation of the IPF PPS may result in certain changes in IPF 
practices, especially with respect to coding for comorbid medical 
conditions. As a result, Medicare may make higher payments than assumed 
in our calculations. Accounting for these effects through an adjustment 
is commonly known as a behavioral offset.
    Based on accepted actuarial practices and consistent with the 
assumptions made in other PPSs, we assumed in determining the 
behavioral offset that IPFs would regain 15 percent of potential 
``losses'' and augment payment increases by 5 percent. We applied this 
actuarial assumption, which is based on our historical experience with 
new payment systems, to the estimated ``losses'' and ``gains'' among 
the IPFs. The behavioral offset for the IPF PPS was calculated to be 
2.66 percent. As a result, we reduced the standardized Federal per diem 
base rate by 2.66 percent to account for behavioral changes. As 
indicated in the November 2004 IPF PPS final rule, we do not plan to 
change adjustment factors or projections until we analyze IPF PPS data.
    If we find that an adjustment is warranted, the percent difference 
may be applied prospectively to the established PPS rates to ensure the 
rates accurately reflect the payment level intended by the statute. In 
conducting this analysis, we will be interested in the extent to which 
improved coding of patients' principal and other diagnoses, which may 
not reflect real increases in underlying resource demands, has occurred 
under the PPS.

B. Update of the Federal Per Diem Base Rate and Electroconvulsive 
Therapy Rate

    As described in the November 2004 IPF PPS final rule (69 FR 66931), 
the average per diem cost was updated to the midpoint of the 
implementation year. This updated average per diem cost of $724.43 was 
reduced by 17.46 percent to account for standardization to projected 
TEFRA payments for the implementation period, by 2 percent to account 
for outlier payments, by 0.39 percent to account for stop-loss 
payments, and by 2.66 percent to account for the behavioral offset. The 
Federal per diem base rate in the implementation year was $575.95. The 
increase in the per diem base rate for RY 2009 included the 0.39 
percent increase due to the removal of the stop-loss provision. We 
indicated in the November 2004 IPF PPS final rule (69 FR 66932) that we 
would remove this 0.39 percent reduction to the Federal per diem base 
rate after the transition. As discussed in section IV.D.2. of the May 
2008 IPF PPS notice, we increased the Federal per diem base rate and 
the ECT base rate by 0.39 percent in RY 2009. Therefore for RY 2009 and 
beyond, the stop-loss provision has ended and is no longer a part of 
budget neutrality.
    In accordance with section 1886(s)(2)(A)(ii) of the Act, which 
requires the application of an ``other adjustment,'' described in 
section 1886(s)(3) of the Act (specifically, section 1886(s)(3)(A) for 
RYs 2011 and 2012) that reduces the update to the IPF PPS base rate for 
the RY beginning in Calendar Year (CY) 2011, we are adjusting the IPF 
PPS update by a 0.25 percentage point reduction for RY 2012. For this 
final rule, we are applying the 15-month 2008-based RPL market basket 
increase for RY 2012 of 3.2 percent, as adjusted by the ``other 
adjustment'' of -0.25 percentage point, and the wage index budget 
neutrality factor of 0.9995 to the RY 2011 Federal per diem base rate 
of $665.71 yielding a Federal per diem base rate of $685.01 for RY 
2012. Similarly, we are applying the market basket increase, as 
adjusted by the ``other adjustment'', and the wage index budget 
neutrality factor to the RY 2011 ECT base rate, yielding an ECT base 
rate of $294.91 for RY 2012.

[[Page 26449]]

    Final Rule Action: In summary, for the RY 2012, we received no 
public comments concerning the ``other adjustment''; therefore, we will 
apply the 15-month FY 2008-based RPL market basket increase of 3.2 
percent with the ``other adjustment'' of -0.25 percent and the wage 
index budget neutrality factor to the RY 2011 ECT and Federal per diem 
base rates to yield the RY 2012 ECT base rate of $294.91 and Federal 
per diem base rate of $685.01.

VI. Update of the IPF PPS Adjustment Factors

A. Overview of the IPF PPS Adjustment Factors

    The IPF PPS payment adjustments were derived from a regression 
analysis of 100 percent of the FY 2002 MedPAR data file, which 
contained 483,038 cases. For the proposed rule, we used the same 
results of the regression analysis used to implement the November 2004 
IPF PPS final rule. For a more detailed description of the data file 
used for the regression analysis, see the November 2004 IPF PPS final 
rule (69 FR 66935 through 66936). While we have since used more recent 
claims data to set the fixed dollar loss threshold amount, we used the 
same results of this regression analysis to update the IPF PPS for RY 
2011 and we proposed to use these same results for RY 2012. Now that we 
are approximately 5 years into the IPF PPS, we believe that we have 
enough data to begin looking at the process of refining the IPF PPS as 
appropriate. We believe that in the next rulemaking, for FY 2013, we 
will be ready to propose potential refinements to the system.
    As we stated previously, we do not plan to update the regression 
analysis until we are able to analyze IPF PPS claims and cost report 
data. However, we continue to monitor claims and payment data 
independently from cost report data to assess issues, to determine 
whether changes in case-mix or payment shifts have occurred among 
freestanding governmental, non-profit and private psychiatric 
hospitals, and psychiatric units of general hospitals, and CAHs and 
other issues of importance to IPFs.

B. Patient-Level Adjustments

    In the April 2010 IPF PPS notice (75 FR 23113 through 23117), we 
announced payment adjustments for the following patient-level 
characteristics: Medicare Severity diagnosis related groups (MS-DRGs) 
assignment of the patient's principal diagnosis, selected 
comorbidities, patient age, and the variable per diem adjustments.
1. Adjustment for MS-DRG Assignment
    The IPF PPS includes payment adjustments for the psychiatric DRG 
assigned to the claim based on each patient's principal diagnosis. The 
IPF PPS recognizes the MS-DRGs. The DRG adjustment factors were 
expressed relative to the most frequently reported psychiatric DRG in 
FY 2002, that is, DRG 430 (psychoses). The coefficient values and 
adjustment factors were derived from the regression analysis.
    In accordance with Sec.  412.27(a), payment under the IPF PPS is 
conditioned on IPFs admitting ``only patients whose admission to the 
unit is required for active treatment, of an intensity that can be 
provided appropriately only in an inpatient hospital setting, of a 
psychiatric principal diagnosis that is listed in Chapter Five 
(``Mental Disorders'') of the International Classification of Diseases, 
Ninth Revision, Clinical Modification (ICD-9-CM)'' or in the Fourth 
Edition, Text Revision of the American Psychiatric Association's 
Diagnostic and Statistical Manual, (DSM-IV-TR). IPF claims with a 
principal diagnosis included in Chapter Five of the ICD-9-CM or the 
DSM-IV-TR are paid the Federal per diem base rate under the IPF PPS and 
all other applicable adjustments, including any applicable DRG 
adjustment. Psychiatric principal diagnoses that do not group to one of 
the designated DRGs still receive the Federal per diem base rate and 
all other applicable adjustments, but the payment would not include a 
DRG adjustment.
    The Standards for Electronic Transaction final rule published in 
the Federal Register on August 17, 2000 (65 FR 50312), adopted the ICD-
9-CM as the designated code set for reporting diseases, injuries, 
impairments, other health related problems, their manifestations, and 
causes of injury, disease, impairment, or other health related 
problems. Therefore, we use the ICD-9-CM as the designated code set for 
the IPF PPS.
    We believe that it is important to maintain the same diagnostic 
coding and DRG classification for IPFs that are used under the IPPS for 
providing psychiatric care. Therefore, when the IPF PPS was implemented 
for cost reporting periods beginning on or after January 1, 2005, we 
adopted the same diagnostic code set and DRG patient classification 
system (that is, the CMS DRGs) that were utilized at the time under the 
hospital inpatient prospective payment system (IPPS). Since the 
inception of the IPF PPS, the DRGs used as the patient classification 
system under the IPF PPS have corresponded exactly with the CMS DRGs 
applicable under the IPPS for acute care hospitals.
    Every year, changes to the ICD-9-CM coding system are addressed in 
the IPPS proposed and final rules. The changes to the codes are 
effective October 1 of each year and must be used by acute care 
hospitals as well as other providers to report diagnostic and procedure 
information. The IPF PPS has always incorporated ICD-9-CM coding 
changes made in the annual IPPS update. We publish coding changes in a 
Transmittal/Change Request, similar to how coding changes are announced 
by the IPPS and LTCH PPS. Those ICD-9-CM coding changes are also 
published in the following IPF PPS RY update, in either the IPF PPS 
proposed and final rules, or in an IPF PPS update notice.
    In the May 2008 IPF PPS notice (73 FR 25709), we discussed CMS' 
effort to better recognize resource use and the severity of illness 
among patients. CMS adopted the new MS-DRGs for the IPPS in the FY 2008 
IPPS final rule with comment period (72 FR 47130). We believe by better 
accounting for patients' severity of illness in Medicare payment rates, 
the MS-DRGs encourage hospitals to improve their coding and 
documentation of patient diagnoses. The MS-DRGs, which are based on the 
CMS DRGs, represent a significant increase in the number of DRGs (from 
538 to 745, an increase of 207). For a full description of the 
development and implementation of the MS-DRGs, see the FY 2008 IPPS 
final rule with comment period (72 FR 47141 through 47175).
    In the May 2008 IPF PPS notice, the IPF PPS recognized the MS-DRGs. 
A crosswalk, to reflect changes that were made to the DRGs under the 
IPF PPS to the new MS-DRGs was provided (73 FR 25716). Since then, we 
have referred to the IPF PPS DRGs as MS-DRGs. In the RY 2012 IPF PPS 
proposed rule, we proposed that all references to the MS-DRGs used for 
the IPF PPS would be to MS-IPF-DRGs. This would only be a change in 
terminology. We proposed to revise Sec.  412.402 to add the definition 
of MS-IPF-DRG.
    Comment: One Commenter suggested for consistency sake, that the DRG 
name of MS-DRG should remain the same in this rule as it is in the IPPS 
rule. The commenter believes that the name change to MS-IPF-DRGs 
suggest that there are two separate and distinct DRG classification 
systems.
    Response: We understand the commenter's concern that the name 
change from MS-DRG to MS-IPF-DRG could suggest that there are two 
separate DRG classification systems. Although we proposed to simply 
change the

[[Page 26450]]

terminology only and this change does not mean two separate and 
distinct DRG classification systems, we will retain the MS-DRG name for 
consistency sake and to avoid confusion. Therefore, we will not 
finalize the revision of Sec.  412.402 to add the definition of MS-IPF-
DRG. All references to the DRG name of MS-DRGs for the IPF PPS will 
remain the same.
    All of the ICD-9-CM coding changes are reflected in the FY 2011 
GROUPER, Version 28.0, effective for IPPS discharges occurring on or 
after October 1, 2010 through September 30, 2011. The GROUPER Version 
28.0 software package assigns each case to an MS-DRG on the basis of 
the diagnosis and procedure codes and demographic information (that is, 
age, sex, and discharge status). The Medicare Code Editor (MCE) 27.0 
uses the new ICD-9-CM codes to validate coding for IPPS discharges on 
or after October 1, 2010. For additional information on the GROUPER 
Version 28.0 and MCE 27.0, see Transmittal 2060 (Change Request 7134), 
dated October 1, 2010. The IPF PPS has always used the same GROUPER and 
Code Editor as the IPPS. Therefore, the ICD-9-CM changes, which were 
reflected in the GROUPER Version 28.0 and MCE 27.0 on October 1, 2010, 
also became effective for the IPF PPS for discharges occurring on or 
after October 1, 2010.
    The impact of the new MS-DRGs on the IPF PPS was negligible. 
Mapping to the MS-DRGs resulted in the current 17 MS-DRGs, instead of 
the original 15, for which the IPF PPS provides an adjustment. Although 
the code set is updated, the same associated adjustment factors apply 
now that have been in place since implementation of the IPF PPS, with 
one exception that is unrelated to the update to the codes. When DRGs 
521 and 522 were consolidated into MS-DRG 895, we carried over the 
adjustment factor of 1.02 from DRG 521 to the newly consolidated MS-
DRG. This was done to reflect the higher claims volume under DRG 521, 
with more than eight times the number of claims than billed under DRG 
522. The updates are reflected in Tables 7 and 8. For a detailed 
description of the mapping changes from the original DRG adjustment 
categories to the current MS-DRG adjustment categories we refer readers 
to the May 2008 IPF PPS notice (73 FR 25714).
    The official version of the ICD-9-CM is available on CD-ROM from 
the U.S. Government Printing Office. The FY 2009 version can be ordered 
by contacting the Superintendent of Documents, U.S. Government Printing 
Office, Department 50, Washington, DC 20402-9329, telephone number 
(202) 512-1800. Questions concerning the ICD-9-CM should be directed to 
Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination and 
Maintenance Committee, CMS, Center for Medicare Management, Hospital 
and Ambulatory Policy Group, Division of Acute Care, Mailstop C4-08-06, 
7500 Security Boulevard, Baltimore, Maryland 21244-1850.
    Further information concerning the official version of the ICD-9-CM 
can be found in the IPPS final rule with comment period, ``Changes to 
Hospital Inpatient Prospective Payment System and Fiscal Year 2011 
Rates'' in the August 16, 2010 Federal Register (75 FR 50042) and at 
Tables 7 and 8 below list the FY 2011 new and revised ICD-9-CM 
diagnosis codes that group to one of the 17 MS-DRGs for which the IPF 
PPS provides an adjustment. These tables are only a listing of FY 2011 
changes and do not reflect all of the currently valid and applicable 
ICD-9-CM codes classified in the MS-DRGs. When coded as a principal 
code or diagnosis, these codes receive the correlating MS-DRG 
adjustment.

                                      Table 7--FY 2011 New Diagnosis Codes
----------------------------------------------------------------------------------------------------------------
                Diagnosis code                                  MS-DRG descriptions                     MS-DRG
----------------------------------------------------------------------------------------------------------------
799.51.......................................  Attention or concentration deficit..................          886
799.52.......................................  Cognitive communication deficit.....................          884
799.54.......................................  Psychomotor deficit.................................          884
799.55.......................................  Frontal lobe and executive function deficit.........          884
799.59.......................................  Other signs and symptoms involving cognition........          884
----------------------------------------------------------------------------------------------------------------

                                     Table 8--FY 2011 Revised Diagnosis Code
----------------------------------------------------------------------------------------------------------------
                Diagnosis code                                  MS-DRG description                      MS-DRG
----------------------------------------------------------------------------------------------------------------
307.0........................................  Adult onset fluency disorder........................          887
----------------------------------------------------------------------------------------------------------------

    Because we do not plan to update the regression analysis until we 
are able to analyze IPF PPS data, we proposed that the MS-IPF-DRG 
adjustment factors (as shown in Table 9) would continue to be paid for 
discharges occurring in RY 2012.

             Table 9--RY 2012 Current MS-IPF-DRGs Applicable for the Principal Diagnosis Adjustment
----------------------------------------------------------------------------------------------------------------
                                                                                                      Adjustment
                    MS-DRG                                      MS-DRG descriptions                     factor
----------------------------------------------------------------------------------------------------------------
056..........................................  Degenerative nervous system disorders w/MCC.........         1.05
057..........................................  Degenerative nervous system disorders w/o MCC.......         1.05
080..........................................  Nontraumatic stupor & coma w/MCC....................         1.07
081..........................................  Nontraumatic stupor & coma w/o MCC..................         1.07
876..........................................  O.R. procedure w/principal diagnoses of mental               1.22
                                                illness.
880..........................................  Acute adjustment reaction & psychosocial dysfunction         1.05
881..........................................  Depressive neuroses.................................         0.99
882..........................................  Neuroses except depressive..........................         1.02
883..........................................  Disorders of personality & impulse control..........         1.02

[[Page 26451]]

 
884..........................................  Organic disturbances & mental retardation...........         1.03
885..........................................  Psychoses...........................................         1.00
886..........................................  Behavioral & developmental disorders................         0.99
887..........................................  Other mental disorder diagnoses.....................         0.92
894..........................................  Alcohol/drug abuse or dependence, left AMA..........         0.97
895..........................................  Alcohol/drug abuse or dependence w/rehabilitation            1.02
                                                therapy.
896..........................................  Alcohol/drug abuse or dependence w/o rehabilitation          0.88
                                                therapy w/MCC.
897..........................................  Alcohol/drug abuse or dependence w/o rehabilitation          0.88
                                                therapy w/o MCC.
----------------------------------------------------------------------------------------------------------------

    Final Rule Action: In summary, we received one public comment 
objecting to our proposed change to Sec.  412.402 to change the 
terminology from MS-DRG to MS-IPF-DRG. Therefore, we will not revise 
Sec.  412.402 to add the definition of MS-IPF-DRG. Instead, we will 
retain the MS-DRG name for consistency sake and in order to avoid 
confusion. All references to the DRG name of MS-DRG for the IPF PPS 
will remain the same. In addition, we are adopting the MS-DRG 
adjustments currently in effect and as shown in Table 9.
2. Payment for Comorbid Conditions
    The intent of the comorbidity adjustments is to recognize the 
increased costs associated with comorbid conditions by providing 
additional payments for certain concurrent medical or psychiatric 
conditions that are expensive to treat. In the April 2010 IPF PPS 
notice (75 FR 23114), we explained that the IPF PPS includes 17 
comorbidity categories and identified the new, revised, and deleted 
ICD-9-CM diagnosis codes that generate a comorbid condition payment 
adjustment under the IPF PPS for RY 2011 (75 FR 23115).
    Comorbidities are specific patient conditions that are secondary to 
the patient's principal diagnosis and that require treatment during the 
stay. Diagnoses that relate to an earlier episode of care and have no 
bearing on the current hospital stay are excluded and must not be 
reported on IPF claims. Comorbid conditions must exist at the time of 
admission or develop subsequently, and affect the treatment received, 
length of stay (LOS), or both treatment and LOS.
    For each claim, an IPF may receive only one comorbidity adjustment 
per comorbidity category, but it may receive an adjustment for more 
than one comorbidity category. Billing instructions require that IPFs 
must enter the full ICD-9-CM codes for up to 8 additional diagnoses if 
they co-exist at the time of admission or develop subsequently and 
impact the treatment provided.
    The comorbidity adjustments were determined based on the regression 
analysis using the diagnoses reported by IPFs in FY 2002. The principal 
diagnoses were used to establish the DRG adjustments and were not 
accounted for in establishing the comorbidity category adjustments, 
except where ICD-9-CM ``code first'' instructions apply. As we 
explained in the April 2010 IPF PPS notice (75 FR 23115), the code 
first rule applies when a condition has both an underlying etiology and 
a manifestation due to the underlying etiology. For these conditions, 
the ICD-9-CM has a coding convention that requires the underlying 
conditions to be sequenced first followed by the manifestation. 
Whenever a combination exists, there is a ``use additional code'' note 
at the etiology code and a code first note at the manifestation code.
    As discussed in the MS-DRG section, where we proposed that all 
references to MS-DRGs used for the IPF PPS be to MS-IPF-DRGs (as 
previously stated, we are not finalizing that proposal), it is our 
policy to maintain the same diagnostic coding set for IPFs that is used 
under the IPPS for providing the same psychiatric care. Although the 
ICD-9-CM code set has been updated, the same adjustment factors have 
been in place since the implementation of the IPF PPS.
    Table 10 below lists the FY 2011 new ICD diagnosis codes that 
impact the comorbidity adjustments under the IPF PPS. Table 10 is not a 
list of all currently valid ICD codes applicable for the IPF PPS 
comorbidity adjustments.

                    Table 10--FY 2011 New ICD Codes Applicable for the Comorbidity Adjustment
----------------------------------------------------------------------------------------------------------------
            Diagnosis  code                                Description                    Comorbidity  category
----------------------------------------------------------------------------------------------------------------
237.73.................................  Schwannomatosis...............................  Oncology.
237.79.................................  Other neurofibromatosis.......................  Oncology.
----------------------------------------------------------------------------------------------------------------

    For RY 2012, we are applying the seventeen comorbidity categories 
for which we are providing an adjustment, their respective codes, 
including the new FY 2011 ICD-9-CM codes, and their respective 
adjustment factors in Table 11 below.

               Table 11--RY 2012 Diagnosis Codes and Adjustment Factors for Comorbidity Categories
----------------------------------------------------------------------------------------------------------------
                                                                                                      Adjustment
          Description of comorbidity                              Diagnoses codes                       factor
----------------------------------------------------------------------------------------------------------------
Developmental Disabilities...................  317, 3180, 3181, 3182, and 319......................         1.04
Coagulation Factor Deficits..................  2860 through 2864...................................         1.13
Tracheostomy.................................  51900 through 51909 and V440........................         1.06

[[Page 26452]]

 
Renal Failure, Acute.........................  5845 through 5849, 63630, 63631, 63632, 63730,               1.11
                                                63731, 63732, 6383, 6393, 66932, 66934, 9585.
Renal Failure, Chronic.......................  40301, 40311, 40391, 40402, 40412, 40413, 40492,             1.11
                                                40493, 5853, 5854, 5855, 5856, 5859,586, V451,
                                                V560, V561, and V562.
Oncology Treatment...........................  1400 through 2399 with a radiation therapy code              1.07
                                                92.21-92.29 or chemotherapy code 99.25.
Uncontrolled Diabetes-Mellitus with or         25002, 25003, 25012, 25013, 25022, 25023, 25032,             1.05
 without complications.                         25033, 25042, 25043, 25052, 25053, 25062, 25063,
                                                25072, 25073, 25082, 25083, 25092, and 25093.
Severe Protein Calorie Malnutrition..........  260 through 262.....................................         1.13
Eating and Conduct Disorders.................  3071, 30750, 31203, 31233, and 31234................         1.12
Infectious Disease...........................  01000 through 04110, 042, 04500 through 05319, 05440         1.07
                                                through 05449, 0550 through 0770, 0782 through
                                                07889, and 07950 through 07959.
Drug and/or Alcohol Induced Mental Disorders.  2910, 2920, 29212, 2922, 30300, and 30400...........         1.03
Cardiac Conditions...........................  3910, 3911, 3912, 40201, 40403, 4160, 4210, 4211,            1.11
                                                and 4219.
Gangrene.....................................  44024 and 7854......................................         1.10
Chronic Obstructive Pulmonary Disease........  49121, 4941, 5100, 51883, 51884, V4611 and V4612,            1.12
                                                V4613 and V4614.
Artificial Openings--Digestive and Urinary...  56960 through 56969, 9975, and V441 through V446....         1.08
Severe Musculoskeletal and Connective Tissue   6960, 7100, 73000 through 73009, 73010 through               1.09
 Diseases.                                      73019, and 73020 through 73029.
Poisoning....................................  96500 through 96509, 9654, 9670 through 9699, 9770,          1.11
                                                9800 through 9809, 9830 through 9839, 986, 9890
                                                through 9897.
----------------------------------------------------------------------------------------------------------------

    Final Rule Action: In summary, we are adopting the comorbidity 
adjustments currently in effect and as shown in Table 11 above for RY 
2012 beginning on July 1, 2011.
3. Patient Age Adjustments
    As explained in the November 2004 IPF PPS final rule (69 FR 66922), 
we analyzed the impact of age on per diem cost by examining the age 
variable (that is, the range of ages) for payment adjustments.
    In general, we found that the cost per day increases with age. The 
older age groups are more costly than the under 45 age group, the 
differences in per diem cost increase for each successive age group, 
and the differences are statistically significant.
    We do not plan to update the regression analysis until we are able 
to analyze IPF PPS data. Therefore, for RY 2012, we proposed to 
continue to use the patient age adjustments currently in effect as 
shown in Table 12 below.

             Table 12--Age Groupings and Adjustment Factors
------------------------------------------------------------------------
                                                              Adjustment
                            Age                                 factor
------------------------------------------------------------------------
Under 45...................................................         1.00
45 and under 50............................................         1.01
50 and under 55............................................         1.02
55 and under 60............................................         1.04
60 and under 65............................................         1.07
65 and under 70............................................         1.10
70 and under 75............................................         1.13
75 and under 80............................................         1.15
80 and over................................................         1.17
------------------------------------------------------------------------

    Final Rule Action: We received no comments on the RY 2012 IPF PPS 
proposed rule concerning the age adjustment. We are adopting the age 
adjustment currently in effect and as shown in Table 12 above for RY 
2012.
4. Variable Per Diem Adjustments
    We explained in the November 2004 IPF PPS final rule (69 FR 66946) 
that the regression analysis indicated that per diem cost declines as 
the LOS increases. The variable per diem adjustments to the Federal per 
diem base rate account for ancillary and administrative costs that 
occur disproportionately in the first days after admission to an IPF.
    We used a regression analysis to estimate the average differences 
in per diem cost among stays of different lengths. As a result of this 
analysis, we established variable per diem adjustments that begin on 
day 1 and decline gradually until day 21 of a patient's stay. For day 
22 and thereafter, the variable per diem adjustment remains the same 
each day for the remainder of the stay. However, the adjustment applied 
to day 1 depends upon whether the IPF has a qualifying ED. If an IPF 
has a qualifying ED, it receives a 1.31 adjustment factor for day 1 of 
each stay. If an IPF does not have a qualifying ED, it receives a 1.19 
adjustment factor for day 1 of the stay. The ED adjustment is explained 
in more detail in section V.C.5 of this final rule.
    For RY 2012, we proposed to continue to use the variable per diem 
adjustment factors currently in effect as shown in Table 13 below. A 
complete discussion of the variable per diem adjustments appears in the 
November 2004 IPF PPS final rule (69 FR 66946).

                 Table 13--Variable Per Diem Adjustments
------------------------------------------------------------------------
                                                              Adjustment
                        Day-of-stay                             factor
------------------------------------------------------------------------
Day 1--IPF Without a Qualifying ED.........................         1.19
Day 1--IPF With a Qualifying ED............................         1.31
Day 2......................................................         1.12
Day 3......................................................         1.08
Day 4......................................................         1.05
Day 5......................................................         1.04
Day 6......................................................         1.02
Day 7......................................................         1.01
Day 8......................................................         1.01
Day 9......................................................         1.00
Day 10.....................................................         1.00
Day 11.....................................................         0.99
Day 12.....................................................         0.99
Day 13.....................................................         0.99
Day 14.....................................................         0.99
Day 15.....................................................         0.98
Day 16.....................................................         0.97
Day 17.....................................................         0.97
Day 18.....................................................         0.96
Day 19.....................................................         0.95
Day 20.....................................................         0.95
Day 21.....................................................         0.95

[[Page 26453]]

 
After Day 21...............................................         0.92
------------------------------------------------------------------------

    Final Rule Action: In response to the RY 2012 IPF PPS proposed 
rule, we received no public comments concerning the variable per diem 
adjustment. We are adopting the variable per diem adjustment currently 
in effect and as shown in Table 13 above.

C. Facility-Level Adjustments

    The IPF PPS includes facility-level adjustments for the wage index, 
IPFs located in rural areas, teaching IPFs, cost of living adjustments 
for IPFs located in Alaska and Hawaii, and IPFs with a qualifying ED.
1. Wage Index Adjustment
a. Background
    As discussed in the May 2006 IPF PPS final rule and in the May 2008 
and May 2009 IPF PPS notices, in providing an adjustment for geographic 
wage levels, the labor-related portion of an IPF's payment is adjusted 
using an appropriate wage index. Currently, an IPF's geographic wage 
index value is determined based on the actual location of the IPF in an 
urban or rural area as defined in Sec.  412.64(b)(1)(ii)(A) through 
Sec.  412.64(C).
b. Wage Index for RY 2012
    Since the inception of the IPF PPS, we have used hospital wage data 
in developing a wage index to be applied to IPFs. We are continuing 
that practice for RY 2012. We apply the wage index adjustment to the 
labor-related portion of the Federal rate, which is 70.317 percent. 
This percentage reflects the labor-related relative importance of the 
FY 2008-based RPL market basket for RY 2012 (see section IV.C.6 of this 
final rule). The IPF PPS uses the pre-floor, pre-reclassified hospital 
wage index. Changes to the wage index are made in a budget neutral 
manner so that updates do not increase expenditures.
    For RY 2012, we proposed to apply the most recent hospital wage 
index (that is, the FY 2011 pre-floor, pre-reclassified hospital wage 
index because this is the most appropriate index as it best reflects 
the variation in local labor costs of IPFs in the various geographic 
areas) using the most recent hospital wage data (that is, data from 
hospital cost reports for the cost reporting period beginning during FY 
2007), and applying an adjustment in accordance with our budget 
neutrality policy. This policy requires us to estimate the total amount 
of IPF PPS payments in RY 2011 using the applicable wage index value 
divided by the total estimated IPF PPS payments in RY 2012 using the 
most recent wage index. The estimated payments are based on FY 2009 IPF 
claims, inflated to the appropriate RY. This quotient is the wage index 
budget neutrality factor, and it is applied in the update of the 
Federal per diem base rate for RY 2012 in addition to the market basket 
described in section IV.C.5 of this final rule. The wage index budget 
neutrality factor for RY 2012 is 0.9995.
    The wage index applicable for RY 2012 appears in Table 1 and Table 
2 in Addendum B of this final rule. As explained in the May 2006 IPF 
PPS final rule for RY 2007 (71 FR 27061), the IPF PPS applies the 
hospital wage index without a hold-harmless policy, and without an out-
commuting adjustment or out-migration adjustment because the statutory 
authority for these policies applies only to the IPPS.
    Also in the May 2006 IPF PPS final rule for RY 2007 (71 FR 27061), 
we adopted the changes discussed in the Office of Management and Budget 
(OMB) Bulletin No. 03-04 (June 6, 2003), which announced revised 
definitions for Metropolitan Statistical Areas (MSAs), and the creation 
of Micropolitan Statistical Areas and Combined Statistical Areas. In 
adopting the OMB Core-Based Statistical Area (CBSA) geographic 
designations, since the IPF PPS was already in a transition period from 
TEFRA payments to PPS payments, we did not provide a separate 
transition for the CBSA-based wage index.
    As was the case in RY 2011, for RY 2012 we proposed to continue to 
use the CBSA-based wage index values as presented in Tables 1 and 2 in 
Addendum B of this final rule. A complete discussion of the CBSA labor 
market definitions appears in the May 2006 IPF PPS final rule (71 FR 
27061 through 27067).
    In summary, for RY 2012 we proposed to use the FY 2011 wage index 
data (collected from cost reports submitted by hospitals for cost 
reporting periods beginning during FY 2007) to adjust IPF PPS payments 
beginning July 1, 2011.
c. OMB Bulletins
    The Office of Management and Budget (OMB) publishes bulletins 
regarding CBSA changes, including changes to CBSA numbers and titles. 
In the May 2008 IPF PPS notice, we incorporated the CBSA nomenclature 
changes published in the most recent OMB bulletin that applies to the 
hospital wage data used to determine the current IPF PPS wage index (73 
FR 25721). We will continue to do the same for all such OMB CBSA 
nomenclature changes in future IPF PPS rules and notices, as necessary. 
The OMB bulletins may be accessed online at http://www.whitehouse.gov/omb/bulletins/index.html.
    Final Rule Action: We are finalizing our proposal to use FY 2011 
wage index data to adjust IPF PPS payments beginning July 1, 2011.
2. Adjustment for Rural Location
    In the November 2004 IPF PPS final rule, we provided a 17 percent 
payment adjustment for IPFs located in a rural area. This adjustment 
was based on the regression analysis, which indicated that the per diem 
cost of rural facilities was 17 percent higher than that of urban 
facilities after accounting for the influence of the other variables 
included in the regression. For RY 2012, we proposed to apply a 17 
percent payment adjustment for IPFs located in a rural area as defined 
at Sec.  412.64(b)(1)(ii)(C). As stated in the November 2004 IPF PPS 
final rule, we do not intend to update the adjustment factors derived 
from the regression analysis until we are able to analyze IPF PPS data. 
A complete discussion of the adjustment for rural locations appears in 
the November 2004 IPF PPS final rule (69 FR 66954).
    Final Rule Action: In summary, we are adopting the 17 percent rural 
adjustment in effect for RY 2012.
3. Teaching Adjustment
    In the November 2004 IPF PPS final rule, we implemented regulations 
at Sec.  412.424(d)(1)(iii) to establish a facility-level adjustment 
for IPFs that are, or are part of, teaching hospitals. The teaching 
adjustment accounts for the higher indirect operating costs experienced 
by hospitals that participate in GME programs. The payment adjustments 
are made based on the number of full-time equivalent (FTE) interns and 
residents training in the IPF and the IPF's average daily census.
    Medicare makes direct GME payments (for direct costs such as 
resident and teaching physician salaries, and other direct teaching 
costs) to all teaching hospitals including those paid under a PPS, and 
those paid under the TEFRA rate-of-increase limits. These direct GME 
payments are made separately from payments for hospital operating costs 
and are not part of the PPSs. The direct GME payments do not address 
the estimated higher indirect operating costs teaching hospitals may 
face.
    For teaching hospitals paid under the TEFRA rate-of- increase 
limits,

[[Page 26454]]

Medicare does not make separate payments for indirect medical education 
costs because payments to these hospitals are based on the hospitals' 
reasonable costs which already include these higher indirect costs that 
may be associated with teaching programs.
    The results of the regression analysis of FY 2002 IPF data 
established the basis for the payment adjustments included in the 
November 2004 IPF PPS final rule. The results showed that the indirect 
teaching cost variable is significant in explaining the higher costs of 
IPFs that have teaching programs. We calculated the teaching adjustment 
based on the IPF's ``teaching variable,'' which is one plus the ratio 
of the number of FTE residents training in the IPF (subject to 
limitations described below) to the IPF's average daily census (ADC).
    We established the teaching adjustment in a manner that limited the 
incentives for IPFs to add FTE residents for the purpose of increasing 
their teaching adjustment. We imposed a cap on the number of FTE 
residents that may be counted for purposes of calculating the teaching 
adjustment. The cap limits the number of FTE residents that teaching 
IPFs may count for the purpose of calculating the IPF PPS teaching 
adjustment, not the number of residents teaching institutions can hire 
or train. We calculated the number of FTE residents that trained in the 
IPF during a ``base year'' and used that FTE resident number as the 
cap. An IPF's FTE resident cap is ultimately determined based on the 
final settlement of the IPF's most recent cost report filed before 
November 15, 2004 (that is, the publication date of the IPF PPS final 
rule).
    In the regression analysis, the logarithm of the teaching variable 
had a coefficient value of 0.5150. We converted this cost effect to a 
teaching payment adjustment by treating the regression coefficient as 
an exponent and raising the teaching variable to a power equal to the 
coefficient value. We note that the coefficient value of 0.5150 was 
based on the regression analysis holding all other components of the 
payment system constant.
    As with other adjustment factors derived through the regression 
analysis, we do not plan to rerun the regression analysis until we 
analyze IPF PPS data. Therefore, in this final rule, for RY 2012, we 
are retaining the coefficient value of 0.5150 for the teaching 
adjustment to the Federal per diem base rate.
    A complete discussion of how the teaching adjustment was calculated 
appears in the November 2004 IPF PPS final rule (69 FR 66954 through 
66957) and the May 2008 IPF PPS notice (73 FR 25721).
FTE Intern and Resident Cap Adjustment
    CMS has been asked to reconsider the current IPF teaching policy 
and permit a temporary increase in the FTE resident cap when the IPF 
increases the number of FTE residents it trains due to the acceptance 
of displaced residents (residents that are training in an IPF or a 
program before the IPF or program closed) when another IPF closes or 
closes its medical residency training program.
    To help us assess how many IPFs have been, or expect to be 
adversely affected by their inability to adjust their caps under Sec.  
412.424(d)(1) and under these situations, we specifically requested 
public comment from IPFs in the May 1, 2009 IPF PPS notice (74 FR 20376 
through 20377). A summary of the comments and our response can be 
reviewed in the April 30, 2010 IPF PPS notice (75 FR 23106, 23117). All 
of the commenters recommended that CMS modify the IPF PPS teaching 
adjustment policy, supporting a policy change that would permit the IPF 
PPS residency cap to be temporarily adjusted when that IPF trains 
displaced residents due to closure of an IPF or closure of an IPF's 
medical residency training program(s). The commenters recommended a 
temporary resident cap adjustment policy similar to such policies 
applied in similar contexts for acute care hospitals.
    We agree with the commenters that, when a hospital temporarily 
takes on residents because another hospital closes or discontinues its 
program, a temporary adjustment to the cap would be appropriate for 
rotation that occurs in an IPF setting (freestanding or units). In 
these situations, residents may have partially completed a medical 
residency training program at the hospital that has closed its training 
program and may be unable to complete their training at another 
hospital that is already training residents up to or in excess of its 
cap. We believe that it is appropriate to allow temporary adjustments 
to the FTE caps for an IPF that provides residency training to medical 
residents who have partially completed a residency training program at 
an IPF that closes or at an IPF that discontinues training residents in 
a residency training program(s) (also referred to as a ``closed'' 
program throughout this preamble). For this reason, we proposed to 
adopt the following temporary resident cap adjustment policies, similar 
to the temporary adjustments to the FTE cap used for acute care 
hospitals. We proposed that the cap adjustment would be temporary 
because it is resident specific and would only apply to the displaced 
resident(s) until the resident(s) completes training in that specialty. 
We proposed that, as under the IPPS policy for displaced residents, the 
IPF PPS temporary cap adjustment would apply only to residents that 
were still training at the IPF at the time the IPF closed or at the 
time the IPF ceased training residents in the residency training 
program(s). Residents who leave the IPF, for whatever reason, before 
the closure of the IPF hospital or medical residency training program 
would not be considered displaced residents for purposes of the IPF 
temporary cap adjustment policy. Similarly, as under the IPPS policy, 
we proposed that medical students who match to a program at an IPF but 
the IPF or medical residency training program closes before the 
individual begins training at that IPF are also not considered 
displaced residents for purposes of the IPF temporary cap adjustments. 
For detailed information on these acute care hospital GME/IME payment 
policies, see 66 FR 39899 (August 1, 2001), 64 FR 41522 (July 30 1999), 
and 64 FR 24736 (May 7 1999). We note that although we proposed to 
adopt a policy under the IPF PPS that is consistent with the policy 
applicable under the IPPS, the actual caps under the two payment 
systems may not be commingled.
a. Temporary Adjustment to the FTE Cap To Reflect Residents Added Due 
to Hospital Closure
    We proposed to allow an IPF to receive a temporary adjustment to 
the FTE cap to reflect residents added because of another IPF's 
closure. This adjustment is intended to account for medical residents 
who would have partially completed a medical residency training program 
at the hospital that has closed and may be unable to complete their 
training at another hospital because that hospital is already training 
residents up to or in excess of its cap. We proposed this change 
because IPFs have indicated a reluctance to accept additional residents 
from a closed IPF without a temporary adjustment to their caps. For 
purposes of this policy on IPF closure, we proposed to adopt the IPPS 
definition of ``closure of a hospital'' in 42 CFR 413.79(h) to mean the 
IPF terminates its Medicare provider agreement as specified in 42 CFR 
489.52. Therefore, we proposed to add a new Sec.  
412.424(d)(1)(iii)(F)(1) to allow a temporary adjustment to an IPF's 
FTE cap to reflect residents added because of

[[Page 26455]]

an IPF's closure on or after July 1, 2011 to be effective for cost 
reporting periods beginning on or after July 1, 2011. We would allow an 
adjustment to an IPF's FTE cap if the IPF meets the following criteria: 
(a) The IPF is training displaced residents from an IPF that closed on 
or after July 1, 2011; and (b) the IPF that is training the displaced 
residents from the closed IPF submits a request for a temporary 
adjustment to its FTE cap to its Medicare contractor no later than 60 
days after the hospital first begins training the displaced residents, 
and documents that the IPF is eligible for this temporary adjustment to 
its FTE cap by identifying the residents who have come from the closed 
IPF and have caused the IPF to exceed its cap, (or the IPF may already 
be over its cap), and specifies the length of time that the adjustment 
is needed. After the displaced residents leave the IPF's training 
program or complete their residency program, the IPF's cap would revert 
to its original level. This means that the temporary adjustment to the 
FTE cap would be available to the IPF only for the period of time 
necessary for the displaced residents to complete their training. 
Further, as under the IPPS policy, we also proposed that the total 
amount of temporary cap adjustment that can be distributed to all 
receiving hospitals cannot exceed the cap amount of the IPF that 
closed.
    We also note that section 5506 of the Affordable Care Act, 
``Preservation of Resident Cap Positions from Closed Hospitals,'' does 
not apply to IPFs that closed. Section 5506 only amends sections 
1886(d) and (h) of the Act with respect to direct GME and IPPS IME 
payments. Therefore, the IME FTE cap redistributions under section 5506 
only apply to ``subsection (d)'' IPPS hospitals. Section 5506 has no 
applicability to the IME teaching adjustments under the IPF PPS (or the 
IRF PPS, for that matter).
b. Temporary Adjustment to FTE Cap To Reflect Residents Affected by 
Residency Program Closure
    We proposed that if an IPF that ceases training residents in a 
residency training program(s) agrees to temporarily reduce its FTE cap, 
another IPF may receive a temporary adjustment to its FTE cap to 
reflect residents added because of the closure of another IPF's 
residency training program. For purposes of this policy on closed 
residency programs, we proposed to adopt the IPPS definition of 
``closure of a hospital residency training program'' to mean that the 
hospital ceases to offer training for residents in a particular 
approved medical residency training program as specified in Sec.  
413.79(h). The methodology for adjusting the caps for the ``receiving 
IPF'' and the ``IPF that closed its program'' is described below.
i. Receiving IPF
    We proposed that an IPF(s) may receive a temporary adjustment to 
its FTE cap to reflect residents added because of the closure of 
another IPF's residency training program for cost reporting periods 
beginning on or after July 1, 2011 if--
     The IPF is training additional residents from the 
residency training program of an IPF that closed its program on or 
after July 1, 2011; and
     No later than 60 days after the IPF begins to train the 
residents, the IPF submits to its Medicare Contractor a request for a 
temporary adjustment to its FTE cap, documents that the IPF is eligible 
for this temporary adjustment by identifying the residents who have 
come from another IPF's closed program and have caused the IPF to 
exceed its cap,(or the IPF may already be in excess of its cap), 
specifies the length of time the adjustment is needed, and, as 
explained in more detail below, submits to its Medicare contractor a 
copy of the FTE cap reduction statement by the IPF closing the 
residency training program.
    In general, the temporary adjustment criteria established for 
closed medical residency training programs at IPFs is similar to the 
criteria established for closed IPFs. More than one IPF may be eligible 
to apply for the temporary adjustment because residents from one closed 
program may migrate to different IPFs, or they may complete their 
training at more than one IPF. Also, only to the extent to which an IPF 
would exceed its FTE cap by training displaced residents would it be 
eligible for the temporary adjustment.
    Finally, we proposed that IPFs that meet the proposed criteria 
would be eligible to receive temporary adjustments to their FTE caps 
for cost reporting periods beginning on or after July 1, 2011.
ii. IPF That Closed Its Program(s)
    We proposed that an IPF that agrees to train residents who have 
been displaced by the closure of another IPF's resident teaching 
program may receive a temporary FTE cap adjustment only if the IPF with 
the closed program meets the following criteria--
     Temporarily reduces its FTE cap by the number of FTE 
residents in each program year, training in the program at the time of 
the program's closure. The yearly reduction would be determined by 
deducting the number of those residents who would have been training in 
the program during the year of the closure, had the program not closed; 
and
     No later than 60 days after the residents who were in the 
closed program begin training at another IPF, submits to its Medicare 
contractor a statement signed and dated by its representative that 
specifies that it agrees to the temporary reduction in its FTE cap to 
allow the IPF training the displaced residents to obtain a temporary 
adjustment to its cap; identifies the residents who were training at 
the time of the program's closure; identifies the IPFs to which the 
residents are transferring once the program closes; and specifies the 
reduction for the applicable program years.
    Unlike the proposed closed IPF policy at Sec.  412.424(d) 
(1)(iii)(F)(1), we proposed under this closed program policy that in 
order for the receiving IPF(s) to qualify for a temporary adjustment to 
their FTE cap, the IPFs that are closing their programs would need to 
reduce their FTE cap for the duration of time the displaced residents 
would need to finish their training. We proposed this because the IPF 
that closes the program still retains the FTE slots in its cap, even if 
the IPF chooses not to fill the slots with residents. We believe it is 
inappropriate to allow an increase to the receiving IPF's cap without 
an attendant decrease to the cap of the IPF with the closed program, 
because the IPF that closed a program(s) could fill these slots with 
residents from other programs even if the increase and related decrease 
is only temporary.
    We proposed that the cap reduction for the IPF with the closed 
program would be based on the number of FTE residents in each program 
year who were in the program at the IPF at the time of the program's 
closure, and who begin training at another IPF.
    Comment: The majority of the commenters strongly supported the 
proposed policy to allow a temporary adjustment to the resident cap 
when an IPF closes or closes its residency teaching program. However, a 
few of the commenters urged CMS to modify the regulations to allow IPFs 
to receive the temporary cap adjustment if they are training displaced 
residents as of July 1, 2011. One commenter requested the amendment at 
Sec.  412.424(d)(1)(iii)(F)(l)(i) be modified to state, ``The IPF is 
training additional residents as of July 1, 2011 from an IPF that 
closed.'' The commenter also requested that we modify Sec.  
412.424(d)(1)(iii)(l)(ii) to state, ``No later than 60 days after the 
IPF begins to train the resident or in the case where an IPF is 
training the residents as

[[Page 26456]]

of July 1,2011, by August 31, 2011, the IPF submits. * * * ''
    Response: We share the commenters' concern for those FTE residents 
who have been displaced before July 1, 2011 due to closure of an IPF. 
We carefully considered the commenters' request that CMS modify the IPF 
temporary cap adjustment policy to allow IPFs that volunteered to train 
displaced residents before July 1, 2011, to receive the temporary cap 
adjustment. We realize that at present, IPFs provide this important 
service to displaced residents without extra compensation. However, 
this is a new policy that was proposed rather than a correction to an 
existing policy, and as such the effective date of the IPF closure 
policy must be applied prospectively. Therefore, as proposed, we are 
finalizing the IPF PPS temporary cap adjustment to apply where an IPF 
is training additional residents from an IPF that closed or closed its' 
residency program on or after July 1, 2011. The policy is effective for 
cost reporting periods beginning on or after July 1, 2011. We 
appreciate the support for the proposed policies to allow a temporary 
adjustment to the resident cap when an IPF closes or closes its 
residency teaching program. We are finalizing these policies as 
proposed.
    Comment: Several commenters expressed concern about the caps on the 
number of FTE residents that can be used to calculate the teaching 
adjustment. These commenters believe that the current cap is based on a 
snapshot of activity freezing the status of residency education at a 
random point in time-2004. The commenters stated that they continue to 
advocate for a substantial increase in the total number of residency 
training positions supported by the Federal Government.
    One commenter expressed concern about having caps in general since 
the current cap is based on 2004 data. Several commenters pointed out 
that the demand for health care services will continue with the growing 
needs of 78 million ``baby boomers'' that started retirement in 2010 
and with the passage of Paul Wellstone and Pete Domenici Mental Health 
Parity and Addiction Equality Act of 2008. These commenters stated that 
the U.S. already faces a shortage of psychiatrist, and these factors 
could potentially elevate what is now a problem to what could be a 
crisis.
    Response: We established the teaching adjustment in a manner that 
limited the incentives for IPFs to add FTE residents for the purpose of 
increasing their teaching adjustment. We imposed a cap on the number of 
FTE residents that may be counted for purposes of calculating the 
teaching adjustment, similar to that established by sections 4621 (IME 
FTE cap for IPPS hospitals) and 4623 (direct GME FTE cap for all 
hospitals) of the BBA. The cap limits the number of residents that 
teaching IPFs may count for purposes of calculating the teaching 
adjustment, not the number of residents that teaching institutions can 
hire or train.
    We acknowledge that the cap on the number of FTE residents that may 
be counted under the IPF PPS teaching adjustment is based on 2004 data 
and the cap freezes the number of residents that Medicare will 
recognize for payment under the IPF PPS teaching adjustment to that 
year. This policy is intended to exercise our statutory responsibility 
under the BBA to prevent any erosion of the resident caps established 
under the IPPS that could result from incentives created by the 
facility adjustment for teaching hospitals under the IPF PPS. In 
addition, we wanted to avoid creating incentives to artificially expand 
residency training in IPFs, and ensure that the resident base used to 
determine payments is related to the care needs in IPF institutions. We 
provided a detailed discussion in the November 15, 2004 Federal 
Register (69 FR 66954-66955) of the BBA cap. We are continually 
monitoring the impact of our policies to assess the appropriateness of 
the policies and will continue to monitor the impact of this policy 
closely and consider the appropriateness of our FTE cap for future 
refinements for the RY 2013.
    Comment: One commenter recommended that CMS work with the Congress 
to provide a permanent distribution of the resident cap for IPFs that 
close, similar to the Affordable Care Act for acute care hospital 
closures.
    Response: We believe the commenter is referring to section 5506 of 
the Affordable Care Act, ``Preservation of Resident Cap Positions from 
Closed Hospitals,'' which does not apply to IPFs that closed. In the 
absence of such authority, we are finalizing the temporary adjustment 
to the FTE resident caps for when an IPF closes or closes its residency 
teaching program, as described above.
    Final Rule Action: In summary, we are adding Sec.  
412.424(d)(1)(iii)(F)(1) and Sec.  412.424(d)(1)(iii)(F)(2) to 
implement policies related to temporary adjustments to FTE caps to 
reflect residents added due to closure of an IPF or an IPFs medical 
residency training program respectfully.
4. Cost of Living Adjustment for IPFs Located in Alaska and Hawaii
    The IPF PPS includes a payment adjustment for IPFs located in 
Alaska and Hawaii based upon the county in which the IPF is located. As 
we explained in the November 2004 IPF PPS final rule, the FY 2002 data 
demonstrated that IPFs in Alaska and Hawaii had per diem costs that 
were disproportionately higher than other IPFs. Other Medicare PPSs 
(for example, the IPPS and LTCH PPS) have adopted a cost of living 
adjustment (COLA) to account for the cost differential of care 
furnished in Alaska and Hawaii.
    We analyzed the effect of applying a COLA to payments for IPFs 
located in Alaska and Hawaii. The results of our analysis demonstrated 
that a COLA for IPFs located in Alaska and Hawaii would improve payment 
equity for these facilities. As a result of this analysis, we provided 
a COLA in the November 2004 IPF PPS final rule.
    A COLA adjustment for IPFs located in Alaska and Hawaii is made by 
multiplying the nonlabor-related portion of the Federal per diem base 
rate by the applicable COLA factor based on the COLA area in which the 
IPF is located.
    The COLA factors are published on the OPM Web site at (http://www.opm.gov/oca/cola/rates.asp).
    We note that the COLA areas for Alaska are not defined by county as 
are the COLA areas for Hawaii. In 5 CFR 591.207, the OPM established 
the following COLA areas:
    (a) City of Anchorage, and 80-kilometer (50-mile) radius by road, 
as measured from the Federal courthouse;
    (b) City of Fairbanks, and 80-kilometer (50-mile) radius by road, 
as measured from the Federal courthouse;
    (c) City of Juneau, and 80-kilometer (50-mile) radius by road, as 
measured from the Federal courthouse;
    (d) Rest of the State of Alaska.
    As previously stated in the November 2004 IPF PPS final rule, we 
update the COLA factors according to updates established by the U.S. 
Office of Personnel Management (OPM).
    Sections 1911 through 1919 of the Nonforeign Area Retirement Equity 
Assurance Act, as contained in subtitle B of title XIX of the National 
Defense Authorization Act (NDAA) for Fiscal Year 2010 (Pub. L. 111-84, 
October 28, 2009), transitions the Alaska and Hawaii COLAs to locality 
pay. Under section 1914 of Public Law 111-84, locality pay is being 
phased in over a 3-year period beginning in January 2010, with COLA 
rates frozen as of the date of enactment, October 28, 2009, and then

[[Page 26457]]

proportionately reduced to reflect the phase-in of locality pay.
    When we published the proposed COLA adjustment factors in the 
January 2011 proposed rule, we inadvertently selected the FY 2010 COLA 
rates. The FY 2010 COLA rates were reduced rates to account for the 
phase-in of locality pay. We did not intend to propose reduced COLA 
rates, and we do not believe it is appropriate to finalize the reduced 
COLAs that we showed in our proposed rule. The 2009 COLA rates do not 
reflect the phase-in of locality pay. Therefore, we are finalizing the 
FY 2009 COLA rates, which are the same rates that were in effect for 
both RY 2010 and RY 2011. We plan to address COLA in the future 
refinement process in FY 2013.

            Table 14--COLA Factors for Alaska and Hawaii IPFs
------------------------------------------------------------------------
                                                         Cost of living
                         Area                              adjustment
                                                             factor
------------------------------------------------------------------------
Alaska:                                                 ................
    City of Anchorage and 80-kilometer (50-mile)                    1.23
     radius by road...................................
    City of Fairbanks and 80-kilometer (50-mile)                    1.23
     radius by road...................................
    City of Juneau and 80-kilometer (50-mile) radius                1.23
     by road..........................................
    Rest of Alaska....................................              1.25
Hawaii:
    City and County of Honolulu.......................              1.25
    County of Hawaii..................................              1.18
    County of Kauai...................................              1.25
    County of Maui and County of Kalawao..............              1.25
------------------------------------------------------------------------
(The above factors are based on data obtained from the U.S. Office of
  Personnel Management Web site at: http://www.opm.gov/oca/cola/rates.asp.)

    Final Rule Action: In summary, although we did not propose the FY 
2009 COLAs, in order to provide a full COLA, we are adopting the FY 
2009 COLA rates obtained from the OPM Web site and as shown in Table 14 
above.
5. Adjustment for IPFs With a Qualifying Emergency Department (ED)
    Currently, the IPF PPS includes a facility-level adjustment for 
IPFs with qualifying EDs. We provide an adjustment to the Federal per 
diem base rate to account for the costs associated with maintaining a 
full-service ED. The adjustment is intended to account for ED costs 
incurred by a freestanding psychiatric hospital with a qualifying ED or 
a distinct part psychiatric unit of an acute hospital or a CAH for 
preadmission services otherwise payable under the Medicare Outpatient 
Prospective Payment System (OPPS) furnished to a beneficiary during the 
day immediately preceding the date of admission to the IPF (see Sec.  
413.40(c)(2)) and the overhead cost of maintaining the ED. This payment 
is a facility-level adjustment that applies to all IPF admissions (with 
one exception described below), regardless of whether a particular 
patient receives preadmission services in the hospital's ED.
    The ED adjustment is incorporated into the variable per diem 
adjustment for the first day of each stay for IPFs with a qualifying 
ED. That is, IPFs with a qualifying ED receive an adjustment factor of 
1.31 as the variable per diem adjustment for day 1 of each stay. If an 
IPF does not have a qualifying ED, it receives an adjustment factor of 
1.19 as the variable per diem adjustment for day 1 of each patient 
stay.
    The ED adjustment is made on every qualifying claim except as 
described below. As specified in Sec.  412.424(d)(1)(v)(B), the ED 
adjustment is not made where a patient is discharged from an acute care 
hospital or critical access hospital (CAH) and admitted to the same 
hospital's or CAH's psychiatric unit. An ED adjustment is not made in 
this case because the costs associated with ED services are reflected 
in the DRG payment to the acute care hospital or through the reasonable 
cost payment made to the CAH. If we provided the ED adjustment in these 
cases, the hospital would be paid twice for the overhead costs of the 
ED, as stated in the November 2004 IPF PPS final rule (69 FR 66960).
    Therefore, when patients are discharged from an acute care hospital 
or CAH and admitted to the same hospital's or CAH's psychiatric unit, 
the IPF receives the 1.19 adjustment factor as the variable per diem 
adjustment for the first day of the patient's stay in the IPF.
    For RY 2012, we proposed to retain the 1.31 adjustment factor for 
IPFs with qualifying EDs. A complete discussion of the steps involved 
in the calculation of the ED adjustment factor appears in the November 
2004 IPF PPS final rule (69 FR 66959 through 66960) and the May 2006 
IPF PPS final rule (71 FR 27070 through 27072).
    Final Rule Action: We are retaining the 1.31 adjustment factor for 
IPFs with qualifying EDs for RY 2012.

D. Other Payment Adjustments and Policies

    For RY 2012, the IPF PPS includes an outlier adjustment to promote 
access to IPF care for those patients who require expensive care and to 
limit the financial risk of IPFs treating unusually costly patients. In 
this section, we also explain the reason for ending the stop-loss 
provision that was applicable during the transition period.
1. Outlier Payments
    In the November 2004 IPF PPS final rule, we implemented regulations 
at Sec.  412.424(d)(3)(i) to provide a per-case payment for IPF stays 
that are extraordinarily costly. Providing additional payments to IPFs 
for extremely costly cases strongly improves the accuracy of the IPF 
PPS in determining resource costs at the patient and facility level. 
These additional payments reduce the financial losses that would 
otherwise be incurred in treating patients who require more costly care 
and, therefore, reduce the incentives for IPFs to under-serve these 
patients.
    We make outlier payments for discharges in which an IPF's estimated 
total cost for a case exceeds a fixed dollar loss threshold amount 
(multiplied by the IPF's facility-level adjustments) plus the Federal 
per diem payment amount for the case.
    In instances when the case qualifies for an outlier payment, we pay 
80

[[Page 26458]]

percent of the difference between the estimated cost for the case and 
the adjusted threshold amount for days 1 through 9 of the stay 
(consistent with the median LOS for IPFs in FY 2002), and 60 percent of 
the difference for day 10 and thereafter. We established the 80 percent 
and 60 percent loss sharing ratios because we were concerned that a 
single ratio established at 80 percent (like other Medicare PPSs) might 
provide an incentive under the IPF per diem payment system to increase 
LOS in order to receive additional payments. After establishing the 
loss sharing ratios, we determined the current fixed dollar loss 
threshold amount of $6,372 through payment simulations designed to 
compute a dollar loss beyond which payments are estimated to meet the 2 
percent outlier spending target.
a. Update to the Outlier Fixed Dollar Loss Threshold Amount
    In accordance with the update methodology described in Sec.  
412.428(d), we proposed to update the fixed dollar loss threshold 
amount used under the IPF PPS outlier policy. Based on the regression 
analysis and payment simulations used to develop the IPF PPS, we 
established a 2 percent outlier policy which strikes an appropriate 
balance between protecting IPFs from extraordinarily costly cases while 
ensuring the adequacy of the Federal per diem base rate for all other 
cases that are not outlier cases.
    We believe it is necessary to update the fixed dollar loss 
threshold amount because an analysis of the latest available data (that 
is, FY 2009 IPF claims) and rate increases indicates that adjusting the 
fixed dollar loss amount is necessary in order to maintain an outlier 
percentage that equals 2 percent of total estimated IPF PPS payments.
    In the May 2006 IPF PPS final rule (71 FR 27072), we describe the 
process by which we calculate the outlier fixed dollar loss threshold 
amount. We will continue to use this process for RY 2012. We begin by 
simulating aggregate payments with and without an outlier policy, and 
applying an iterative process to determine an outlier fixed dollar loss 
threshold amount that will result in outlier payments being equal to 2 
percent of total estimated payments under the simulation. Based on this 
process, using the FY 2009 claims data, we estimate that IPF outlier 
payments as a percentage of total estimated payments are approximately 
2.2 percent in RY 2011. Thus, for this final rule, we are updating the 
RY 2012 IPF outlier threshold amount to ensure that estimated RY 2012 
outlier payments are approximately 2 percent of total estimated IPF 
payments. The outlier fixed dollar loss threshold amount of $6,372 for 
RY 2011 will be changed to $7,340 for RY 2012 to reduce estimated 
outlier payments and thereby maintain estimated outlier payments at 2 
percent of total estimated aggregate IPF payments for RY 2012.
    Final Rule Action: In this final rule, we are adopting $7,340 as 
the fixed dollar loss threshold for RY 2012.
b. Statistical Accuracy of Cost-to-Charge Ratios
    As previously stated, under the IPF PPS, an outlier payment is made 
if an IPF's cost for a stay exceeds a fixed dollar loss threshold 
amount. In order to establish an IPF's cost for a particular case, we 
multiply the IPF's reported charges on the discharge bill by its 
overall cost-to-charge ratio (CCR). This approach to determining an 
IPF's cost is consistent with the approach used under the IPPS and 
other PPSs. In FY 2004, we implemented changes to the IPPS outlier 
policy used to determine CCRs for acute care hospitals because we 
became aware that payment vulnerabilities resulted in inappropriate 
outlier payments. Under the IPPS, we established a statistical measure 
of accuracy for CCRs in order to ensure that aberrant CCR data did not 
result in inappropriate outlier payments.
    As we indicated in the November 2004 IPF PPS final rule, because we 
believe that the IPF outlier policy is susceptible to the same payment 
vulnerabilities as the IPPS, we adopted an approach to ensure the 
statistical accuracy of CCRs under the IPF PPS (69 FR 66961). 
Therefore, we adopted the following procedure in the November 2004 IPF 
PPS final rule:
     We calculated two national ceilings, one for IPFs located 
in rural areas and one for IPFs located in urban areas. We computed the 
ceilings by first calculating the national average and the standard 
deviation of the CCR for both urban and rural IPFs.
    To determine the rural and urban ceilings, we multiplied each of 
the standard deviations by 3 and added the result to the appropriate 
national CCR average (either rural or urban). The upper threshold CCR 
for IPFs in RY 2012 is 1.8199 for rural IPFs, and 1.7643 for urban 
IPFs, based on CBSA-based geographic designations. If an IPF's CCR is 
above the applicable ceiling, the ratio is considered statistically 
inaccurate and we assign the appropriate national (either rural or 
urban) median CCR to the IPF.
    We apply the national CCRs to the following situations:
    ++ New IPFs that have not yet submitted their first Medicare cost 
report.
    ++ IPFs whose overall CCR is in excess of 3 standard deviations 
above the corresponding national geometric mean (that is, above the 
ceiling).
    ++ Other IPFs for which the Medicare contractor obtains inaccurate 
or incomplete data with which to calculate a CCR.
    For new IPFs, we are using these national CCRs until the facility's 
actual CCR can be computed using the first tentatively or final settled 
cost report.
    We are not making any changes to the procedures for ensuring the 
statistical accuracy of CCRs in RY 2012. However, we are updating the 
national urban and rural CCRs (ceilings and medians) for IPFs for RY 
2012 based on the CCRs entered in the latest available IPF PPS Provider 
Specific File.
    Specifically, for RY 2012, and to be used in each of the three 
situations listed above, we estimate the national average CCR to be 
0.6435 for rural IPFs and the national average CCR of 0.5055 for urban 
IPFs. These calculations are based on the IPF's location (either urban 
or rural) using the CBSA-based geographic designations.
    A complete discussion regarding the national median CCRs appears in 
the November 2004 IPF PPS final rule (69 FR 66961 through 66964).
2. Expiration of the Stop-Loss Provision
    In the November 2004 IPF PPS final rule, we implemented a stop-loss 
policy that reduced financial risk to IPFs projected to experience 
substantial reductions in Medicare payments during the period of 
transition to the IPF PPS. This stop-loss policy guaranteed that each 
facility received total IPF PPS payments that were no less than 70 
percent of its TEFRA payments had the IPF PPS not been implemented. 
This policy was applied to the IPF PPS portion of Medicare payments 
during the 3-year transition.
    In the implementation year, the 70 percent of TEFRA payment stop-
loss policy required a reduction in the standardized Federal per diem 
and ECT base rates of 0.39 percent in order to make the stop-loss 
payments budget neutral. As described in the May 2008 IPF PPS notice 
for RY 2009, we increased the Federal per diem base rate and ECT rate 
by 0.39 percent because these rates were reduced by 0.39 percent in the 
implementation year to ensure stop-loss payments were budget neutral.
    The stop-loss provision ended during RY 2009 (that is for 
discharges occurring on or after July 1, 2008 through June 30,

[[Page 26459]]

2009). The stop-loss policy is no longer applicable under the IPF PPS.
3. Future Refinements
    As we have noted throughout the RY 2012 IPF PPS proposed rule as 
well as in this final rule, we have delayed making refinements to the 
IPF PPS until we have adequate IPF PPS data on which to base those 
decisions. Now that we are approximately 5 years into the system, we 
believe that we have enough data to begin that process. We have begun 
the necessary analysis to better understand IPF industry practices so 
that we may refine the IPF PPS as appropriate. While we did not propose 
to make the following refinements in the RY 2012 IPF PPS proposed 
rulemaking, we believe that in the rulemaking for FY 2013 we will be 
ready to present the results of our analysis.
    Specifically, with the change from ICD-9-CM to ICD-10-CM coming in 
FY 2013, we are analyzing the comorbidity categories and related codes 
for utilization and continued suitability. While we would continue to 
provide for comorbidity adjustments, we are analyzing whether the 
current groupings and codes continue to be warranted and whether other 
appropriate codes should be added. Also, we are analyzing our current 
policies for interrupted stays, readmissions, same-day transfers, and 
length of stays in order to assess whether these policies continue to 
be appropriate. Additionally, in accordance with section 1886(s)(4) of 
the Act, which was added by section 10322 of the Affordable Care Act, 
IPFs must submit data on quality measures, as specified by the 
Secretary, for each RY beginning in RY 2014. If data is not submitted, 
any annual update to a Federal base rate for discharges for the 
payments shall be reduced by 2 percentage points. Quality measures are 
currently being developed to effectuate this requirement. Lastly, for 
the first time MedPAC will become involved in evaluating facility 
margins and will likely make recommendations regarding the appropriate 
payment update to IPFs based on their findings. CMS is interested in 
gaining feedback on these areas for future refinements and therefore we 
invite comments on these issues described in this section at this time.
    Comment: A few commenters strongly supported the need to develop 
and implement quality measures for the IPF PPS. They strongly 
encouraged CMS to review and consider the Hospital-Based Inpatient 
Psychiatric Services (HBIPS) core measures as a foundation for quality 
measures for the IPF PPS. They pointed out that these quality measures 
are now in effect for all Joint Commission-accredited psychiatric 
hospitals and are available for use by psychiatric units in acute care 
hospitals.
    Response: We appreciate the support for the development and 
implementation of quality measures, as well as the recommendation 
regarding the Hospital-Based Inpatient Psychiatric Services (HBIPS) 
core measures for IPFs. In accordance with section 1886(s)(4) of the 
SSA (the Act), which was added by section 10322 of the Affordable Care 
Act, IPFs must submit data on quality measures as specified by the 
Secretary, for each RY (that coincides with a FY) beginning in FY 2014. 
Quality measures are currently being developed to effectuate this 
requirement. To implement this, a Technical Expert Panel (TEP) has been 
assembled to develop quality measures for inpatient psychiatric 
hospitals and psychiatric units. The TEP consists of a wide cross-
section of today's learned scholars and experts in the field including 
the Joint Commission on Hospital and Accreditation (formerly Joint 
Commission on Accreditation of Healthcare Organizations), to provide 
valued input on quality measure development. The TEP is charged with 
identifying measures that reflect current knowledge regarding 
effective, evidenced-based treatments for psychiatric disorders; 
addressing the range of treatments and care processes provided at IPFs; 
and identifying measures applicable to all Medicare beneficiaries 
treated in IPFs. Therefore, consistent with the views of these 
commenters, CMS is reviewing and taking into consideration those HBIPS 
core measures to help form a foundation for quality measures as 
directed under the Act.
    Comment: A few commenters stated that although the core adjustments 
to the system, such as age, length of stay, and comorbidities have been 
effective in addressing the variability in the costs of treating 
Medicare patients with psychiatric disorders, they recommend that the 
key adjustments (such as age, comorbidities, and length of stays) be 
analyzed to determine if any changes are warranted.
    Response: We agree with the commenters on the need to analyze 
patient characteristics such as age, comorbidities, and length of stays 
when we refine the IPF PPS system. As explained in the RY 2012 IPF PPS 
proposed rule, in preparation for the migration from ICD-9-CM to ICD-
10-CM in FY 2013, we plan to analyze the comorbidity categories and 
related codes for utilization and continued suitability. We will make 
determinations as to whether the current groupings and codes continue 
to be warranted and whether other appropriate codes should also be 
added. We are also analyzing our current policies on interrupted stays, 
readmissions, same-day transfers, and length of stays in order to 
assess whether these policies continue to be appropriate. We welcome 
the support by these commenters for such future refinements.

VII. Regulations Text Corrections

    We proposed several minor corrections to the regulations text to 
address typographical errors. We noted that these proposed changes do 
not impact policy. We proposed to correct typographical errors at Sec.  
412.404, ``Conditions for payment'' under the prospective payment 
system for inpatient hospital services of psychiatric facilities; Sec.  
412.422, ``Basis of payment;'' and Sec.  412.426, ``Transition 
period.'' In addition to these corrections, we proposed to add 
clarifying language at Sec.  412.426 and Sec.  412.432(d), ``Method of 
payment under the inpatient psychiatric facility prospective payment 
system.'' The proposed revisions are described below.

Section 412.404(a)(1)

    Under Sec.  412.404, in paragraph (a)(1), ``General requirements,'' 
we proposed to delete the word ``in'' between the words ``furnished'' 
and ``to Medicare''.

Section 412.422(b)(2)

    Under Sec.  412.422, in paragraph (b)(2), we proposed to correct 
the reference to Sec.  413.80 to Sec.  413.89. The regulations covered 
at Sec.  413.89 include bad debts, charity, and courtesy allowances.

Section 412.426(a)

    Under Sec.  412.426, in paragraph (a), ``Duration of transition 
period and composition of the blended transition payment,'' we proposed 
to replace ``Except as provided in paragraph (d) of this section'' with 
``Except as provided in paragraph (c) of this section.'' There is no 
paragraph (d); this exception should refer to paragraph (c), 
``Treatment of new inpatient psychiatric facilities.''
    Also in paragraph (a), we proposed to add the words ``of this 
part'' after ``as specified in Sec.  412.424(d)'' and ``of this 
section'' after ``as specified under paragraph (b).'' This regulatory 
language is required by the Federal Register.
    In each of paragraphs Sec.  412.426(a)(1) through (a)(3), we 
proposed to delete the words ``on or'' directly before the words 
``before January''. For example, paragraph (a)(1) currently states, 
``For

[[Page 26460]]

cost reporting periods beginning on or after January 1, 2005 and on or 
before January 1, 2006 * * *'' We proposed that this statement read: 
``For cost reporting periods beginning on or after January 1, 2005 and 
before January 1, 2006 * * *'' This correction does not represent a 
change in policy. Rather, it is a correction to conform the regulation 
text to our policy, which was established in our final rule that 
appeared in the Federal Register on November 15, 2004 (69 FR 66980) 
(which was subsequently corrected on April 1, 2005 (70 FR 16729)). It 
is clear that the current regulation text is incorrect. The same 
January date (for example, January 1, 2007) cannot be both the date on 
which a new transition period begins and the date on which the previous 
transition period ends. Our policy, since we established the 
transition, has been to begin a transition period on or after a January 
1 date and to end that transition period before the next transition 
period begins. Because our regulation text does not accurately reflect 
our actual policy, we proposed this correction.
    At Sec.  412.426(a)(4), we proposed to replace the statement, ``For 
cost reporting periods beginning on or after July 1, 2008, payment is 
based entirely on the Federal per diem payment amount'' with the 
following statement: ``For cost reporting periods beginning on or after 
January 1, 2008, payment is based entirely on the Federal per diem 
payment amount.'' The transition period during which payment was based 
on a combination of the Federal per diem payment amount and TEFRA 
payments, ended on January 1, 2008, not July 1, 2008.
    Comment: Two commenters expressed serious concern that CMS is 
making retroactive policy changes to the regulations text for the 3-
year transition period for the IPF PPS rather than minor corrections to 
address typographical errors.
    Response: We disagree with the commenters. We are simply making 
minor corrections to the regulations at Sec.  412.426 covering the 
transition period to address typographical errors to the IPF PPS. In 
the November 2004 IPF PPS final rule, we provided for a 3-year 
transition period. During this 3-year transition period, an IPF's total 
payment under the PPS was based on an increasing percentage of the 
Federal rate with a corresponding decreasing percentage of the IPF PPS 
payment that was based on reasonable cost concepts. However, effective 
for cost reporting periods beginning on or after January 1, 2008, IPF 
PPS payments are based on 100 percent of the Federal rate. This 
correction does not represent a policy change, and therefore is not a 
retroactive change. Rather, it is a correction to conform the 
regulation text to our policy, which was established in our final rule 
that appeared in the Federal Register on November 15, 2004 (69 FR 
66980) (which was subsequently corrected on April 1, 2005 (70 FR 
16729)). It is clear that the current regulation text is incorrect. The 
same January date (for example, January 1, 2007) cannot be both the 
date on which a new transition period begins and the date on which the 
previous transition period ends. Our policy, since we established the 
transition, has been to begin a transition period on or after a January 
1 date and to end that transition period before the next transition 
period begins. Because our regulation text does not accurately reflect 
our actual policy, we proposed this correction.
    In addition for Sec.  412.426, in paragraph (a), ``Duration of 
transition period and composition of the blended transition payment,'' 
we intended to propose, but did not, to replace ``on or after January 
1, 2005 through January 1, 2008'' with ``on or after January 1, 2005 
through December 31,2007''. Here again, this correction does not 
represent a policy change; it is merely a correction to conform the 
regulation text to our policy, and it is consistent with the other 
typographical errors we are correcting in Sec.  412.426.

Section 412.432(d)

    Under Sec.  412.432, in paragraph (d), ``Outlier payments,'' we 
proposed to add the words ``of this part'' after ``subject to the cost 
report settlement specified in Sec.  412.84(i) and Sec.  412.84(m).'' 
This regulatory language is required by the Federal Register and 
clarifies that Sec.  412.84(i) and Sec.  412.84(m) refer to 42 CFR part 
412, ``Prospective Payment Systems for Inpatient Hospital Services.''

VIII. Collection of Information Requirements

    This document does not impose any information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 35).

IX. Regulatory Impact Analysis

A. Statement of Need

    This final rule will update the prospective payment rates for 
Medicare inpatient hospital services provided by inpatient psychiatric 
facilities for discharges occurring during the RY beginning July 1, 
2011 through September 30, 2012. We are applying the 15-month FY 2008-
based RPL market basket increase of 3.2 percent, adjusted by the 0.25 
percentage point reduction, as required by section 1886(s)(3)(A) of the 
Act. In addition, the rule implements policy changes affecting the IPF 
PPS teaching adjustment, as well as makes some clarifications and 
corrections to terminology and regulations text.

B. Overall Impact

    We have examined the impact of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993), 
Executive Order 13563 on Improving Regulation and Regulatory Review 
(January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, 
section 202 of the Unfunded Mandates Reform Act of 1995 (March 22, 
1995; Pub. L. 104-4), Executive Order 13132 on Federalism (August 4, 
1999) and the Congressional Review Act (5 U.S.C. 804(2)).
    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year). 
This final rule has been designated an ``economically'' significant 
rule, under section 3(f) (1) of Executive Order 12866 and a major rule 
under the Congressional Review Act. Accordingly, the rule has been 
reviewed by the Office of Management and Budget.
    We estimate that the total impact of these changes for estimated RY 
2012 payments compared to estimated RY 2011 payments would be an 
increase of approximately $120 million (this reflects a $130 million 
increase from the update to the payment rates and a $10 million 
decrease due to the update to the outlier threshold amount to decrease 
outlier payments from approximately 2.2 percent in RY 2011 to 2.0 
percent in RY 2012).
    The RFA requires agencies to analyze options for regulatory relief 
of small entities, if a rule has a significant impact on a substantial 
number of small entities. For purposes of the RFA, small entities 
include small businesses, nonprofit organizations, and small

[[Page 26461]]

governmental jurisdictions. Most IPFs and most other providers and 
suppliers are small entities, either by nonprofit status or by having 
revenues of $7 million to $34.5 million in any one year (for details, 
refer to the SBA Small Business Size Standards found at http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=2465b064ba6965cc1fbd2eae60854b11&rgn=div8&view=text&node=13:1.0.1.1.16.1.266.9&idno=13). Because we lack data on individual 
hospital receipts, we cannot determine the number of small proprietary 
IPFs or the proportion of IPFs' revenue that is derived from Medicare 
payments. Therefore, we assume that all IPFs are considered small 
entities. The Department of Health and Human Services generally uses a 
revenue impact of 3 to 5 percent as a significance threshold under the 
RFA.
    As shown in Table 15, we estimate that the revenue impact of this 
final rule on all IPFs is to increase estimated Medicare payments by 
about 2.74 percent, with rural IPFs estimated to receive an increase in 
estimated Medicare payments greater than 3 percent (an aggregate 3.80 
percent). As a result, the Secretary has determined that this final 
rule will not have a significant impact on a substantial number of 
small entities. Medicare fiscal intermediaries, Medicare Administrative 
Contractors, and carriers are not considered to be small entities. 
Individuals and States are not included in the definition of a small 
entity. We solicited comment on the above analysis.
    In addition, section 1102(b) of the Social Security Act requires us 
to prepare a regulatory impact analysis, if a rule may have a 
significant impact on the operations of a substantial number of small 
rural hospitals. This analysis must conform to the provisions of 
section 604 of the RFA. For purposes of section 1102(b) of the Act, we 
define a small rural hospital as a hospital that is located outside of 
a metropolitan statistical area and has fewer than 100 beds. As 
discussed in detail below, the rates and policies set forth in this 
final rule will not have an adverse impact on the rural hospitals based 
on the data of the 320 rural units and 67 rural hospitals in our 
database of 1,653 IPFs for which data were available. Therefore, the 
Secretary has determined that this final rule will not have a 
significant impact on the operations of a substantial number of small 
rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. In 2011, that 
threshold is approximately $136 million. This final rule will not 
impose spending costs on State, local, or Tribal governments in the 
aggregate, or by the private sector, of $136 million.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. As stated above, this final rule would not have a 
substantial effect on State and local governments.

C. Anticipated Effects of the Final Rule

    We discuss below the historical background of the IPF PPS and the 
impact of this final rule on the Federal Medicare budget and on IPFs.
1. Budgetary Impact
    As discussed in the November 2004 and May 2006 IPF PPS final rules, 
we applied a budget neutrality factor to the Federal per diem and ECT 
base rates to ensure that total estimated payments under the IPF PPS in 
the implementation period would equal the amount that would have been 
paid if the IPF PPS had not been implemented. The budget neutrality 
factor includes the following components: Outlier adjustment, stop-loss 
adjustment, and the behavioral offset. As discussed in the May 2008 IPF 
PPS notice (73 FR 25711), the stop-loss adjustment is no longer 
applicable under the IPF PPS.
    In accordance with Sec.  412.424(c)(3)(ii), we indicated that we 
would evaluate the accuracy of the budget neutrality adjustment within 
the first 5 years after implementation of the payment system. We may 
make a one-time prospective adjustment to the Federal per diem and ECT 
base rates to account for differences between the historical data on 
cost-based TEFRA payments (the basis of the budget neutrality 
adjustment) and estimates of TEFRA payments based on actual data from 
the first year of the IPF PPS. As part of that process, we will 
reassess the accuracy of all of the factors impacting budget 
neutrality. In addition, as discussed in section IV.C.6 of this final 
rule, we are using the wage index and labor-related share in a budget 
neutral manner by applying a wage index budget neutrality factor to the 
Federal per diem and ECT base rates. Therefore, the budgetary impact to 
the Medicare program of this final rule will be due to the 15-month 
market basket update for RY 2012 of 3.2 percent (see section IV.C.5 of 
this final rule) as adjusted by the ``other adjustment'' of -0.25 
percentage point according to section 1886(s)(3)(A) of the Act, and the 
update to the outlier fixed dollar loss threshold amount.
    We estimate that the RY 2012 impact would be a net increase of $120 
million in payments to IPF providers. This reflects an estimated $130 
million increase from the update to the payment rates and a $10 million 
decrease due to the update to the outlier threshold amount to decrease 
estimated outlier payments from approximately 2.2 percent in RY 2011 to 
2.0 percent in RY 2012.
2. Impact on Providers
    To understand the impact of the changes to the IPF PPS on 
providers, discussed in this final rule, it is necessary to compare 
estimated payments under the IPF PPS rates and factors for RY 2012 
versus those under RY 2011. The estimated payments for RY 2011 and RY 
2012 will be 100 percent of the IPF PPS payment, since the transition 
period has ended and stop-loss payments are no longer paid. We 
determined the percent change of estimated RY 2012 IPF PPS payments to 
RY 2011 IPF PPS payments for each category of IPFs. In addition, for 
each category of IPFs, we have included the estimated percent change in 
payments resulting from the update to the outlier fixed dollar loss 
threshold amount, the labor-related share and wage index changes for 
the RY 2012 IPF PPS, and the 15-month market basket update for RY 2012, 
as adjusted by the ``other adjustment'' according to section 
1886(s)(3)(A) of the Act.
    To illustrate the impacts of the RY 2012 changes in this final 
rule, our analysis begins with a RY 2011 baseline simulation model 
based on FY 2009 IPF payments inflated to the midpoint of RY 2011 using 
IHS Global Insight's most recent forecast of the market basket update 
(see section IV.C.5 of this final rule); the estimated outlier payments 
in RY 2011; the CBSA designations for IPFs based on OMB's MSA 
definitions after June 2003; the FY 2010 pre-floor, pre-reclassified 
hospital wage index; the RY 2011 labor-related share; and the RY 2011 
percentage amount of the rural adjustment. During the simulation, the 
total estimated outlier payments are maintained at 2 percent of total 
IPF PPS payments.
    Each of the following changes is added incrementally to this 
baseline model in order for us to isolate the effects of each change:

[[Page 26462]]

     The update to the outlier fixed dollar loss threshold 
amount.
     The FY 2011 pre-floor, pre-reclassified hospital wage 
index and RY 2012 labor-related share.
     The 15-month market basket update for RY 2012 of 3.2 
percent adjusted by the 0.25 percentage point reduction in accordance 
with section 1886(s)(3)(A) of the Act.
    Our final comparison illustrates the percent change in payments 
from RY 2011 (that is, July 1, 2010 to June 30, 2011) to RY 2012 (that 
is, July 1, 2011 to September 30, 2012) including all the changes in 
this final rule.

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3. Results
    Table 15 above displays the results of our analysis. The table 
groups IPFs into the categories listed below based on characteristics 
provided in the Provider of Services (POS) file, the IPF provider 
specific file, and cost report data from HCRIS:
     Facility Type
     Location
     Teaching Status Adjustment
     Census Region
     Size

The top row of the table shows the overall impact on the 1,653 IPFs 
included in this analysis.
    In column 3, we present the effects of the update to the outlier 
fixed dollar loss threshold amount. We estimate that IPF outlier 
payments as a percentage of total IPF payments are 2.2 percent in RY 
2011. Therefore, we are adjusting the outlier threshold amount from 
$6,372 in RY 2011 to $7,340 in RY 2012 in order to set total estimated 
outlier payments equal to 2 percent of total payments in RY 2012. The 
estimated change in total IPF payments for RY 2012, therefore, includes 
an approximate 0.2 percent decrease in payments because the outlier 
portion of total payments is expected to decrease from approximately 
2.2 percent to 2 percent.
    The overall aggregate effect of this outlier adjustment update (as 
shown in column 3 of table 15), across all hospital groups, is to 
decrease total estimated payments to IPFs by 0.21 percent. We do not 
estimate that any group of IPFs will experience an increase in payments 
from this update. The largest decrease in payments is estimated to 
reflect a 1.57 percent decrease in payments to urban government IPF 
units located in CAHs which is due to the small number of IPFs of that 
type and the high volume of outlier payments made to those IPFs.
    In column 4, we present the effects of the budget-neutral update to 
the labor-related share and the wage index adjustment under the CBSA 
geographic area definitions announced by OMB in June 2003. This is a 
comparison of the simulated RY 2012 payments under the FY 2011 hospital 
wage index under CBSA classification and associated labor-related share 
to the simulated RY 2011 payments under the FY 2010 hospital wage index 
under CBSA classifications and associated labor-related share. We note 
that there is no projected change in aggregate payments to IPFs, as 
indicated in the first row of column 4. However, there will be 
distributional effects among different categories of IPFs. For example, 
we estimate a 1.02 percent increase in overall payments to rural IPFs, 
with the largest increase in payments of 2.25 percent for rural, for-
profit freestanding psychiatric hospitals. In addition, we estimate the 
largest decrease in payments to be a 0.91 percent decrease for IPFs in 
the New England region.
    Column 5 shows the estimated effect of the update to the IPF PPS 
payment rates, which includes a 3.2 percent 15-month market basket 
update adjusted by the 0.25 percentage point reduction in accordance 
with section 1886(s)(3)(A).
    Column 6 compares our estimates of the changes reflected in this 
final rule for RY 2012, to our payments for RY 2011 (without these 
changes). This column reflects all RY 2012 changes relative to RY 2011. 
The average estimated increase for all IPFs is approximately 2.74 
percent. This estimated net increase includes the effects of the 3.2 
percent 15-month market basket update adjusted by the ``other 
adjustment'' of -0.25 percentage point, as required by section 
1886(s)(3)(A) of the Act. It also includes the overall estimated 0.2 
percent decrease in estimated IPF outlier payments from the update to 
the outlier fixed dollar loss threshold amount. Since we are making the 
updates to the IPF labor-related share and wage index in a budget-
neutral manner, they will not affect total estimated IPF payments in 
the aggregate. However, they will affect the estimated distribution of 
payments among providers.
    Overall, no IPFs are estimated to experience a net decrease in 
payments as a result of the updates in this rule. IPFs in urban areas 
will experience a 2.57 percent increase and IPFs in rural areas will 
experience a 3.80 percent increase. The largest payment increase is 
estimated at 5.23 percent for rural, for-profit freestanding 
psychiatric hospitals. This is due to the larger than average positive 
effect of the FY 2011 CBSA wage index and labor-related share updates 
for rural IPFs in this category.
4. Effect on the Medicare Program
    Based on actuarial projections resulting from our experience with 
other PPSs, we estimate that Medicare spending (total Medicare program 
payments) for IPF services over the next 5 years would be as shown in 
Table 16 below.

                      Table 16--Estimated Payments
------------------------------------------------------------------------
                                                              Dollars in
                         Rate year                             millions
------------------------------------------------------------------------
July 1, 2011 to June 30, 2012..............................       $4,615
July 1, 2012 to June 30, 2013..............................        4,945
July 1, 2013 to June 30, 2014..............................        5,330
July 1, 2014 to June 30, 2015..............................        5,775
July 1, 2015 to June 30, 2016..............................        6,273
------------------------------------------------------------------------

    These estimates are based on the current forecast of the increases 
in the RPL market basket, including an adjustment for productivity, for 
the RY beginning in 2012 and each subsequent RY, as required by section 
1886(s)(3)(A) of the Act, as follows:
     2.8 percent for rate years beginning in 2011 (RY 2012).
     1.7 percent for rate years beginning in 2012 (RY 2013).
     2.0 percent for rate years beginning in 2013 (RY 2014).
     2.2 percent for rate years beginning in 2014 (RY 2015).
     2.4 percent for rate years beginning in 2015 (RY 2016).
    The estimates in Table 16 also include the application of the 
``other adjustment,'' as required by section 1886(s)(3)(A) of the Act, 
as follows:
     -0.25 percentage point for rate years beginning in 2011.
     -0.1 percentage point for rate years beginning in 2012.
     -0.1 percentage point for rate years beginning in 2013.
     -0.3 percentage point for rate years beginning in 2014.
     -0.2 percentage point for rate years beginning in 2015.
    We estimate that there would be a change in fee-for-service 
Medicare beneficiary enrollment as follows:
     3.3 percent in RY 2012.
     3.7 percent in RY 2013.
     4.3 percent in RY 2014.
     4.9 percent in RY 2015.
     5.6 percent in RY 2016.
5. Effect on Beneficiaries
    Under the IPF PPS, IPFs would receive payment based on the average 
resources consumed by patients for each day. We do not expect changes 
in the quality of care or access to services for Medicare beneficiaries 
under the RY 2012 IPF PPS. In fact, we believe that access to IPF 
services will be enhanced due to the patient- and facility-level 
adjustment factors, all of which are intended to adequately reimburse 
IPFs for expensive cases. Finally, the outlier policy is intended to 
assist IPFs that experience high-cost cases.

D. Alternatives Considered

    The statute does not specify an update strategy for the IPF PPS and 
is broadly written to give the Secretary discretion in establishing an 
update methodology.

[[Page 26465]]

Therefore, we are updating the IPF PPS using the methodology published 
in the November 2004 IPF PPS final rule.
    We note that this final rule initiates policy changes with regard 
to the IPF PPS, and it also provides an update to the rates for RY 
2012. We considered making refinements to the IPF PPS in this final 
rule. However, more time is required to assess the data and will 
therefore once again delay running the regression analysis until we 
have adequate IPF PPS data. We have initiated the necessary analysis to 
better understand IPF industry practices. We did not consider rebasing 
the IPF PPS for concerns that rebasing would be too costly (re-
calculate the cost-per-day) and time consuming.

E. Accounting Statement

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table 17 below, we 
have prepared an accounting statement showing the classification of the 
expenditures associated with the provisions of this final rule. This 
table provides our best estimate of the increase in Medicare payments 
under the IPF PPS as a result of the proposed changes presented in this 
final rule and based on the data for 1,653 IPFs in our database. All 
expenditures are classified as transfers to IPF Medicare providers.

       Table 17--Accounting Statement: Classification of Estimated
      Expenditures, From the 2011 IPF PPS RY to the 2012 IPF PPS RY
                              [In millions]
------------------------------------------------------------------------
                 Category                             Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers............  $120.
From Whom To Whom?                          Federal Government to IPF
                                             Medicare Providers.
------------------------------------------------------------------------

    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 412

    Administrative practice and procedure, Health facilities, Medicare, 
Puerto Rico, Reporting and recordkeeping requirements.
    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services amends 42 CFR chapter IV as set forth below:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

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

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

Subpart N--Prospective Payment System for Inpatient Hospital 
Services of Inpatient Psychiatric Facilities

0
2. In Sec.  412.402, the definition of ``Inpatient psychiatric 
facilities prospective payment system rate year'' is added in 
alphabetical order to read as follows:

Sec.  412.402  Definitions.

* * * * *
    Inpatient psychiatric facilities prospective payment system rate 
year means--
    (1) Through June 30, 2011, the 12-month period of July 1 through 
June 30.
    (2) Beginning July 1, 2011, the 15-month period of July 1, 2011 
through September 30, 2012.
    (3) Beginning October 1, 2012, the 12-month period of October 1 
through September 30, referred to as Fiscal Year (FY).
* * * * *

0
3. Section 412.404 is amended by revising paragraph (a)(1) to read as 
follows:

Sec.  412.404  Conditions for payment under the prospective payment 
system for inpatient hospital services of psychiatric facilities.

    (a) * * *
    (1) Effective for cost reporting periods beginning on or after 
January 1, 2005, an inpatient psychiatric facility must meet the 
conditions of this section to receive payment under the prospective 
payment system described in this subpart for inpatient hospital 
services furnished to Medicare Part A fee-for-service beneficiaries.
* * * * *

0
4. Section 412.422 is amended by revising paragraph (b)(2) to read as 
follows:

Sec.  412.422  Basis of payment.

* * * * *
    (b) * * *
    (2) In addition to the Federal per diem payment amounts, inpatient 
psychiatric facilities receive payment for bad debts of Medicare 
beneficiaries, as specified in Sec.  413.89 of this chapter.

0
5. Section 412.424 is amended by adding a new paragraph (d)(1)(iii)(F) 
to read as follows:

Sec.  412.424  Methodology for calculating the Federal per diem payment 
amount.

* * * * *
    (d) * * *
    (1) * * *
    (iii) * * *
    (F) Closure of an IPF. (1) For cost reporting periods beginning on 
or after July 1, 2011, an IPF may receive a temporary adjustment to its 
FTE cap to reflect residents added because of another IPF's closure if 
the IPF meets the following criteria:
    (i) The IPF is training additional residents from an IPF that 
closed on or after July 1, 2011.
    (ii) No later than 60 days after the IPF begins to train the 
residents, the IPF submits a request to its Medicare contractor for a 
temporary adjustment to its cap, documents that the IPF is eligible for 
this temporary adjustment by identifying the residents who have come 
from the closed IPF and have caused the IPF to exceed its cap, and 
specifies the length of time the adjustment is needed.
    (2) Closure of an IPF's residency training program. If an IPF that 
closes its residency training program on or after July 1, 2011, agrees 
to temporarily reduce its FTE cap according to the criteria specified 
in paragraph (d)(1)(iii)(F)(2)(ii) of this section, another IPF(s) may 
receive a temporary adjustment to its FTE cap to reflect residents 
added because of the closure of the residency training program if the 
criteria specified in paragraph (d)(1)(iii)(F)(2)(i) of this section 
are met.
    (i) Receiving IPF(s). For cost reporting periods beginning on or 
after July 1, 2011, an IPF may receive a temporary adjustment to its 
FTE cap to reflect residents added because of the closure of another 
IPF's residency training program if the IPF is training additional 
residents from the residency training program of an IPF that closed a 
program; and if no later than 60 days after the IPF begins to train the 
residents, the IPF submits to its Medicare Contractor a request for a 
temporary adjustment to its FTE cap, documents that it is eligible for 
this temporary adjustment by identifying the residents who have come 
from another IPF's closed program and have caused the IPF to exceed its 
cap, specifies the length of time the adjustment is needed, and submits 
to its Medicare contractor a copy of the FTE reduction statement by the 
hospital that closed its program, as specified in paragraph 
(d)(1)(iii)(F)(2)(ii) of this section.
    (ii) IPF that closed its program. An IPF that agrees to train 
residents who have been displaced by the closure of another IPF's 
program may receive a

[[Page 26466]]

temporary FTE cap adjustment only if the hospital with the closed 
program temporarily reduces its FTE cap based on the FTE residents in 
each program year training in the program at the time of the program's 
closure. This yearly reduction in the FTE cap will be determined based 
on the number of those residents who would have been training in the 
program during that year had the program not closed. No later than 60 
days after the residents who were in the closed program begin training 
at another hospital, the hospital with the closed program must submit 
to its Medicare contractor a statement signed and dated by its 
representative that specifies that it agrees to the temporary reduction 
in its FTE cap to allow the IPF training the displaced residents to 
obtain a temporary adjustment to its cap; identifies the residents who 
were in training at the time of the program's closure; identifies the 
IPFs to which the residents are transferring once the program closes; 
and specifies the reduction for the applicable program years.
* * * * *

0
6. Section 412.426 is amended by revising paragraph (a) to read as 
follows:

Sec.  412.426  Transition period.

    (a) Duration of transition period and composition of the blended 
transition payment. Except as provided in paragraph (c) of this 
section, for cost reporting periods beginning on or after January 1, 
2005 through December 31, 2007, an inpatient psychiatric facility 
receives a payment comprised of a blend of the estimated Federal per 
diem payment amount, as specified in Sec.  412.424(d) of this subpart 
and a facility-specific payment as specified under paragraph (b) of 
this section.
    (1) For cost reporting periods beginning on or after January 1, 
2005 and before January 1, 2006, payment is based on 75 percent of the 
facility-specific payment and 25 percent is based on the Federal per 
diem payment amount.
    (2) For cost reporting periods beginning on or after January 1, 
2006 and before January 1, 2007, payment is based on 50 percent of the 
facility-specific payment and 50 percent is based on the Federal per 
diem payment amount.
    (3) For cost reporting periods beginning on or after January 1, 
2007 and before January 1, 2008, payment is based on 25 percent of the 
facility-specific payment and 75 percent is based on the Federal per 
diem payment amount.
    (4) For cost reporting periods beginning on or after January 1, 
2008, payment is based entirely on the Federal per diem payment amount.
* * * * *

0
7. Section 412.432 is amended by revising paragraph (d) to read as 
follows:

Sec.  412.432  Method of payment under the inpatient psychiatric 
facility prospective payment system.

* * * * *
    (d) Outlier payments. Additional payments for outliers are not made 
on an interim basis. Outlier payments are made based on the submission 
of a discharge bill and represents final payment subject to the cost 
report settlement specified in Sec.  412.84(i) and Sec.  412.84(m) of 
this part.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)

    Dated: April 21, 2011.
Donald Berwick,
Administrator, Centers for Medicare & Medicaid Services.

    Approved: April 26, 2011.
Kathleen Sebelius,
Secretary.

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

BILLING CODE 4120-01-P

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[FR Doc. 2011-10562 Filed 4-28-11; 4:15 pm]
BILLING CODE 4120-01-C
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