24214 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Part 412 

[CMS–1349–P] 

RIN 0938–AQ28 

Medicare Program; Inpatient 

Rehabilitation Facility Prospective 

Payment System for Federal Fiscal 

Year 2012; Changes in Size and Square 

Footage of Inpatient Rehabilitation 

Units and Inpatient Psychiatric Units 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Proposed rule. 

SUMMARY: This proposed rule would 

implement section 3004 of the 

Affordable Care Act, which establishes 

a new quality reporting program that 

provides for a 2 percent reduction in the 

annual increase factor beginning in 2014 

for failure to report quality data to the 

Secretary of Health and Human 

Services. This proposed rule would also 

update the prospective payment rates 

for inpatient rehabilitation facilities 

(IRFs) for Federal fiscal year 2012 (for 

discharges occurring on or after October 

1, 2011 and on or before September 30, 

2012) as required by the Social Security 

Act (the Act). The Act requires the 

Secretary to publish in the Federal 

Register on or before the August 1 that 

precedes the start of each FY the 

classification and weighting factors for 

the IRF prospective payment system 

(PPS) case-mix groups and a description 

of the methodology and data used in 

computing the prospective payment 

rates for that fiscal year. We are also 

proposing to consolidate, clarify, and 

revise existing policies regarding IRF 

hospitals and IRF units of hospitals to 

eliminate unnecessary confusion and 

enhance consistency. Furthermore, in 

accordance with the general principles 

of the President’s January 18, 2011 

Executive Order entitled ‘‘Improving 

Regulation and Regulatory Review,’’ we 

are proposing to amend existing 

regulatory provisions regarding ‘‘new’’ 

facilities and changes in the bed size 

and square footage of IRFs and inpatient 

psychiatric facilities (IPFs) to improve 

clarity and remove obsolete material. 

DATES: To be assured consideration, 

comments must be received at one of 

the addresses provided below, no later 

than 5 p.m. on June 21, 2011. 

ADDRESSES: In commenting, please refer 

to file code CMS–1349–P. Because of 

staff and resource limitations, we cannot 

accept comments by facsimile (FAX) 

transmission. 

You may submit comments in one of 

four ways (please choose only one of the 

ways listed): 

1. Electronically. You may submit 

electronic comments on this regulation 

to http://www.regulations.gov. Follow 

the ‘‘Submit a comment’’ instructions. 

2. By regular mail. You may mail 

written comments to the following 

address only: Centers for Medicare & 

Medicaid Services, Department of 

Health and Human Services, Attention: 

CMS–1349–P, P.O. Box 8016, Baltimore, 

MD 21244–8016. 

Please allow sufficient time for mailed 

comments to be received before the 

close of the comment period. 

3. By express or overnight mail. You 

may send written comments to the 

following address only: Centers for 

Medicare & Medicaid Services, 

Department of Health and Human 

Services, Attention: CMS–1349–P, Mail 

Stop C4–26–05, 7500 Security 

Boulevard, Baltimore, MD 21244–1850. 

4. By hand or courier. If you prefer, 

you may deliver (by hand or courier) 

your written comments before the close 

of the comment period to either of the 

following addresses: a. For delivery in 

Washington, DC—Centers for Medicare 

& Medicaid Services, Department of 

Health and Human Services, Room 445– 

G, Hubert H. Humphrey Building, 200 

Independence Avenue, SW., 

Washington, DC 20201. 

(Because access to the interior of the 

Hubert H. Humphrey Building is not 

readily available to persons without 

Federal government identification, 

commenters are encouraged to leave 

their comments in the CMS drop slots 

located in the main lobby of the 

building. A stamp-in clock is available 

for persons wishing to retain a proof of 

filing by stamping in and retaining an 

extra copy of the comments being filed.) 

b. For delivery in Baltimore, MD— 

Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, 7500 Security 

Boulevard, Baltimore, MD 21244–1850. 

If you intend to deliver your 

comments to the Baltimore address, 

please call telephone number (410) 786– 

7195 in advance to schedule your 

arrival with one of our staff members. 

Comments mailed to the addresses 

indicated as appropriate for hand or 

courier delivery may be delayed and 

received after the comment period. 

Submission of comments on 

paperwork requirements. You may 

submit comments on this document’s 

paperwork requirements by following 

the instructions at the end of the 

‘‘Collection of Information 

Requirements’’ section in this document. 

For information on viewing public 

comments, see the beginning of the 

SUPPLEMENTARY INFORMATION section. 

FOR FURTHER INFORMATION CONTACT: 

Gwendolyn Johnson, (410) 786–6954, 

for general information about the 

proposed rule. 

Hillary Loeffler, (410) 786–0456, for 

information about the proposed 

payment rates. 

Stella R. Mandl, (410) 786–2547, for 

information about the proposed 

quality reporting program. 

Susanne Seagrave, (410) 786–0044, for 

information about the proposed 

payment policies. 

SUPPLEMENTARY INFORMATION: 

Inspection of Public Comments: All 

comments received before the close of 

the comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. We post all comments 

received before the close of the 

comment period on the following Web 

site as soon as possible after they have 

been received: http:// 

www.regulations.gov. Follow the search 

instructions on that Web site to view 

public comments. 

Comments received timely will also 

be available for public inspection as 

they are received, generally beginning 

approximately 3 weeks after publication 

of a document, at the headquarters of 

the Centers for Medicare & Medicaid 

Services, 7500 Security Boulevard, 

Baltimore, Maryland 21244, Monday 

through Friday of each week from 8:30 

a.m. to 4 p.m. To schedule an 

appointment to view public comments, 

phone 1–800–743–3951. 

Table of Contents 

To assist readers in referencing 

sections contained in this document, we 

are providing the following table of 

contents. 

I. Background 

A. Historical Overview of the Inpatient 

Rehabilitation Facility Prospective 

Payment System (IRF PPS) 

B. Provisions of the Affordable Care Act 

Affecting the IRF PPS in FY 2012 and 

Beyond 

C. Operational Overview of the Current IRF 

PPS 

II. Summary of Provisions of the Proposed 

Rule 

A. Proposed Updates to the IRF Federal 

Prospective Payment Rates for Federal 

Fiscal Year (FY) 2012 

B. Proposed Revisions to Existing 

Regulation Text 

III. Proposed Update to the Case-Mix Group 

(CMG) Relative Weights and Average 

Length of Stay Values for FY 2012 


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IV. Proposed Updates to the Facility-Level 

Adjustment Factors for FY 2012 

A. Proposed Updates to the IRF FacilityLevel Adjustment Factors 

B. Budget Neutrality Methodology for the 

Proposed Updates to the IRF FacilityLevel Adjustment Factors 

C. Proposed Policy for Temporary Cap 

Adjustments to Reflect Interns and 

Residents Displaced Due to Closure of 

IRFs or IRF Residency Training Programs 

1. Background 

2. Proposed FTE Intern and Resident 

Temporary Cap Adjustment 

3. Proposed Temporary Adjustment to the 

FTE Cap to Reflect Interns and Residents 

Displaced Due to IRF Closure 

4. Proposed Temporary Adjustment to the 

FTE Cap to Reflect Interns and Residents 

Displaced Due to a Residency Program 

Closure 

V. Proposed FY 2012 IRF PPS Federal 

Prospective Payment Rates 

A. Proposed Market Basket Increase Factor, 

Productivity Adjustment, and LaborRelated Share for FY 2012 

1. Proposed Rebasing of the RPL Market 

Basket for FY 2012 

2. Proposed Productivity Adjustment 

3. Proposed Calculation of the IRF PPS 

Market Basket Increase Factor for FY 

2012 

4. Proposed Calculation of the LaborRelated Share for FY 2012 

B. Proposed Area Wage Adjustment 

C. Description of the Proposed IRF 

Standard Conversion Factor and 

Payment Rates for FY 2012 

D. Example of the Methodology for 

Adjusting the Proposed Federal 

Prospective Payment Rates 

VI. Proposed Update to Payments for HighCost Outliers Under the IRF PPS 

A. Proposed Update to the Outlier 

Threshold Amount for FY 2012 

B. Proposed Update to the IRF Cost-toCharge Ratio Ceilings 

VII. Impact of the IPPS Data Matching 

Process Changes on the IRF PPS 

Calculation of the Low-Income 

Percentage Adjustment Factor 

VIII. Proposed Updates to the Policies in 42 

CFR 412 

A. Proposed Consolidation of the 

Requirements for Rehabilitation 

Hospitals and Rehabilitation Units 

B. Proposed Revisions to the Regulations at 

Proposed § 412.29 

C. Proposed Revisions to the Requirements 

for Changes in Bed Size and Square 

Footage 

D. Proposed Revisions to Enhance 

Consistency Between the IRF Coverage 

and Payment Requirements 

IX. Proposed Quality Reporting Program for 

IRFs 

A. Background and Statutory Authority 

B. Quality Measures for IRF Quality 

Reporting Program for FY 2014 

1. General 

2. Considerations in the Selection of the 

Proposed Quality Measures 

3. FY 2014 Measure #1: Healthcare 

Associated Infection Measure (HAI): 

Urinary Catheter-Associated Urinary 

Tract Infections (CAUTI) 

4. FY 2014 Measure #2: Percent of Patients 

with Pressure Ulcers that are New or 

Worsened 

5. Potential FY 2014 Measure #3: 30-Day 

Comprehensive All Cause Risk 

Standardized Readmission Measure 

C. Data Submission Requirements 

1. Proposed Method of Data Submission for 

HAI Measure (CAUTI) 

2. Proposed Method of Data Submission for 

the Percent of Patients with New or 

Worsened Pressure Ulcer Measure 

3. Potential Method of Data Submission for 

the 30-Day Comprehensive All-Cause 

Risk-Standardized Readmission Measure 

D. Public Reporting 

E. Quality Measures for Future 

Consideration for Determination of 

Increase Factors for Future Fiscal Year 

Payments 

F. Proposed New Regulation Text for the IRF 

Quality Reporting Program 

X. Collection of Information Requirements 

XI. Response to Public Comments 

XII. Economic Analyses 

A. Regulatory Impact Analysis 

1. Introduction 

2. Statement of Need 

3. Overall Impacts 

4. Detailed Economic Analysis 

5. Alternatives Considered 

6. Accounting Statement 

7. Conclusion 

B. Regulatory Flexibility Act Analysis 

C. Unfunded Mandates Reform Act 

Analysis 

XIII. Federalism Analysis 

Regulation Text 

Addendum 

Acronyms 

To assist the reader, we are listing the 

acronyms used and their corresponding 

meaning in alphabetical order. 

ADC Average Daily Census 

AHA American Hospital Association 

ASCA Administrative Simplification 

Compliance Act of 2002, Public Law 107– 

105 

BBA Balanced Budget Act of 1997, Public 

Law 105–33 

BBRA Medicare, Medicaid, and SCHIP 

[State Children’s Health Insurance 

Program] Balanced Budget Refinement Act 

of 1999, Public Law 106–113 

BEA Bureau of Economic Analysis 

BIPA Medicare, Medicaid, and SCHIP [State 

Children’s Health Insurance Program] 

Benefits Improvement and Protection Act 

of 2000, Public Law 106–554 

BLS Bureau of Labor Statistics 

CAH Critical Access Hospital 

CAUTI Catheter-Associated Urinary Tract 

Infection 

CDC Centers for Disease Control and 

Prevention 

CBSA Core-Based Statistical Area 

CCR Cost-to-Charge Ratio 

CFR Code of Federal Regulations 

CIPI Capital Input Price Index 

CMG Case-Mix Group 

CMS Centers for Medicare & Medicaid 

Services 

CPI Consumer Price Index 

DSH Disproportionate Share Hospital 

ECI Employment Cost Index 

EHR Electronic Health Record 

FI Fiscal Intermediary 

FR Federal Register 

FTE Full-time Equivalent 

FY Federal Fiscal Year 

GDP Gross Domestic Product 

GME Graduate Medical Education 

HAI Healthcare Associated Infection 

HHH Hubert H. Humphrey Building 

HHS Department of Health Human Services 

HIPAA Health Insurance Portability and 

Accountability Act of 1996, Public Law 

104–191 

HOMER Home Office Medicare Records 

IGI IHS Global Insight 

IME Indirect Medical Education 

I–O Input-Output 

IPF Inpatient Psychiatric Facility 

IPPS Inpatient Prospective Payment System 

IRF Inpatient Rehabilitation Facility 

IRF–PAI Inpatient Rehabilitation FacilityPatient Assessment Instrument 

IRF PPS Inpatient Rehabilitation Facility 

Prospective Payment System 

IRVEN Inpatient Rehabilitation Validation 

and Entry 

LTCH Long Term Care Hospital 

LIP Low-Income Percentage 

LOS Length of Stay 

MA Medicare Advantage 

MAC Medicare Administrative Contractor 

MedPAR Medicare Provider Analysis and 

Review 

MFP Multifactor Productivity 

MMSEA Medicare, Medicaid, and SCHIP 

Extension Act of 2007, Public Law 110–173 

MSA Metropolitan Statistical Area 

NAICS North American Industry 

Classification System 

NHSN National Healthcare Safety Network 

NQF National Quality Forum 

OMB Office of Management and Budget 

PLI Professional Liability Insurance 

PPI Producer Price Indexes 

PPS Prospective Payment System 

QM Quality Measure 

RFA Regulatory Flexibility Act of 1980, 

Public Law 96–354 

RIA Regulatory Impact Analysis 

RIC Rehabilitation Impairment Category 

RO Regional Office 

RP Rehabilitation and Psychiatric 

RPL Rehabilitation, Psychiatric, and LongTerm Care Hospital 

SCHIP State Children’s Health Insurance 

Program 

SSI Supplemental Security Income 

TEFRA Tax Equity and Fiscal Responsibility 

Act of 1982, Public Law 97–248 

I. Background 

A. Historical Overview of the Inpatient 

Rehabilitation Facility Prospective 

Payment System (IRF PPS) 

Section 4421 of the Balanced Budget 

Act of 1997 (Pub. L. 105–33, enacted on 

August 5, 1997) (BBA), as amended by 

section 125 of the Medicare, Medicaid, 

State Children’s Health Insurance 

Program (SCHIP) Balanced Budget 

Refinement Act of 1999 (Pub. L. 106– 

113, enacted on November 29, 1999) 

(BBRA) and by section 305 of the 


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Medicare, Medicaid, and SCHIP 

Benefits Improvement and Protection 

Act of 2000 (Pub. L. 106–554, enacted 

on December 21, 2000) (BIPA) provides 

for the implementation of a per 

discharge prospective payment system 

(PPS) under section 1886(j) of the Social 

Security Act (the Act) for inpatient 

rehabilitation hospitals and inpatient 

rehabilitation units of a hospital 

(hereinafter referred to as IRFs). 

Payments under the IRF PPS 

encompass inpatient operating and 

capital costs of furnishing covered 

rehabilitation services (that is, routine, 

ancillary, and capital costs) but not 

direct graduate medical education costs, 

costs of approved nursing and allied 

health education activities, bad debts, 

and other services or items outside the 

scope of the IRF PPS. Although a 

complete discussion of the IRF PPS 

provisions appears in the original FY 

2002 IRF PPS final rule (66 FR 41316) 

and the FY 2006 IRF PPS final rule (70 

FR 47880), we are providing below a 

general description of the IRF PPS for 

fiscal years (FYs) 2002 through 2010. 

Under the IRF PPS from FY 2002 

through FY 2005, as described in the FY 

2002 IRF PPS final rule (66 FR 41316), 

the Federal prospective payment rates 

were computed across 100 distinct casemix groups (CMGs). We constructed 95 

CMGs using rehabilitation impairment 

categories (RICs), functional status (both 

motor and cognitive), and age (in some 

cases, cognitive status and age may not 

be a factor in defining a CMG). In 

addition, we constructed five special 

CMGs to account for very short stays 

and for patients who expire in the IRF. 

For each of the CMGs, we developed 

relative weighting factors to account for 

a patient’s clinical characteristics and 

expected resource needs. Thus, the 

weighting factors accounted for the 

relative difference in resource use across 

all CMGs. Within each CMG, we created 

tiers based on the estimated effects that 

certain comorbidities would have on 

resource use. 

We established the Federal PPS rates 

using a standardized payment 

conversion factor (formerly referred to 

as the budget neutral conversion factor). 

For a detailed discussion of the budget 

neutral conversion factor, please refer to 

our FY 2004 IRF PPS final rule (68 FR 

45684 through 45685). In the FY 2006 

IRF PPS final rule (70 FR 47880), we 

discussed in detail the methodology for 

determining the standard payment 

conversion factor. 

We applied the relative weighting 

factors to the standard payment 

conversion factor to compute the 

unadjusted Federal prospective 

payment rates under the IRF PPS from 

FYs 2002 through 2005. Within the 

structure of the payment system, we 

then made adjustments to account for 

interrupted stays, transfers, short stays, 

and deaths. Finally, we applied the 

applicable adjustments to account for 

geographic variations in wages (wage 

index), the percentage of low-income 

patients, location in a rural area (if 

applicable), and outlier payments (if 

applicable) to the IRF’s unadjusted 

Federal prospective payment rates. 

For cost reporting periods that began 

on or after January 1, 2002 and before 

October 1, 2002, we determined the 

final prospective payment amounts 

using the transition methodology 

prescribed in section 1886(j)(1) of the 

Act. Under this provision, IRFs 

transitioning into the PPS were paid a 

blend of the Federal IRF PPS rate and 

the payment that the IRF would have 

received had the IRF PPS not been 

implemented. This provision also 

allowed IRFs to elect to bypass this 

blended payment and immediately be 

paid 100 percent of the Federal IRF PPS 

rate. The transition methodology 

expired as of cost reporting periods 

beginning on or after October 1, 2002 

(FY 2003), and payments for all IRFs 

now consist of 100 percent of the 

Federal IRF PPS rate. 

We established a CMS Website as a 

primary information resource for the 

IRF PPS. The Web site URL is http://

www.cms.gov/InpatientRehabFacPPS/ 

and may be accessed to download or 

view publications, software, data 

specifications, educational materials, 

and other information pertinent to the 

IRF PPS. 

Section 1886(j) of the Act confers 

broad statutory authority upon the 

Secretary to propose refinements to the 

IRF PPS. In the FY 2006 IRF PPS final 

rule (70 FR 47880) and in correcting 

amendments to the FY 2006 IRF PPS 

final rule (70 FR 57166) that we 

published on September 30, 2005, we 

finalized a number of refinements to the 

IRF PPS case-mix classification system 

(the CMGs and the corresponding 

relative weights) and the case-level and 

facility-level adjustments. These 

refinements included the adoption of 

the Office of Management and Budget’s 

(OMB) Core-Based Statistical Area 

(CBSA) market definitions, 

modifications to the CMGs, tier 

comorbidities, and CMG relative 

weights, implementation of a new 

teaching status adjustment for IRFs, 

revision and rebasing of the market 

basket index used to update IRF 

payments, and updates to the rural, lowincome percentage (LIP), and high-cost 

outlier adjustments. Beginning with the 

FY 2006 IRF PPS final rule (70 FR 47908 

through 47917), the market basket index 

used to update IRF payments is a market 

basket reflecting the operating and 

capital cost structures for freestanding 

IRFs, freestanding inpatient psychiatric 

facilities (IPFs), and long-term care 

hospitals (LTCHs) (hereafter referred to 

as the rehabilitation, psychiatric, and 

long-term care (RPL) market basket). 

Any reference to the FY 2006 IRF PPS 

final rule in this proposed rule also 

includes the provisions effective in the 

correcting amendments. For a detailed 

discussion of the final key policy 

changes for FY 2006, please refer to the 

FY 2006 IRF PPS final rule (70 FR 47880 

and 70 FR 57166). 

In the FY 2007 IRF PPS final rule (71 

FR 48354), we further refined the IRF 

PPS case-mix classification system (the 

CMG relative weights) and the caselevel adjustments, to ensure that IRF 

PPS payments would continue to reflect 

as accurately as possible the costs of 

care. For a detailed discussion of the FY 

2007 policy revisions, please refer to the 

FY 2007 IRF PPS final rule (71 FR 

48354). 

In the FY 2008 IRF PPS final rule 

(72 FR 44284), we updated the Federal 

prospective payment rates and the 

outlier threshold, revised the IRF wage 

index policy, and clarified how we 

determine high-cost outlier payments 

for transfer cases. For more information 

on the policy changes implemented for 

FY 2008, please refer to the FY 2008 IRF 

PPS final rule (72 FR 44284), in which 

we published the final FY 2008 IRF 

Federal prospective payment rates. 

After publication of the FY 2008 IRF 

PPS final rule (72 FR 44284), section 

115 of the Medicare, Medicaid, and 

SCHIP Extension Act of 2007 (Pub. L. 

110–173, enacted on December 29, 

2007) (MMSEA), amended section 

1886(j)(3)(C) of the Act to apply a zero 

percent increase factor for FYs 2008 and 

2009, effective for IRF discharges 

occurring on or after April 1, 2008. 

Section 1886(j)(3)(C) of the Act required 

the Secretary to develop an increase 

factor to update the IRF Federal 

prospective payment rates for each FY. 

Based on the legislative change to the 

increase factor, we revised the FY 2008 

Federal prospective payment rates for 

IRF discharges occurring on or after 

April 1, 2008. Thus, the final FY 2008 

IRF Federal prospective payment rates 

that were published in the FY 2008 IRF 

PPS final rule (72 FR 44284) were 

effective for discharges occurring on or 

after October 1, 2007 and on or before 

March 31, 2008; and the revised FY 

2008 IRF Federal prospective payment 

rates were effective for discharges 

occurring on or after April 1, 2008 and 

on or before September 30, 2008. The 


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revised FY 2008 Federal prospective 

payment rates are available on the CMS 

Web site at http://www.cms.gov/

InpatientRehabFacPPS/07_

DataFiles.asp#TopOfPage. 

In the FY 2009 IRF PPS final rule 

(73 FR 46370), we updated the CMG 

relative weights, the average length of 

stay values, and the outlier threshold; 

clarified IRF wage index policies 

regarding the treatment of ‘‘New 

England deemed’’ counties and multicampus hospitals; and revised the 

regulation text in response to section 

115 of the MMSEA to set the IRF 

compliance percentage at 60 percent 

(‘‘the 60 percent rule’’) and continue the 

practice of including comorbidities in 

the calculation of compliance 

percentages. We also applied a zero 

percent market basket increase factor for 

FY 2009 in accordance with section 115 

of the MMSEA. For more information on 

the policy changes implemented for FY 

2009, please refer to the FY 2009 IRF 

PPS final rule (73 FR 46370), in which 

we published the final FY 2009 IRF 

Federal prospective payment rates. 

In the FY 2010 IRF PPS final rule 

(74 FR 39762) and in correcting 

amendments to the FY 2010 IRF PPS 

final rule (74 FR 50712) that we 

published on October 1, 2009, we 

updated the Federal prospective 

payment rates, the CMG relative 

weights, the average length of stay 

values, the rural, LIP, and teaching 

status adjustment factors, and the 

outlier threshold; implemented new IRF 

coverage requirements for determining 

whether an IRF claim is reasonable and 

necessary; and revised the regulation 

text to require IRFs to submit patient 

assessments on Medicare Advantage 

(MA) (Medicare Part C) patients for use 

in the 60 percent rule calculations. Any 

reference to the FY 2010 IRF PPS final 

rule in this proposed rule also includes 

the provisions effective in the correcting 

amendments. For more information on 

the policy changes implemented for FY 

2010, please refer to the FY 2010 IRF 

PPS final rule (74 FR 39762 and 74 FR 

50712), in which we published the final 

FY 2010 IRF Federal prospective 

payment rates. 

After publication of the FY 2010 IRF 

PPS final rule (74 FR 39762), section 

3401(d) of the Patient Protection and 

Affordable Care Act (Pub. L. 111–148, 

enacted on March 23, 2010) as amended 

by section 10319 of the same Act and by 

section 1105 of the Health Care and 

Education Reconciliation Act of 2010 

(Pub. L. 111–152, enacted on March 30, 

2010) (collectively, hereafter referred to 

as ‘‘The Affordable Care Act’’), amended 

section 1886(j)(3)(C) of the Act and 

added section 1886(j)(3)(D) of the Act. 

Section 1886(j)(3)(C) of the Act requires 

the Secretary to estimate a multi-factor 

productivity adjustment to the market 

basket increase factor, and to apply 

other adjustments as defined by the Act. 

The productivity adjustment applies to 

FYs from 2012 forward. The other 

adjustments apply to FYs 2010–2019. 

Sections 1886(j)(3)(C)(ii)(II) and 

1886(j)(3)(D)(i) of the Act defined the 

adjustments that were to be applied to 

the market basket increase factors in 

FYs 2010 and 2011. Under these 

provisions, the Secretary was required 

to reduce the market basket increase 

factor in FY 2010 by a 0.25 percentage 

point adjustment. Notwithstanding this 

provision, in accordance with section 

3401(p) of the Affordable Care Act, the 

adjusted FY 2010 rate was only to be 

applied to discharges occurring on or 

after April 1, 2010. Based on the selfimplementing legislative changes to 

section 1886(j)(3) of the Act, we 

adjusted the FY 2010 Federal 

prospective payment rates as required, 

and applied these rates to IRF 

discharges occurring on or after April 1, 

2010 and on or before September 30, 

2010. Thus, the final FY 2010 IRF 

Federal prospective payment rates that 

were published in the FY 2010 IRF PPS 

final rule (74 FR 39762) were used for 

discharges occurring on or after October 

1, 2009 and on or before March 31, 

2010; and the adjusted FY 2010 IRF 

Federal prospective payment rates 

applied to discharges occurring on or 

after April 1, 2010 and on or before 

September 30, 2010. The adjusted FY 

2010 Federal prospective payment rates 

are available on the CMS Web site at 

http://www.cms.gov/InpatientRehab

FacPPS/07_DataFiles.asp#TopOfPage. 

In addition, sections 1886(j)(3)(C) and 

(D) of the Act also affected the FY 2010 

IRF outlier threshold amount because 

they required an adjustment to the FY 

2010 RPL market basket increase factor, 

which changed the standard payment 

conversion factor for FY 2010. 

Specifically, the original FY 2010 IRF 

outlier threshold amount was 

determined based on the original 

estimated FY 2010 RPL market basket 

increase factor of 2.5 percent and the 

standard payment conversion factor of 

$13,661. However, as adjusted, the IRF 

prospective payments are based on the 

adjusted RPL market basket increase 

factor of 2.25 percent and the revised 

standard payment conversion factor of 

$13,627. To maintain estimated outlier 

payments for FY 2010 equal to the 

established standard of 3 percent of total 

estimated IRF PPS payments for FY 

2010, we revised the IRF outlier 

threshold amount for FY 2010 for 

discharges occurring on or after April 1, 

2010 and on or before September 30, 

2010. The revised IRF outlier threshold 

amount for FY 2010 was $10,721. 

Sections 1886(j)(3)(ii)(II) and 

1886(j)(3)(D)(i) also required the 

Secretary to reduce the market basket 

increase factor in FY 2011 by a 0.25 

percentage point adjustment. The FY 

2011 IRF PPS notice (75 FR 42836) and 

the correcting amendments to the FY 

2011 IRF PPS notice (75 FR 70013, 

November 16, 2010) described the 

required adjustments to the FY 2011 

and FY 2010 IRF PPS Federal 

prospective payment rates and outlier 

threshold amount for IRF discharges 

occurring on or after April 1, 2010 and 

on or before September 30, 2011. It also 

updated the FY 2011 Federal 

prospective payment rates, the CMG 

relative weights, and the average length 

of stay values. Any reference to the FY 

2011 IRF PPS notice in this proposed 

rule also includes the provisions 

effective in the correcting amendments. 

For more information on the FY 2010 

and FY 2011 adjustments or the updates 

for FY 2011, please refer to the FY 2011 

IRF PPS notice (75 FR 42836 and 75 FR 

70013). 

B. Provisions of the Affordable Care Act 

Affecting the IRF PPS in FY 2012 and 

Beyond 

The Affordable Care Act included 

several provisions that affect IRF PPS in 

FYs 2012 and beyond. In addition to 

what was discussed above, section 

3401(d) of the Affordable Care Act also 

added section 1886(j)(3)(C)(ii)(I) 

(providing for a ‘‘productivity’’ 

adjustment’’ for fiscal year 2012 and 

each subsequent fiscal year). The 

proposed productivity adjustment for 

FY 2012 is discussed in section V.A.6. 

of this proposed rule, and the 0.1 

percentage point adjustment is 

discussed in section V.A of this 

proposed rule. Section 

1886(j)(3)(C)(ii)(II) of the Act notes that 

the application of these adjustments to 

the market basket update may result in 

an update that is less than 0.0 for a fiscal 

year and in payment rates for a fiscal 

year being less than such payment rates 

for the preceding fiscal year. 

Section 3004(b) of the Affordable Care 

Act also addressed the IRF PPS 

program. It reassigned the previouslydesignated section 1886(j)(7) of the Act 

to section 1886(j)(8) and inserted a new 

section 1886(j)(7), which contains new 

requirements for the Secretary to 

establish a quality reporting program for 

IRFs. Under that program, data must be 

submitted in a form and manner, and at 

a time specified by the Secretary. 

Beginning in FY 2014, section 

1886(j)(7)(A)(i) will require application 


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of a 2 percentage point reduction of the 

applicable market basket increase factor 

for IRFs that fail to comply with the 

quality data submission requirements. 

Application of the 2 percentage point 

reduction may result in an update that 

is less than 0.0 for a fiscal year and in 

payment rates for a fiscal year being less 

than such payment rates for the 

preceding fiscal year. Reporting-based 

reductions to the market basket increase 

factor will not be cumulative; they will 

only apply for the FY involved. 

Under section 1886(j)(7)(D)(i) and (ii) 

of the Act, the Secretary is generally 

required to select quality measures for 

the IRF quality reporting program from 

those that have been endorsed by the 

consensus-based entity which holds a 

performance measurement contract 

under section 1890(a) of the Act. This 

contract is currently held by the 

National Quality Forum (NQF). So long 

as due consideration is given to 

measures that have been endorsed or 

adopted by a consensus-based 

organization, section 1886(j)(7)(D)(ii) of 

the Act authorizes the Secretary to 

select non-endorsed measures for 

specified areas or medical topics when 

there are no feasible or practical 

endorsed measure(s). Under section 

1886(j)(7)(D)(iii) of the Act, the 

Secretary is required to publish the 

measures that will be used in FY 2014 

no later than October 1, 2012. 

Section 1886(j)(7)(E) of the Act 

requires the Secretary to establish 

procedures for making the IRF PPS 

quality reporting data available to the 

public. In so doing, the Secretary must 

ensure that IRFs have the opportunity to 

review any such data prior to its release 

to the public. Future rulemaking will 

address these public reporting 

obligations. 

The proposed quality reporting 

program for IRFs, in accordance with 

section 1886(j)(7) of the Act, is 

discussed in detail in section IX. of this 

proposed rule. 

C. Operational Overview of the Current 

IRF PPS 

As described in the FY 2002 IRF PPS 

final rule, upon the admission and 

discharge of a Medicare Part A fee-forservice patient, the IRF is required to 

complete the appropriate sections of a 

patient assessment instrument, 

designated as the Inpatient 

Rehabilitation Facility-Patient 

Assessment Instrument (IRF–PAI). In 

addition, beginning with IRF discharges 

occurring on or after October 1, 2009, 

the IRF is also required to complete the 

appropriate sections of the IRF–PAI 

upon the admission and discharge of 

each Medicare Part C (Medicare 

Advantage) patient, as described in the 

FY 2010 IRF PPS final rule. All required 

data must be electronically encoded into 

the IRF–PAI software product. 

Generally, the software product 

includes patient classification 

programming called the GROUPER 

software. The GROUPER software uses 

specific IRF–PAI data elements to 

classify (or group) patients into distinct 

CMGs and account for the existence of 

any relevant comorbidities. 

The GROUPER software produces a 

5-digit CMG number. The first digit is 

an alpha-character that indicates the 

comorbidity tier. The last 4 digits 

represent the distinct CMG number. 

Free downloads of the Inpatient 

Rehabilitation Validation and Entry 

(IRVEN) software product, including the 

GROUPER software, are available on the 

CMS Web site at http://www.cms.gov/

InpatientRehabFacPPS/06_

Software.asp. 

Once a patient is discharged, the IRF 

submits a Medicare claim as a Health 

Insurance Portability and 

Accountability Act of 1996 (Pub. L. 

104–191, enacted on August 21, 1996) 

(HIPAA), compliant electronic claim or, 

if the Administrative Simplification 

Compliance Act of 2002 (Pub. L. 107– 

105, enacted on December 27, 2002) 

(ASCA) permits, a paper claim (a UB– 

04 or a CMS–1450 as appropriate) using 

the five-digit CMG number and sends it 

to the appropriate Medicare fiscal 

intermediary (FI) or Medicare 

Administrative Contractor (MAC). 

Claims submitted to Medicare must 

comply with both ASCA and HIPAA. 

Section 3 of the ASCA amends section 

1862(a) of the Act by adding paragraph 

(22) which requires the Medicare 

program, subject to section 1862(h) of 

the Act, to deny payment under Part A 

or Part B for any expenses for items or 

services ‘‘for which a claim is submitted 

other than in an electronic form 

specified by the Secretary.’’ Section 

1862(h) of the Act, in turn, provides that 

the Secretary shall waive such denial in 

situations in which there is no method 

available for the submission of claims in 

an electronic form or the entity 

submitting the claim is a small provider. 

In addition, the Secretary also has the 

authority to waive such denial ‘‘in such 

unusual cases as the Secretary finds 

appropriate.’’ For more information, see 

the ‘‘Medicare Program; Electronic 

Submission of Medicare Claims’’ final 

rule (70 FR 71008, November 25, 2005). 

CMS instructions for the limited 

number of Medicare claims submitted 

on paper are available at http://

www.cms.gov/manuals/downloads/

clm104c25.pdf. 

Section 3 of the ASCA operates in the 

context of the administrative 

simplification provisions of HIPAA, 

which include, among others, the 

requirements for transaction standards 

and code sets codified in 45 CFR, parts 

160 and 162, subparts A and I through 

R (generally known as the Transactions 

Rule). The Transactions Rule requires 

covered entities, including covered 

healthcare providers, to conduct 

covered electronic transactions 

according to the applicable transaction 

standards. (See the CMS program claim 

memoranda at http://www.cms.gov/

ElectronicBillingEDITrans/ and listed in 

the addenda to the Medicare 

Intermediary Manual, Part 3, section 

3600). 

The Medicare FI or MAC processes 

the claim through its software system. 

This software system includes pricing 

programming called the ‘‘PRICER’’ 

software. The PRICER software uses the 

CMG number, along with other specific 

claim data elements and providerspecific data, to adjust the IRF’s 

prospective payment for interrupted 

stays, transfers, short stays, and deaths, 

and then applies the applicable 

adjustments to account for the IRF’s 

wage index, percentage of low-income 

patients, rural location, and outlier 

payments. For discharges occurring on 

or after October 1, 2005, the IRF PPS 

payment also reflects the new teaching 

status adjustment that became effective 

as of FY 2006, as discussed in the FY 

2006 IRF PPS final rule (70 FR 47880). 

II. Summary of Provisions of the 

Proposed Rule 

In this proposed rule, we are 

proposing to update the IRF Federal 

prospective payment rates, to rebase and 

revise the RPL market basket, to 

implement refinements to the 

methodologies for calculating the LIP 

adjustment, and to establish a new 

quality reporting program for IRFs in 

accordance with section 1886(j)(7) of the 

Act. We are also proposing to revise 

existing regulations text for the purpose 

of updating and providing greater 

clarity. These proposals are as follows: 

A. Proposed Updates to the IRF Federal 

Prospective Payment Rates for Federal 

Fiscal Year (FY) 2012 

The proposed updates to the IRF 

Federal prospective payment rates for 

FY 2012 are as follows: 

• Update the FY 2012 IRF PPS 

relative weights and average length of 

stay values using the most current and 

complete Medicare claims and cost 

report data in a budget neutral manner, 

as discussed in section III. of this 

proposed rule. 


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• Update the FY 2012 IRF facilitylevel adjustments (rural, LIP, and 

teaching status adjustments) in a budget 

neutral manner using the most current 

and complete Medicare claims and cost 

report data and by removing the 

weighting methodology previously used 

to analyze such data, and propose a 

temporary cap adjustment policy for the 

teaching status adjustment to reflect 

interns and residents displaced due to 

closure of IRFs or IRF residency training 

programs, as discussed in section IV. of 

this proposed rule. 

• Update the FY 2012 IRF PPS 

payment rates by the proposed market 

basket increase factor, based upon the 

most current data available, with a 0.1 

percentage point reduction as required 

by sections 1886(j)(3)(C)(ii)(II) and 

1886(j)(3)(D)(ii) of the Act and a 

productivity adjustment required by 

section 1886(j)(3)(C)(ii)(I) of the Act, as 

described in section V. of this proposed 

rule. 

• Update the wage index and the 

labor-related share of the FY 2012 IRF 

PPS payment rates in a budget neutral 

manner, as discussed in section V. of 

this proposed rule. 

• Calculate the IRF Standard Payment 

Conversion Factor for FY 2012, as 

discussed in section V. of this proposed 

rule. 

• Update the outlier threshold 

amount for FY 2012, as discussed in 

section VI. of this proposed rule. 

• Update the cost-to-charge ratio 

(CCR) ceiling and urban/rural average 

CCRs for FY 2012, as discussed in 

section VI. of this proposed rule. 

• Discuss the impact of the IPPS data 

matching process changes on the IRF 

PPS calculation of the Supplemental 

Security Income (SSI) ratios used to 

compute the IRF LIP adjustment factor, 

as discussed in section VII. of this 

proposed rule. 

• Implement the IRF quality reporting 

program provisions of section 1886(j)(7) 

of the Act, as discussed in section IX. of 

this proposed rule. 

B. Proposed Revisions to Existing 

Regulation Text 

In this proposed rule, we are 

proposing to revise the existing 

requirements at § 412.25(b), 

§ 412.25(b)(1), § 412.25(b)(2), 

§ 412.25(b)(3), and § 412.25(e)(2)(ii)(A) 

that apply to all units that are excluded 

from the inpatient prospective payment 

system (IPPS), as described in section 

VIII. of this proposed rule. These 

proposed revisions would affect IRFs 

and inpatient psychiatric facilities 

(IPFs). 

We are also proposing to relocate and 

revise the existing requirements at 

§ 412.23(b), § 412.29, and § 412.30 that 

describe the requirements for facilities 

to qualify to receive payment under the 

IRF PPS, as described in section VIII. of 

this proposed rule. 

Finally, we are proposing to redesignate the existing paragraph 

§ 412.624(c)(4) as § 412.624(c)(5) and 

add a new paragraph § 412.624(c)(4) to 

implement the IRF quality reporting 

program. 

III. Proposed Update to the Case-Mix 

Group (CMG) Relative Weights and 

Average Length of Stay Values for FY 

2012 

As specified in § 412.620(b)(1), we 

calculate a relative weight for each CMG 

that is proportional to the resources 

needed by an average inpatient 

rehabilitation case in that CMG. For 

example, cases in a CMG with a relative 

weight of 2, on average, will cost twice 

as much as cases in a CMG with a 

relative weight of 1. Relative weights 

account for the variance in cost per 

discharge due to the variance in 

resource utilization among the payment 

groups, and their use helps to ensure 

that IRF PPS payments support 

beneficiary access to care, as well as 

provider efficiency. 

In this proposed rule, we propose to 

update the CMG relative weights and 

average length of stay values for FY 

2012. As required by statute, we always 

use the most recent available data to 

update the CMG relative weights and 

average lengths of stay. This ensures 

that the CMG relative weights and 

average length of stay values reflect as 

accurately as possible the current costs 

of care in IRFs. For FY 2012, we are 

proposing to use the FY 2010 IRF claims 

and FY 2009 IRF cost report data. These 

data are the most current and complete 

data available at this time. Currently, 

only a small portion of the FY 2010 IRF 

cost report data are available for 

analysis, but the majority of the FY 2010 

IRF claims data are available for 

analysis. 

In this proposed rule, we propose to 

use the same methodology that we used 

to update the CMG relative weights and 

average length of stay values in the FY 

2009 IRF PPS final rule (73 FR 46370), 

which we also used to update the CMG 

relative weights and average length of 

stay values in the FY 2010 IRF PPS final 

rule (74 FR 39762) and the FY 2011 

notice (75 FR 42836). 

In calculating the CMG relative 

weights, we use a hospital-specific 

relative value method to estimate 

operating (routine and ancillary 

services) and capital costs of IRFs. The 

process used to calculate the CMG 

relative weights for this proposed rule is 

as follows: 

Step 1. We estimate the effects that 

comorbidities have on costs. 

Step 2. We adjust the cost of each 

Medicare discharge (case) to reflect the 

effects found in the first step. 

Step 3. We use the adjusted costs from 

the second step to calculate CMG 

relative weights, using the hospitalspecific relative value method. 

Step 4. We normalize the FY 2012 

CMG relative weights to the same 

average CMG relative weight from the 

CMG relative weights implemented in 

the FY 2011 IRF PPS notice (75 FR 

42836). 

Consistent with the methodology that 

we have used to update the IRF 

classification system in each instance in 

the past, we are proposing to update the 

CMG relative weights for FY 2012 in 

such a way that total estimated 

aggregate payments to IRFs for FY 2012 

are the same with or without the 

changes (that is, in a budget neutral 

manner) by applying a budget neutrality 

factor to the standard payment amount. 

To calculate the appropriate proposed 

budget neutrality factor for use in 

updating the FY 2012 CMG relative 

weights, we propose to use the 

following steps: 

Step 1. Calculate the estimated total 

amount of IRF PPS payments for FY 

2012 (with no proposed changes to the 

CMG relative weights). 

Step 2. Calculate the estimated total 

amount of IRF PPS payments for FY 

2012 by applying the proposed changes 

to the CMG relative weights (as 

discussed above). 

Step 3. Divide the amount calculated 

in step 1 by the amount calculated in 

step 2 to determine the proposed budget 

neutrality factor (0.9989) that would 

maintain the same total estimated 

aggregate payments in FY 2012 with and 

without the proposed changes to the 

CMG relative weights. 

Step 4. Apply the proposed budget 

neutrality factor (0.9989) to the FY 2011 

IRF PPS standard payment amount after 

the application of the budget-neutral 

wage adjustment factor. 

In section V.C. of this proposed rule, 

we discuss the proposed use of the 

existing methodology to calculate the 

standard payment conversion factor for 

FY 2012. 

Table 1, ‘‘Proposed Relative Weights 

and Average Length of Stay Values for 

Case-Mix Groups,’’ presents the CMGs, 

the comorbidity tiers, the proposed 

corresponding relative weights, and the 

proposed average length of stay values 

for each CMG and tier for FY 2012. The 

average length of stay for each CMG is 

used to determine when an IRF 


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discharge meets the definition of a 

short-stay transfer, which results in a 

per diem case level adjustment. The 

proposed relative weights and average 

length of stay values shown in Table 1 

are subject to change for the final rule 

if more recent data become available for 

use in these analyses. 


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Generally, updates to the CMG 

relative weights result in some increases 

and some decreases to the CMG relative 

weight values. Table 2 shows how the 

application of the proposed revisions for 

FY 2012 would affect particular CMG 

relative weight values, which affect the 

overall distribution of payments within 

CMGs and tiers. Note that, because we 

propose to implement the CMG relative 

weight revisions in a budget neutral 

manner (as described above), total 

estimated aggregate payments to IRFs 

for FY 2012 would not be affected as a 

result of the CMG relative weight 

revisions. However, the proposed 

revisions would affect the distribution 

of payments within CMGs and tiers. 

As Table 2 shows, 97 percent of all 

IRF cases are in CMGs and tiers that 

would experience less than a 5 percent 

change (either increase or decrease) in 

the CMG relative weight value as a 

result of the proposed revisions for FY 

2012. The largest increase in the 

proposed CMG relative weight values 

that affects a particularly large number 

of IRF discharges is a 1.7 percent 

increase in the CMG relative weight 

value for CMG A0704—Fracture of 

Lower Extremity with a motor score of 

less than 28.15—in the ‘‘no comorbidity’’ 

tier. In the FY 2010 data, 24,162 IRF 

discharges were classified into this CMG 

and tier. The largest decrease in a CMG 

relative weight value that affects a 

particularly large number of IRF 

discharges is a 0.7 percent decrease in 

the CMG relative weight for CMG 

A0110—Stroke, with a motor score of 

less than 22.35 and a patient age of less 

than 84.5 years in the ‘‘no comorbidity’’ 

tier. In the FY 2010 IRF claims data, this 

change affects 16,975 cases. 


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Given the changes in IRFs’ case mix 

over time, we believe that it is important 

to update the CMG relative weights and 

average length of stay (LOS) values 

periodically to continue to reflect the 

trends in IRF patient populations. As we 

have more recent data that better reflect 

IRFs’ case mix at this time, we propose 

the updates described in this section. 

IV. Proposed Updates to the FacilityLevel Adjustment Factors for FY 2012 

A. Proposed Updates to the IRF FacilityLevel Adjustment Factors 

Section 1886(j)(3)(A)(v) of the Act 

confers broad authority upon the 

Secretary to adjust the per unit payment 

rate ‘‘by such * * * factors as the 

Secretary determines are necessary to 

properly reflect variations in necessary 

costs of treatment among rehabilitation 

facilities.’’ For example, we adjust the 

Federal prospective payment amount 

associated with a CMG to account for 

facility-level characteristics such as an 

IRF’s LIP, teaching status, and location 

in a rural area, if applicable, as 

described in § 412.624(e). 

In the FY 2010 IRF PPS final rule (74 

FR 39762), we updated the adjustment 

factors for calculating the rural, LIP, and 

teaching status adjustments based on 

the most recent three consecutive years 

worth of IRF claims data (at that time, 

FY 2006, FY 2007, and FY 2008) and the 

most recent available corresponding IRF 

cost report data. As discussed in the FY 

2010 IRF PPS proposed rule (74 FR 

21060 through 21061), we observed 

relatively large year-to-year fluctuations 

in the underlying data used to compute 

the adjustment factors, especially the 

teaching status adjustment factor. 

Therefore, we implemented a three-year 

moving average approach to updating 

the facility-level adjustment factors in 

the FY 2010 IRF PPS final rule (74 FR 

39762) to provide greater stability and 

predictability of Medicare payments for 

IRFs. 

Though the 3-year moving average 

approach that we implemented in FY 

2010 improves the year-to-year stability 

and predictability of the facility-level 

adjustment factors, we have continued 

to estimate unusually large year-to-year 

fluctuations in the teaching status 

adjustment factor. To determine the 

underlying reasons for these large yearto-year fluctuations in the teaching 

status adjustment factor, we analyzed 

the data and reviewed the methodology 

that we were using to estimate all three 

of the facility-level adjustment factors 

(that is, the rural, the LIP, and the 

teaching status adjustment factors). We 

found that the unusually large year-toyear fluctuations in the teaching status 

adjustment factors were the result of a 

weighting methodology that we have 

been applying to the regression analysis 

used to estimate the facility-level 

adjustment factors since the 

implementation of the IRF PPS. This 

weighted regression methodology 

assigns greater weight to some facilities 

than to others and, in effect, exaggerates 

the differences among different types of 

IRF facilities. While this weighted 

regression methodology was appropriate 

when the IRF PPS was first being 

developed because we had limited data 

on which to base the initial facility-level 

adjustment factors, we believe that a 

more appropriate and conservative 

approach for the current IRF PPS is to 

assign equal weight to all facilities in 

the regression analysis that is used to 

estimate all of the IRF facility-level 

adjustment factors (that is, the rural, 

LIP, and teaching status adjustment 

factors). Thus, we propose to remove the 

weighting methodology from our 

analysis of the facility-level adjustment 

factors and update the IRF facility-level 

adjustment factors for FY 2012 using an 

unweighted regression analysis. The 

primary effect of the proposed change in 

methodology is to stabilize all three of 

the facility-level adjustment factors (that 

is, the rural, the LIP, and the teaching 

status adjustment factor) over time. 

However, the proposed change in the 

methodology also has a relatively large 

effect on our estimate of the LIP 

adjustment factor that we discuss in this 

section. 

To update the facility-level 

adjustment factors for FY 2012, we 

propose using updated data (FY 2008, 

FY 2009, and 2010 IRF claims data and 

the corresponding year’s cost report data 

or, if unavailable, the most recent 

available cost report data). To analyze 

the updated data, we propose to use a 

revised methodology from the 

methodology that we used to update the 

facility-level adjustment factors in the 

FY 2010 IRF PPS final rule (74 FR 

39762). The revised methodology would 

remove a weighting factor from the 

regression analysis and, instead, assign 

equal weight to all facilities in the 

regression analysis. Based on analysis of 

the updated data using the proposed 

unweighted regression analysis and the 

3-year moving average approach, we 

estimate that IRF PPS payments to IRFs 

in rural areas would be increased by 

18.7 percent for FY 2012. In addition, to 

account for the percentage of lowincome patients that an IRF treats, we 

estimate that IRF PPS payments for FY 

2012 would be adjusted using an 

updated LIP adjustment formula of (1 + 

disproportionate share hospital (DSH) 

patient percentage) raised to the power 

of (0.1897), where the— 

Note that the proposed LIP 

adjustment factor of 0.1897 is 

substantially lower than the current LIP 

adjustment factor of 0.4613 due to the 

use of updated data and the proposed 

use of the unweighted regression 

methodology, which would give equal 

weight to all facilities in the regression. 

Finally, we estimate that IRF PPS 

payments to eligible IRFs that qualify 

for the teaching status adjustment will 

be adjusted by the following updated 

formula for FY 2012: (1 + full-time 

equivalent (FTE) interns and residents/ 

average daily census) raised to the 

power of (0.4888). To calculate the 

proposed updates to the rural, LIP, and 

teaching status adjustment factors for 

FY 2012, we used the following steps: 

[Steps 1 and 2 are performed 

independently for each of 3 years of 

IRF claims data: FY 2008, FY 2009, 

and FY 2010] 

Step 1. Calculate the average cost per 

case for each IRF in the IRF claims data. 

Step 2. Use logarithmic regression 

analysis on average cost per case to 

compute the coefficients for the rural, 

LIP, and teaching status adjustments. 

For FY 2012, we are proposing to 

update the logarithmic regression 

analysis so that we no longer apply 

weights to the analysis. The proposed 

unweighted regression analysis gives 

equal weight to all facilities in the 

regression analysis. 

Step 3. Calculate a simple mean for 

each of the coefficients across the 3 

years of data using logarithms for the 

LIP and teaching status adjustment 

coefficients (because they are 

continuous variables), but not for the 

rural adjustment coefficient (because the 

rural variable is either zero (if not rural) 

or 1 (if rural)). To compute the proposed 


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LIP and teaching status adjustment 

factors, we convert these factors back 

out of the logarithmic form. 

The proposed adjustment factors are 

subject to change for the final rule if 

more recent data become available for 

use in these analyses. 

B. Budget Neutrality Methodology for 

the Proposed Updates to the IRF 

Facility-Level Adjustment Factors 

Consistent with the way that we 

implemented changes to the IRF facilitylevel adjustment factors (the rural, LIP, 

and teaching status adjustment factors) 

in the FY 2006 and FY 2010 IRF PPS 

final rules (70 FR 47880, 70 FR 57166, 

and 74 FR 39762), we propose to make 

changes to the rural, LIP, and teaching 

status adjustment factors for FY 2012 in 

such a way that total estimated 

aggregate payments to IRFs for FY 2012 

would be the same with or without the 

proposed changes (that is, in a budget 

neutral manner) by applying budget 

neutrality factors for each of these three 

changes to the standard payment 

amount. To calculate the proposed 

budget neutrality factors used to update 

the rural, LIP, and teaching status 

adjustment factors, we propose to use 

the following steps: 

Step 1. Using the most recent 

available data (currently FY 2010), 

calculate the estimated total amount of 

IRF PPS payments that would be made 

in FY 2012 (without applying the 

proposed changes to the rural, LIP, or 

teaching status adjustment factors). 

Step 2. Calculate the estimated total 

amount of IRF PPS payments that would 

be made in FY 2012 if the proposed 

update to the rural adjustment factor 

were applied. 

Step 3. Divide the amount calculated 

in step 1 by the amount calculated in 

step 2 to determine the proposed budget 

neutrality factor (0.9998) that would 

maintain the same total estimated 

aggregate payments in FY 2012 with and 

without the proposed change to the 

rural adjustment factor. 

Step 4. Calculate the estimated total 

amount of IRF PPS payments that would 

be made in FY 2012 if the proposed 

update to the LIP adjustment factor were 

applied. 

Step 5. Divide the amount calculated 

in step 1 by the amount calculated in 

step 4 to determine the proposed budget 

neutrality factor (1.0327) that would 

maintain the same total estimated 

aggregate payments in FY 2012 with and 

without the proposed change to the LIP 

adjustment factor. 

Step 6. Calculate the estimated total 

amount of IRF PPS payments that would 

be made in FY 2012 if the proposed 

update to the teaching status adjustment 

factor were applied. 

Step 7. Divide the amount calculated 

in step 1 by the amount calculated in 

step 6 to determine the proposed budget 

neutrality factor (1.0024) that would 

maintain the same total estimated 

aggregate payments in FY 2012 with and 

without the proposed change to the 

teaching status adjustment factor. 

Step 8. Apply the proposed budget 

neutrality factors for the updates to the 

rural, LIP, and teaching status 

adjustment factors to the FY 2011 IRF 

PPS standard payment amount after the 

application of the proposed budget 

neutrality factors for the wage 

adjustment and the CMG relative 

weights. 

The proposed budget neutrality 

factors for the proposed changes to the 

rural, LIP, and teaching status 

adjustment factors are subject to change 

for the final rule if more recent data 

become available for use in these 

analyses or if the proposed payment 

policies associated with the proposed 

budget neutrality factors change. 

In section V.C. of this proposed rule, 

we discuss the proposed methodology 

for calculating the standard payment 

conversion factor for FY 2012. 

C. Proposed Policy for Temporary Cap 

Adjustments To Reflect Interns and 

Residents Displaced Due to Closure of 

IRFs or IRF Residency Training 

Programs 

1. Background 

In the FY 2006 IRF PPS final rule (70 

FR 47880 at 47928 through 47932), we 

implemented regulations at 

§ 412.624(e)(4) to establish a facilitylevel adjustment for IRFs that are, or are 

part of, teaching hospitals. The teaching 

status adjustment accounts for the 

higher indirect operating costs 

experienced by hospitals that 

participate in graduate medical 

education (GME) programs. The 

payment adjustments are made based on 

the number of FTE interns and residents 

training in the IRF and the IRF’s average 

daily census. 

We established the IRF teaching status 

adjustment in a manner that limited the 

incentives for IRFs to add FTE interns 

and residents for the purpose of 

increasing their teaching status 

adjustment. We imposed a cap on the 

number of FTE interns and residents 

that may be counted for purposes of 

calculating the teaching status 

adjustment. The cap limits the number 

of FTE interns and residents that 

teaching IRFs may count for the purpose 

of calculating the IRF PPS teaching 

status adjustment, not the number of 

interns and residents teaching 

institutions can hire or train. We 

calculated the number of FTE interns 

and residents that trained in the IRF 

during a ‘‘base year’’ and used that FTE 

intern and resident number as the cap. 

An IRF’s FTE intern and resident cap is 

ultimately determined based on the 

final settlement of the IRF’s most recent 

cost reporting period ending on or 

before November 15, 2004. A complete 

discussion of how the IRF teaching 

status adjustment was calculated 

appears in the FY 2006 IRF PPS final 

rule (70 FR 47880, 47928 through 

47932). 

2. Proposed Temporary FTE Intern and 

Resident Cap Adjustment 

Sometimes, interns and residents that 

are training in an IRF find themselves 

unable to complete their training in the 

IRF, either because the IRF closes or 

closes a residency training program (we 

refer to these interns and residents as 

‘‘displaced’’). Although we have not 

heard of any instances where IRFs did 

not accept displaced interns and 

residents because the additional interns 

and residents would put the facility 

over the facility’s FTE intern and 

resident cap, we believe that it is 

important to maintain consistent 

policies with other Medicare PPS 

systems, to the extent feasible. The IPPS 

indirect medical education (IME) 

adjustment and the direct GME policies 

contain provisions that allow for 

temporary adjustments to the IME/GME 

caps for IPPS hospitals that train interns 

and residents that are displaced because 

a hospital closes or closes a medical 

residency training program. CMS has 

recently proposed to include a similar 

temporary cap adjustment policy for the 

inpatient psychiatric facility (IPF) PPS 

teaching status adjustment outlined in 

the rate year 2012 IPF PPS proposed 

rule (76 FR 4998 at 5018 through 5020). 

Consistent with the IPPS and the IPF 

PPS, in this proposed rule, we propose 

to permit a temporary increase in the 

FTE intern and resident cap when an 

IRF increases the number of FTE interns 

and residents it trains in order to accept 

displaced interns and residents because 

another IRF closes or closes a medical 

residency training program. 

When an IRF temporarily takes on 

interns and residents that are displaced 

because another IRF closes or closes a 

residency training program, we believe 

that a temporary adjustment to the cap 

would be appropriate. In these 

situations, interns and residents may 

have partially completed a residency 

training program at the IRF that has 

closed or closed a training program and 

may be unable to complete their training 


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at another IRF that is already training 

interns and residents up to or in excess 

of its FTE intern and resident cap. We 

believe that it is appropriate to allow 

temporary adjustments to the FTE caps 

for an IRF that provides residency 

training to medical interns and residents 

who have partially completed a 

residency training program at an IRF 

that closes or at an IRF that discontinues 

training interns and residents in a 

residency training program(s). For this 

reason, we are proposing to adopt the 

following temporary intern and resident 

cap adjustment policies, similar to the 

temporary adjustments to the FTE cap 

used for acute care hospitals and the 

proposed temporary adjustments to the 

FTE caps for IPFs. 

We are proposing that the cap 

adjustment would be temporary because 

it is intern and resident specific and 

would only apply to the displaced 

intern(s) or resident(s) until those 

intern(s) or resident(s) have completed 

their training in the program in which 

they were training at the time of the IRF 

closure or the closure of the program. 

We propose that, as under the IPPS 

policy for displaced interns and 

residents, the IRF PPS temporary cap 

adjustment would apply only to interns 

and residents that were still training at 

the IRF at the time the IRF closed or at 

the time the IRF ceased training interns 

and residents in the residency training 

program(s). Interns and residents who 

leave the IRF, for whatever reason, 

before the closure of the IRF or the 

closure of the residency training 

program would not be considered 

displaced interns and residents for 

purposes of the IRF temporary cap 

adjustment policy. We are proposing to 

adopt the same definition of ‘‘closure of 

a hospital residency training program’’ 

as it is currently defined at 

§ 413.79(h)(1)(ii); that is, the hospital 

ceases to offer training for residents in 

a particular approved medical residency 

training program. Similarly, as under 

the IPPS policy, we are proposing that 

medical students who are accepted into 

a program at an IRF but the IRF or 

residency training program closes before 

the individual begins training at that 

IRF are also not considered displaced 

interns and residents for purposes of the 

IRF temporary cap adjustments. We note 

that although we are proposing to adopt 

a policy under the IRF PPS that is 

consistent with the policy applicable 

under the IPPS, the actual caps under 

the two payment systems are separate 

and distinct. This means, for example, 

if a program closes at an IPPS hospital 

that has an IRF unit, but the interns and 

residents from that closed program were 

not rotating into the IRF unit when the 

program closed, then there would be no 

temporary FTE cap adjustment under 

the IRF PPS, since the interns and 

residents were not displaced from the 

IRF. However, if an IPPS hospital that 

has an IRF unit closes a training 

program and interns and residents from 

that program were rotating into the IRF 

unit when the program closed, an IRF 

hospital or IRF unit may temporarily 

adjust their FTE intern and resident cap 

if they train the displaced interns and 

residents, but only for the portion of the 

training that has to be completed in the 

IRF setting and only if all of the 

requirements specified in section IV.C. 

of this proposed rule are met. 

3. Proposed Temporary Adjustment to 

the FTE Cap To Reflect Interns and 

Residents Displaced Due to an IRF 

Closure 

We are proposing to allow an IRF to 

receive a temporary adjustment to the 

FTE cap to reflect interns and residents 

added because of another IRF’s closure. 

The temporary cap adjustment is 

intended to account for medical interns 

and residents who have partially 

completed a medical residency training 

program at the IRF that has closed and 

may be unable to complete their training 

at another IRF because that IRF is 

already training interns and residents 

up to or in excess of its cap. We are 

proposing this change because IRFs may 

be reluctant to accept additional interns 

and residents from a closed IRF without 

a temporary adjustment to their caps. 

For purposes of this policy, we are 

proposing to adopt the IPPS definition 

of ‘‘closure of a hospital’’ in 

§ 413.79(h)(1)(i) to mean the IRF 

terminates its Medicare provider 

agreement as specified in § 489.52. 

Therefore, we are proposing to allow a 

temporary adjustment to an IRF’s FTE 

cap to reflect interns and residents 

added because of an IRF’s closure. The 

proposed policy would be effective for 

cost reporting periods beginning on or 

after October 1, 2011, when an IRF 

trains an intern or resident from an IRF 

that closed on or after October 1, 2011. 

We would allow an adjustment to an 

IRF’s FTE cap if the IRF meets the 

following criteria: 

(a) The IRF is training displaced 

interns and residents from an IRF that 

closed on or after October 1, 2011. 

(b) The IRF that is training the 

displaced interns and residents from the 

closed IRF 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 interns and 

residents, and documents that the IRF is 

eligible for this temporary adjustment to 

its FTE cap by identifying the interns 

and residents who have come from the 

closed IRF and have caused the IRF to 

exceed its cap, (or the IRF may already 

be over its cap), and specifies the length 

of time that the adjustment is needed. 

After the displaced interns and 

residents leave the IRF’s training 

program or complete their residency 

program, the IRF’s cap would revert to 

its original level. This means that the 

temporary adjustment to the FTE cap 

would be available to the IRF only for 

the period of time necessary for the 

displaced interns and residents to 

complete their training. Further, as 

under the IPPS policy, we are also 

proposing that the total amount of 

temporary cap adjustment that can be 

allotted to all receiving IRFs cannot 

exceed the cap amount of the IRF that 

closed. 

We also note that section 5506 of the 

Affordable Care Act, ‘‘Preservation of 

Resident Cap Positions from Closed 

Hospitals,’’ does not apply to IRFs that 

closed. Section 5506 of the Affordable 

Care Act only amends sections 1886(d) 

and (h) of the Act for direct GME and 

IPPS IME payments. Therefore, the IME 

FTE cap redistributions under section 

5506 of the Affordable Care Act only 

apply to ‘‘subsection (d)’’ IPPS hospitals. 

Section 5506 of the Affordable Care Act 

has no applicability to the teaching 

status adjustments under the IRF PPS 

(or the IPF PPS, for that matter). 

4. Proposed Temporary Adjustment to 

FTE Cap To Reflect Interns and 

Residents Displaced Due to a Residency 

Program Closure 

We are proposing that if an IRF ceases 

training interns and residents in a 

residency training program(s) and agrees 

to temporarily reduce its FTE cap, 

another IRF may receive a temporary 

adjustment to its FTE cap to reflect the 

addition of the displaced interns and 

residents. For purposes of this policy on 

closed residency programs, we are 

proposing to adopt the IPPS definition 

of ‘‘closure of a hospital residency 

training program’’ as specified in 

§ 413.79(h)(1)(ii) which means that the 

hospital ceases to offer training for 

interns and residents in a particular 

approved medical residency training 

program. The methodology for adjusting 

the caps for the ‘‘receiving IRF’’ and the 

‘‘IRF that closed its program’’ is 

described below. 

a. Receiving IRF 

We are proposing that an IRF may 

receive a temporary adjustment to its 

FTE cap to reflect interns and residents 

added because of the closure of another 


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IRF’s residency training program for 

cost reporting periods beginning on or 

after October 1, 2011 if— 

• The IRF is training additional 

interns and residents from the residency 

training program of an IRF that closed 

its program on or after October 1, 2011; 

and 

• No later than 60 days after the IRF 

begins to train the interns and residents, 

the IRF submits to its Medicare 

contractor a request for a temporary 

adjustment to its FTE cap, documents 

that the IRF is eligible for this temporary 

adjustment by identifying the interns 

and residents who have come from 

another IRF’s closed program and have 

caused the IRF to exceed its cap (or the 

IRF may already be in excess of its cap), 

specifies the length of time the 

adjustment is needed, and, as explained 

in more detail below, submits to its 

Medicare contractor a copy of the FTE 

cap reduction statement by the IRF 

closing the residency training program. 

In general, the proposed temporary 

adjustment criteria established for 

closed medical residency training 

programs at IRFs is similar to the 

criteria established for closed IRFs. We 

are proposing that more than 1 IRF may 

be eligible to apply for the temporary 

adjustment because interns and 

residents from one closed program may 

rotate to different IRFs, or they may 

complete their training at more than one 

IRF. Also, only to the extent to which 

an IRF would exceed its FTE cap by 

training displaced interns and residents 

would it be eligible for the temporary 

adjustment. Thus, for example, if the 

IRF has room below its cap to take 1 

additional displaced FTE intern or 

resident but taking a second displaced 

FTE intern or resident would cause the 

IRF to exceed its FTE intern and 

resident cap, then the IRF would 

potentially qualify for a temporary cap 

adjustment for 1 FTE intern or resident, 

not 2. 

b. IRF That Closed Its Program(s) 

We are proposing that an IRF that 

agrees to train interns and residents who 

have been displaced by the closure of 

another IRF’s residency training 

program may receive a temporary FTE 

cap adjustment only if the IRF that 

closed its program meets the following 

criteria— 

• Temporarily reduces its FTE cap by 

the number of FTE interns and residents 

in each program year training and in the 

program at the time of the program’s 

closure. The yearly reduction would be 

determined by deducting the number of 

those interns and residents who would 

have been training in the program up to 

the IRF’s cap during the year of the 

closure, had the program not closed; 

and 

• No later than 60 days after the 

interns and residents who were in the 

closed program begin training at another 

IRF, 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 IRF training the 

displaced interns and residents to 

obtain a temporary adjustment to its 

cap; identifies the interns and residents 

who were training at the time of the 

program’s closure; identifies the IRFs to 

which the interns and residents are 

transferring once the program closes; 

and specifies the reduction for the 

applicable program years. 

In addition, we propose under this 

closed program policy that in order for 

the receiving IRF(s) to qualify for a 

temporary adjustment to their FTE cap, 

the IRFs that are closing their programs 

would need to reduce their FTE cap for 

the expected duration of time the 

displaced interns and residents would 

need to finish their training. We are 

proposing this because the IRF that 

closes the program still retains the FTE 

slots in its cap, even if the IRF chooses 

not to fill the slots with interns and 

residents. We believe that it is 

inappropriate to allow an increase to the 

receiving IRF’s cap without an attendant 

decrease to the cap of the IRF with the 

closed program, because the IRF that 

ceased training the interns and residents 

could fill these slots with interns and 

residents from other programs even if 

the increase and related decrease is only 

temporary. 

We are proposing that the cap 

reduction for the IRF with the closed 

program would be based on the number 

of FTE interns and residents in each 

program year that were in the program 

at the IRF at the time of the program’s 

closure, and who begin training at 

another IRF. 

In summary, we are proposing new 

IRF policies related to temporary 

adjustments to FTE caps to reflect 

interns and residents added due to 

closure of an IRF or closure of a 

residency training program. Finally, we 

are proposing that the IRFs that meet the 

proposed criteria would be eligible to 

receive temporary adjustments to their 

FTE caps for cost reporting periods 

beginning on or after October 1, 2011. 

V. Proposed FY 2012 IRF PPS Federal 

Prospective Payment Rates 

A. Proposed Market Basket Increase 

Factor, Productivity Adjustment, and 

Labor-Related Share for FY 2012 

Section 1886(j)(3)(C) of the Act 

requires the Secretary to establish an 

increase factor that reflects changes over 

time in the prices of an appropriate mix 

of goods and services included in the 

covered IRF services, which is referred 

to as a market basket index. According 

to section 1886(j)(3)(A)(i) of the Act, the 

increase factor shall be used to update 

the IRF Federal prospective payment 

rates for each FY. Sections 

1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) 

of the Act require the application of a 

0.1 percentage point reduction to the 

market basket increase factor for FYs 

2012 and 2013. In addition, section 

1886(j)(3)(C)(ii)(I) of the Act requires the 

application of a productivity 

adjustment, as described below. Thus, 

in this proposed rule, we are proposing 

to update the IRF PPS payments for FY 

2012 by a market basket increase factor 

based upon the most current data 

available, with a productivity 

adjustment as required by section 

1886(j)(3)(C)(ii)(I) of the Act as 

described below and a 0.1 percentage 

point reduction as required by sections 

1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) 

of the Act. Further, we are proposing to 

rebase the RPL market basket from a 

2002-based market basket to a 2008- 

based market basket. We typically 

rebase the RPL market basket every 5 to 

7 years to ensure that it continues to 

reflect the most accurate account of the 

cost of relevant goods and services. 

Thus, in this proposed rule, we 

propose to start with a rebased RPL 

market basket (updated from a 2002 

base year to a 2008 base year) and then 

apply a productivity adjustment as 

required by section 1886(j)(3)(C)(ii)(I) of 

the Act and a 0.1 percentage point 

reduction as required by sections 

1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) 

of the Act. In section V.A.1 of this 

proposed rule, we describe the proposed 

methodology for rebasing the RPL 

market basket from a 2002 base year to 

a 2008 base year, and then in section 

V.A.2 of this proposed rule, we describe 

the proposed methodology for 

calculating the productivity adjustment 

as required by section 1886(j)(3)(C)(ii)(I) 

of the Act. Finally, in section V.A.3 of 

this proposed rule, we describe the 

proposed calculation of the market 

basket increase factor to be used to 

adjust IRF PPS payments for FY 2012. 


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1. Proposed Rebasing of the RPL Market 

Basket for FY 2012 

a. Background 

The input price index (that is, the 

market basket) that was used to develop 

the IRF PPS was the Excluded Hospital 

with Capital market basket. This market 

basket was based on 1997 Medicare cost 

report data and included data for 

Medicare participating IRFs, IPFs, 

LTCHs, cancer hospitals, and children’s 

hospitals. Although ‘‘market basket’’ 

technically describes the mix of goods 

and services used in providing hospital 

care, this term is also commonly used to 

denote the input price index (that is, 

cost category weights and price proxies 

combined) derived from that market 

basket. Accordingly, the term ‘‘market 

basket’’, as used in this document, refers 

to an input price index. 

Beginning with the FY 2006 IRF PPS 

final rule (70 FR 47908), IRF PPS 

payments were updated using a FY 

2002-based RPL market basket reflecting 

the operating and capital cost structures 

for freestanding IRFs, freestanding IPFs, 

and LTCHs. 

We excluded cancer and children’s 

hospitals from the RPL market basket 

because their payments are based 

entirely on reasonable costs subject to 

rate-of-increase limits established under 

the authority of section 1886(b) of the 

Act, which is implemented at § 413.40. 

Cancer and children’s hospitals are not 

reimbursed through a PPS. Also, the FY 

2002 cost structures for cancer and 

children’s hospitals are noticeably 

different than the cost structures of 

freestanding IRFs, freestanding IPFs, 

and LTCHs. See the FY 2006 IRF PPS 

final rule (70 FR 47908) for a complete 

discussion of the FY 2002-based RPL 

market basket. 

In the FY 2010 IRF proposed rule (74 

FR 21062), we expressed our interest in 

exploring the possibility of creating a 

stand-alone IRF market basket that 

reflects the cost structures of only IRF 

providers. We noted that, of the 

available options, one is to combine the 

Medicare cost report data from 

freestanding IRF providers (presently 

incorporated into the FY 2002-based 

RPL market basket) with data from 

hospital-based IRF providers. We 

indicated that an examination of the 

Medicare cost report data comparing 

freestanding and hospital-based IRFs 

revealed considerable differences 

between the two with respect to cost 

levels and cost structures. At that time, 

we were unable to fully understand the 

differences between these two types of 

IRF providers. As a result, we believed 

that further research was required and 

we solicited public comment for 

additional information that might help 

us to better understand the reasons for 

the variations in costs and cost 

structures, as indicated by the cost 

report data, between freestanding and 

hospital-based IRFs (74 FR 21062). 

We summarized the public comments 

we received and our responses in the FY 

2010 IRF PPS final rule (74 FR 39762, 

39776 through 39777). Despite receiving 

comments from the public on this issue, 

we remain unable to sufficiently 

understand the observed differences in 

costs and cost structures between 

hospital-based and freestanding IRFs, 

and therefore we do not believe it is 

appropriate at this time to incorporate 

data from hospital-based IRFs with 

those of freestanding IRFs to create a 

stand-alone IRF market basket. 

Although we do not believe it would 

be appropriate to propose a stand-alone 

IRF market basket, we are currently 

exploring the viability of creating two 

separate market baskets from the current 

RPL, one of which would include 

freestanding IRFs and freestanding IPFs 

and would be used to update payments 

under both the IPF and IRF payment 

systems. The other would be a standalone 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. 

We welcome public comment on the 

possibility of using this type of market 

basket to update IRF payments in the 

future. 

For this update cycle, we are 

proposing to rebase and revise the FY 

2002-based RPL market basket by 

creating a proposed FY 2008-based RPL 

market basket. In the following 

discussion, we provide an overview of 

the market basket and describe the 

methodologies we propose to use for 

purposes of determining the operating 

and capital portions of the proposed FY 

2008-based RPL market basket. 

b. Overview of the Proposed FY 2008- 

Based RPL Market Basket 

The proposed FY 2008-based RPL 

market basket is a fixed-weight, 

Laspeyres-type price index. A Laspeyres 

price index measures the change in 

price, over time, of the same mix of 

goods and services purchased in the 

base period. Any changes in the 

quantity or mix of goods and services 

(that is, intensity) purchased over time 

relative to a base period are not 

measured. 

The index itself is constructed in 

three steps. First, a base period is 

selected (in this proposed 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. Proposed Rebasing and Revising of 

the RPL Market Basket 

We are inviting public comments on 

our proposed methodological changes to 

the RPL market basket. The terms 

‘‘rebasing’’ and ‘‘revising,’’ while often 

used interchangeably, actually denote 

different activities. ‘‘Rebasing’’ means 

moving the base year for the structure of 

costs of an input price index (for 

example, in this proposed rule, we are 

proposing to shift the base year cost 

structure for the RPL market basket from 

FY 2002 to FY 2008). ‘‘Revising’’ means 


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changing data sources, price proxies, or 

methods, used to derive the input price 

index. For FY 2012, we are proposing to 

rebase and revise the market basket used 

to update the IRF PPS. 

(1) Development of Cost Categories and 

Weights 

(a) Medicare Cost Reports 

The proposed FY 2008-based RPL 

market basket consists of several major 

cost categories derived from the FY 

2008 Medicare cost reports for 

freestanding IRFs, freestanding IPFs, 

and LTCHs including wages and 

salaries, pharmaceuticals, professional 

liability insurance (PLI), capital, and a 

residual. This residual reflects all 

remaining costs that are not captured in 

the four cost categories listed above. The 

FY 2008 cost reports include providers 

whose cost report begin date is on or 

between October 1, 2007, and 

September 30, 2008. We choose to use 

FY 2008 as the base year because we 

believe that the Medicare cost reports 

for this year represent the most recent, 

complete set of Medicare cost report 

data available for IRFs, IPFs, and 

LTCHs. However, there is an issue with 

obtaining data specifically for benefits 

and contract labor from this set of FY 

2008 Medicare cost reports since IRFs, 

IPFs, and LTCHs were not required to 

complete the Medicare cost report 

worksheet from which these data were 

collected (Worksheet S–3, part II). As a 

result, only a small number of providers 

(less than 30 percent) reported data for 

these categories, and we do not expect 

these data to improve over time. 

Furthermore, since IRFs, IPFs, and 

LTCHs were not required to submit data 

for Worksheet S–3, part II in previous 

cost reporting years, we have always 

had this issue of incomplete Medicare 

cost report data for benefits and contract 

labor (including when we finalized the 

FY 2002-based RPL market basket). Due 

to the incomplete benefits and contract 

labor data for IRFs, IPFs, and LTCHs, we 

propose to develop these cost weights 

using FY 2008 Medicare cost report data 

for IPPS hospitals (similar to the method 

that was used for the FY 2002-based 

RPL market basket). Additional detail is 

provided later in this section. 

Since our goal is to measure cost 

shares that are reflective of case mix and 

practice patterns associated with 

providing services to Medicare 

beneficiaries, we are proposing to limit 

our selection of Medicare cost reports to 

those from hospitals that have a 

Medicare average length of stay (LOS) 

that is within a comparable range of 

their total facility average LOS. We 

believe this provides a more accurate 

reflection of the structure of costs for 

Medicare covered days. We propose to 

use the cost reports of IRFs and LTCHs 

with Medicare average LOS within 15 

percent (that is, 15 percent higher or 

lower) of the total facility average LOS 

for the hospital. This is the same edit 

applied to derive the FY 2002-based 

RPL market basket and generally 

includes those LTCHs and IRFs with 

Medicare LOS within approximately 5 

days of the facility average LOS of the 

hospital. 

We are proposing to use a less 

stringent measure of Medicare LOS for 

IPFs. For this provider-type, and in 

order to produce a robust sample size, 

we propose to use those facilities’ 

Medicare cost reports whose average 

LOS is within 30 or 50 percent 

(depending on the total facility average 

LOS) of the total facility average LOS. 

This is the same edit applied to derive 

the FY 2002-based RPL market basket. 

We applied these LOS edits to first 

obtain a set of cost reports for facilities 

that have a Medicare LOS within a 

comparable range of their total facility 

LOS. Using this set of Medicare cost 

reports, we then calculated cost weights 

for four cost categories and a residual as 

represented by all other costs directly 

from the FY 2008 Medicare cost reports 

for freestanding IRFs, freestanding IPFs, 

and LTCHs (see Table 3 for these four 

cost categories and their associated 

weights). These Medicare cost report 

cost weights were then supplemented 

with information obtained from other 

data sources (explained in more detail 

below) to derive the proposed FY 2008- 

based RPL market basket cost weights. 

(b) Other Data Sources 

In addition to the IRF, IPF and LTCH 

Medicare cost reports for freestanding 

IRFs and freestanding IPFs, and LTCHs, 

the other data sources we used to 

develop the proposed FY 2008-based 

RPL market basket cost weights were the 

FY 2008 IPPS Medicare cost reports and 

the Benchmark Input-Output (I–O) 

Tables created by the Bureau of 

Economic Analysis (BEA), U.S. 

Department of Commerce. The FY 2008 

Medicare cost reports include providers 

whose cost report begin date is on or 

between October 1, 2007 and September 

30, 2008. 

As noted above, the proposed 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 proposed Benefits cost 

weight for the FY 2008-based RPL 

market basket, the ratio of the FY 2008 

IPPS Benefits cost weight to the FY 2008 

IPPS Wages and Salaries cost weight 

was applied to the RPL Wages and 

Salaries cost weight. Similarly, the ratio 

of the FY 2008 IPPS Contract Labor cost 

weight to the FY 2008 IPPS Wages and 

Salaries cost weight was applied to the 

RPL Wages and Salaries cost weight to 

derive a Contract Labor cost weight for 

the proposed FY 2008-based RPL market 

basket. 


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The All Other cost category is divided 

into other hospital expenditure category 

shares using the 2002 BEA Benchmark 

I–O data following the removal of the 

portions of the All Other cost category 

provided in Table 3 that are attributable 

to Benefits and Contract Labor. The BEA 

Benchmark I–O data are scheduled for 

publication every 5 years. The most 

recent data available are for 2002. BEA 

also produces Annual I–O estimates; 

however, the 2002 Benchmark I–O data 

represent a much more comprehensive 

and complete set of data that are derived 

from the 2002 Economic Census. The 

Annual I–O is simply an update of the 

Benchmark I–O tables. For the FY 2002- 

based RPL market basket, we used the 

1997 Benchmark I–O data. We are 

proposing to use the 2002 Benchmark 

I–O data in the FY 2008-based RPL 

market basket. Instead of using the less 

detailed Annual I–O data, we inflated 

the 2002 Benchmark I–O data forward to 

2008. The methodology we used to 

inflate the data forward involves 

applying the annual price changes from 

the respective price proxies to the 

appropriate cost categories. We repeat 

this practice for each year. 

The ‘‘All Other’’ cost category 

expenditure shares are determined as 

being equal to each category’s 

proportion to total ‘‘all other’’ based on 

the inflated 2002 Benchmark I–O data. 

For instance, if the cost for telephone 

services represented 10 percent of the 

sum of the ‘‘all other’’ Benchmark I–O 

hospital expenditures, then telephone 

services would represent 10 percent of 

the RPL market basket’s All Other cost 

category. 

(2) Final Cost Category Computation 

As stated previously, for this rebasing 

we are proposing to use the Medicare 

cost reports for IRFs, IPFs, and LTCHs 

to derive four major cost categories. The 

proposed FY 2008-based RPL market 

basket includes 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 are proposing to break out 

both categories so we can better match 

their respective expenses with more 

appropriate price proxies. A thorough 

discussion of our rationale for each of 

these cost categories is provided in the 

section V.A.1.c.(3) of this proposed rule. 

Also, the proposed FY 2008-based RPL 

market basket excludes 1 cost category: 

Photo Supplies. The 2002 Benchmark 

I–O weight for this category is 

considerably smaller than the 1997 

Benchmark I–O weight, presently 

accounting for less than one-tenth of 

one percentage point of the RPL market 

basket. Therefore, we are proposing to 

include the photo supplies costs in the 

Chemical cost category weight with 

other similar chemical products. 

We are not proposing to change our 

definition of the labor-related share. 

However, we are proposing to rename 

our aggregate cost categories from 

‘‘labor-intensive’’ and ‘‘nonlaborintensive’’ services to ‘‘labor-related’’ and 

‘‘nonlabor-related’’ services. This is 

consistent with the FY 2006-based IPPS 

market basket (74 FR 43845). As 

discussed in more detail below and 

similar to the FY 2002-based RPL 

market basket, we classify a cost 

category as labor-related and include it 

in the labor-related share if the cost 

category is defined as being laborintensive and its cost varies with the 

local labor market. In previous 

regulations, we grouped cost categories 

that met both of these criteria into laborintensive services. We believe the 

proposed new labels more accurately 

reflect the concepts that they are 

intended to convey. We are not 

proposing to change our definition of 

the labor-related share because we 

continue to classify a cost category as 

labor-related if the costs are laborintensive and vary with the local labor 

market. 

(3) Selection of Price Proxies 

After computing the FY 2008 cost 

weights for the proposed rebased RPL 

market basket, it was necessary to select 

appropriate wage and price proxies to 

reflect the rate of price change for each 

expenditure category. With the 

exception of the proxy for PLI, all of the 

proxies for the operating portion of the 

proposed FY 2008-based RPL market 

basket are based on Bureau of Labor 

Statistics (BLS) data and are grouped 

into one of the following BLS categories: 

(a) Producer Price Indexes—Producer 

Price Indexes (PPIs) measure price 

changes for goods sold in markets other 

than the retail market. PPIs are 

preferable price proxies for goods and 

services that hospitals purchase as 

inputs because these PPIs better reflect 

the actual price changes faced by 

hospitals. For example, we use a special 

PPI for prescription drugs, rather than 

the Consumer Price Index (CPI) for 

prescription drugs, because hospitals 

generally purchase drugs directly from a 

wholesaler. The PPIs that we use 

measure price changes at the final stage 

of production. 

(b) Consumer Price Indexes—CPIs 

measure change in the prices of final 

goods and services bought by the typical 

consumer. Because they may not 

represent the price faced by a producer, 

we used CPIs only if an appropriate PPI 

was not available, or if the expenditures 

were more similar to those faced by 

retail consumers in general rather than 

by purchasers of goods at the wholesale 

level. For example, the CPI for food 

purchased away from home is used as 

a proxy for contracted food services. 

(c) Employment Cost Indexes— 

Employment Cost Indexes (ECIs) 

measure the rate of change in employee 

wage rates and employer costs for 

employee benefits per hour worked. 

These indexes are fixed-weight indexes 

and strictly measure the change in wage 

rates and employee benefits per hour. 

Appropriately, these indexes are not 

affected by shifts in employment mix. 

We evaluated the price proxies using 

the criteria of reliability, timeliness, 

availability, and relevance. Reliability 

indicates that the index is based on 

valid statistical methods and has low 

sampling variability. Timeliness implies 

that the proxy is published regularly, 

preferably at least once a quarter. 

Availability means that the proxy is 

publicly available. Finally, relevance 

means that the proxy is applicable and 

representative of the cost category 

weight to which it is applied. The 

proposed CPIs, PPIs, and ECIs selected 

meet these criteria. 

Table 4 sets forth the proposed FY 

2008-based RPL market basket including 

cost categories, and their respective 

weights and price proxies. For 

comparison purposes, the 

corresponding FY 2002-based RPL 

market basket cost weights are listed, as 

well. For example, Wages and Salaries 

are 49.447 percent of total costs in the 

proposed FY 2008-based RPL market 

basket compared to 52.895 percent for 

the FY 2002-based RPL market basket. 

Employee Benefits are 12.831 percent in 

the proposed FY 2008-based RPL market 

basket compared to 12.982 percent for 

the FY 2002-based RPL market basket. 

As a result, compensation costs (Wages 

and Salaries plus Employee Benefits) for 

the proposed FY 2008-based RPL market 

basket are 62.278 percent of total costs 

compared to 65.877 percent for the FY 

2002-based RPL market basket. 

Following Table 4 is a summary 

outlining the choice of the proxies we 

propose to use for the operating portion 

of the FY 2008-based RPL market 

basket. The price proxies proposed for 

the capital portion are described in 

more detail in the capital methodology 

section (see section V.A.1.c.(4) of this 

proposed rule). 


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24232 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

We note that the proxies for the 

operating portion of the FY 2008-based 

RPL market basket are the same as those 

used for the FY 2006-based IPPS 

operating market basket. Because these 

proxies meet our criteria of reliability, 

timeliness, availability, and relevance, 

we believe they are the best measures of 

price changes for the cost categories. For 

further discussion on the FY 2006-based 

IPPS market basket, see the IPPS final 

rule published in the August 27, 2009 

Federal Register (74 FR 43843). 


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24234 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

(i) Wages and Salaries 

We are proposing to use the ECI for 

Wages and Salaries for Hospital Workers 

(All Civilian) (BLS series code 

CIU1026220000000I) to measure the 

price growth of this cost category. This 

same proxy was used in the FY 2002- 

based RPL market basket. 

(ii) Employee Benefits 

We are proposing to use the ECI for 

Employee Benefits for Hospital Workers 

(All Civilian) to measure the price 

growth of this cost category. This same 

proxy was used in the FY 2002-based 

RPL market basket. 

(iii) Electricity 

We are proposing to use the PPI for 

Commercial Electric Power (BLS series 

code WPU0542). This same proxy was 

used in the FY 2002-based RPL market 

basket. 

(iv) Fuel, Oil, and Gasoline 

For the FY 2002-based RPL market 

basket, this category only included 

expenses classified under North 

American Industry Classification 

System (NAICS) 21 (Mining). We 

proxied this category using the PPI for 

Commercial Natural Gas (BLS series 

code WPU0552). For the proposed FY 

2008-based market basket, we are 

proposing to add costs to this category 

that had previously been grouped in 

other categories. The added costs 

include petroleum-related expenses 

under NAICS 324110 (previously 

captured in the miscellaneous category), 

as well as petrochemical manufacturing 

classified under NAICS 325110 

(previously captured in the chemicals 

category). These added costs represent 

80 percent of the hospital industry’s 

fuel, oil, and gasoline expenses (or 80 

percent of this category). Because the 

majority of the industry’s fuel, oil, and 

gasoline expenses originate from 

petroleum refineries (NAICS 324110), 

we are proposing to use the PPI for 

Petroleum Refineries (BLS series code 

PCU324110324110) as the proxy for this 

cost category. 

(v) Water and Sewage 

We are proposing to use the CPI for 

Water and Sewerage Maintenance (All 

Urban Consumers) (BLS series code 

CUUR0000SEHG01) to measure the 

price growth of this cost category. This 

same proxy was used in the FY 2002- 

based RPL market basket. 

(vi) Professional Liability Insurance 

We are proposing to proxy price 

changes in hospital PLI premiums using 

percentage changes as estimated by the 

CMS Hospital Professional Liability 

Index. To generate these estimates, we 

collect commercial insurance premiums 

for a fixed level of coverage while 

holding non-price factors constant (such 

as a change in the level of coverage). 

This method is also used to proxy PLI 

price changes in the Medicare Economic 

Index (75 FR 73268). This same proxy 

was used in the FY 2002-based RPL 

market basket. 

(vii) Pharmaceuticals 

We are proposing to 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 


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Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 24235 

series; however, this is the same proxy 

that was used in the FY 2002-based RPL 

market basket. 

(viii) Food: Direct Purchases 

We are proposing to use the PPI for 

Processed Foods and Feeds (BLS series 

code WPU02) to measure the price 

growth of this cost category. This same 

proxy was used in the FY 2002-based 

RPL market basket. 

(ix) Food: Contract Services 

We are proposing to use the CPI for 

Food Away From Home (All Urban 

Consumers) (BLS series code 

CUUR0000SEFV) to measure the price 

growth of this cost category. This same 

proxy was used in the FY 2002-based 

RPL market basket. 

(x) Chemicals 

We are proposing to 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 are proposing to use 

this blended index because we believe 

its composition better reflects the 

composition of the purchasing patterns 

of hospitals than does the PPI for 

Industrial Chemicals (BLS series code 

WPU061), the proxy used in the FY 

2002-based RPL market basket. Table 5 

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. 

(xi) Medical Instruments 

We are proposing to use the PPI for 

Medical, Surgical, and Personal Aid 

Devices (BLS series code WPU156) to 

measure the price growth of this cost 

category. In the 1997 Benchmark I–O 

data, approximately half of the expenses 

classified in this category were for 

surgical and medical instruments. 

Therefore, we used the PPI for Surgical 

and Medical Instruments and 

Equipment (BLS series code WPU1562) 

to proxy this category in the FY 2002- 

based RPL market basket. The 2002 

Benchmark I–O data show that surgical 

and medical instruments now represent 

only 33 percent of these expenses and 

that the largest expense category is 

surgical appliance and supplies 

manufacturing (corresponding to BLS 

series code WPU1563). Due to this 

reallocation of costs over time, we are 

proposing to change the price proxy for 

this cost category to the more aggregated 

PPI for Medical, Surgical, and Personal 

Aid Devices. 

(xii) Photographic Supplies 

We are proposing to eliminate the cost 

category specific to photographic 

supplies for the proposed FY 2008 

based RPL market basket. These costs 

would now be included in the 

Chemicals cost category because the 

costs are presently reported as all other 

chemical products. Notably, although 

we would be eliminating the specific 

cost category, these costs would still be 

accounted for within the RPL market 

basket. 

(xiii) Rubber and Plastics 

We are proposing to use the PPI for 

Rubber and Plastic Products (BLS series 

code WPU07) to measure price growth 

of this cost category. This same proxy 

was used in the FY 2002-based RPL 

market basket. 

(xiv) Paper and Printing Products 

We are proposing to use the PPI for 

Converted Paper and Paperboard 

Products (BLS series code WPU0915) to 

measure the price growth of this cost 

category. This same proxy was used in 

the FY 2002-based RPL market basket. 

(xv) Apparel 

We are proposing to use the PPI for 

Apparel (BLS series code WPU0381) to 

measure the price growth of this cost 

category. This same proxy was used in 

the FY 2002-based RPL market basket. 

(xvi) Machinery and Equipment 

We are proposing to use the PPI for 

Machinery and Equipment (BLS series 

code WPU11) to measure the price 

growth of this cost category. This same 

proxy was used in the FY 2002-based 

RPL market basket. 

(xvii) Miscellaneous Products 

We are proposing to 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 would 

remove the double-counting of food and 

energy prices, which would already be 

captured elsewhere in the market 

basket. This same proxy was used in the 

FY 2002-based RPL market basket. 

(xviii) Professional Fees: Labor-Related 

We are proposing to 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. 

(xix) Administrative and Business 

Support Services 

We are proposing to 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 


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Occupations. We believe that this 

compensation index better reflects the 

changing price of labor associated with 

the provision of administrative services 

and its incorporation represents a 

technical improvement to the market 

basket. 

(xx) All Other: Labor-Related Services 

We are proposing to use the ECI for 

Compensation for Service Occupations 

(Private Industry) (BLS series code 

CIU2010000300000I) to measure the 

price growth of this cost category. This 

same proxy was used in the FY 2002- 

based RPL market basket. 

(xxi) Professional Fees: NonlaborRelated 

We are proposing to 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 proposing to use for the 

Professional Fees: Labor-related cost 

category. 

(xxii) Financial Services 

We are proposing to use the ECI for 

Compensation for Financial Activities 

(Private Industry) (BLS series code 

CIU201520A000000I) to measure the 

price growth of this cost category. 

Previously these costs were included in 

the All Other: Nonlabor-intensive 

category (now renamed the All Other: 

Nonlabor-related Services category), and 

were proxied by the CPI for All Items. 

We believe that this compensation 

index better reflects the changing price 

of labor associated with the provision of 

financial services and its incorporation 

represents a technical improvement to 

the market basket. 

(xxiii) Telephone Services 

We are proposing to use the CPI for 

Telephone Services (BLS series code 

CUUR0000SEED) to measure the price 

growth of this cost category. This same 

proxy was used in the FY 2002-based 

RPL market basket. 

(xxiv) Postage 

We are proposing to use the CPI for 

Postage (BLS series code 

CUUR0000SEEC01) to measure the price 

growth of this cost category. This same 

proxy was used in the FY 2002-based 

RPL market basket. 

(xxv) All Other: Nonlabor-Related 

Services 

We are proposing to 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 would remove 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 would 

represent a technical improvement to 

the market basket. 

(4) Proposed Methodology for Capital 

Portion of the RPL Market Basket 

In the FY 2002-based RPL market 

basket, we did not have freestanding 

IRF, freestanding IPF, and LTCH 2002 

Medicare cost report data for the capital 

cost weights, due to a change in the 

2002 reporting requirements. Therefore, 

we used these hospitals’ 2001 

expenditure data for the capital cost 

categories of depreciation, interest, and 

other capital expenses, and inflated the 

data to a 2002 base year using relevant 

price proxies. 

For the proposed FY 2008-based RPL 

market basket, we are proposing to 

calculate weights for the proposed RPL 

market basket capital costs using the 

same set of FY 2008 Medicare cost 

reports used to develop the operating 

share for IRFs, IPFs, and LTCHs. To 

calculate the proposed total capital cost 

weight, we first apply the same LOS 

edits as applied when calculating the 

operating cost weights as described 

above in section V.A.1.c.(1)(a) of this 

proposed rule. The resulting proposed 

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 and Fixed 

Equipment; and (2) Movable Equipment. 

The apportionment between building 

and fixed equipment and movable 

equipment was determined using the FY 

2008 Medicare cost reports for 

freestanding IRFs, freestanding IPFs, 

and LTCHs. This methodology was also 

used to compute the apportionment 

used in the FY 2002-based RPL market 

basket (70 FR 47912). 

The total Interest expense cost 

category is split between government/ 

nonprofit interest and for-profit interest. 

The FY 2002-based RPL market basket 

allocated 75 percent of the total Interest 

cost weight to government/nonprofit 

interest and proxied that category by the 

average yield on domestic municipal 

bonds. The remaining 25 percent of the 

Interest cost weight was allocated to forprofit interest and was proxied by the 

average yield on Moody’s Aaa bonds 

(70 FR 47912). This was based on the 

FY 2002-based IPPS Capital input price 

index (CIPI) (70 FR 23406) due to 

insufficient Medicare cost report data 

for freestanding IRFs, freestanding IPFs, 

and LTCHs. For the proposed FY 2008- 

based RPL market basket, we are 

proposing to derive the split using the 

FY 2008 Medicare cost report data on 

interest expenses for government/ 

nonprofit and for-profit freestanding 

IRFs, freestanding IPFs, and LTCHs. 

Based on these data, we calculated a 

proposed 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 V.A.1.c.(1)(a) of this proposed 

rule) prior to calculating this split. 

Therefore, we are using cost reports that 

are reflective of case mix and practice 

patterns associated with providing 

services to Medicare beneficiaries. 

Using data specific to government/ 

nonprofit and for-profit freestanding 

IRFs, freestanding IPFs, and LTCHs as 

well as the application of these LOS 

edits are the primary reasons for the 

difference in this split relative to the FY 

2002-based RPL market basket. 

Because capital is acquired and paid 

for over time, capital expenses in any 

given year are determined by both past 

and present purchases of physical and 

financial capital. The vintage-weighted 

capital portion of the FY 2008-based 

RPL market basket is intended to 

capture the long-term consumption of 

capital, using vintage weights for 

depreciation (physical capital) and 

interest (financial capital). These 

vintage weights reflect the proportion of 

capital purchases attributable to each 

year of the expected life of building and 

fixed equipment, movable equipment, 

and interest. We are proposing to use 

the vintage weights to compute vintageweighted price changes associated with 

depreciation and interest expense. 


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Vintage weights are an integral part of 

the proposed FY 2008-based RPL market 

basket. Capital costs are inherently 

complicated and are determined by 

complex capital purchasing decisions, 

over time, based on such factors as 

interest rates and debt financing. In 

addition, capital is depreciated over 

time instead of being consumed in the 

same period it is purchased. The capital 

portion of the proposed 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 proposed 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 and fixed 

equipment and movable equipment. We 

found no single source that provides an 

appropriate time series of capital 

purchases by hospitals for all of the 

above components of capital purchases. 

The early Medicare cost reports did not 

have sufficient capital data to meet this 

need. Data we obtained from the 

American Hospital Association (AHA) 

do not include annual capital 

purchases. However, AHA does provide 

a consistent database back to 1963. We 

used data from the AHA Panel Survey 

and the AHA Annual Survey to obtain 

a time series of total expenses for 

hospitals. We then used data from the 

AHA Panel Survey supplemented with 

the ratio of depreciation to total hospital 

expenses obtained from the Medicare 

cost reports to derive a trend of annual 

depreciation expenses for 1963 through 

2008. 

To estimate capital purchases using 

data on depreciation expenses, the 

expected life for each cost category 

(building and fixed equipment, movable 

equipment, and interest) is needed to 

calculate vintage weights. For the FY 

2002-based RPL market basket, due to 

insufficient Medicare cost report data 

for freestanding IRFs, freestanding IPFs, 

and LTCHs, we used 2001 Medicare 

Cost Reports for IPPS hospitals to 

determine the expected life of building 

and fixed equipment and movable 

equipment (70 FR 47913). The FY 2002- 

based RPL market basket was based on 

an expected life of building and fixed 

equipment of 23 years. It used 11 years 

as the expected life for movable 

equipment. We believed that this data 

source reflected the latest relative cost 

structure of depreciation expenses for 

hospitals at the time and was analogous 

to freestanding IRFs, freestanding IPFs, 

and LTCHs. 

The expected life of any piece of 

equipment can be determined by 

dividing the value of the asset 

(excluding fully depreciated assets) by 

its current year depreciation amount. 

This calculation yields the estimated 

useful life of an asset if depreciation 

were to continue at current year levels, 

assuming straight-line depreciation. 

Following a similar method to what was 

applied for the FY 2002-based RPL 

market basket, we are proposing to use 

the expected life of building and fixed 

equipment to be equal to 26 years, and 

the expected life of movable equipment 

to be 11 years. These expected lives are 

calculated using FY 2008 Medicare cost 

reports for IPPS hospitals since we are 

currently unable to obtain robust 

measures of the expected lives for 

building and fixed equipment and 

movable equipment using the Medicare 

cost reports from freestanding IRFs, 

freestanding IPFs, and LTCHs. 

We also propose to use the building 

and fixed equipment and movable 

equipment weights derived from FY 

2008 Medicare cost reports for 

freestanding IRFs, freestanding IPFs, 

and LTCHs to separate the depreciation 

expenses into annual amounts of 

building and fixed equipment 

depreciation and movable equipment 

depreciation. Year-end asset costs for 

building and fixed equipment and 

movable equipment were determined by 

multiplying the annual depreciation 

amounts by the expected life 

calculations. We then calculated a time 

series, back to 1963, of annual capital 

purchases by subtracting the previous 

year asset costs from the current year 

asset costs. From this capital purchase 

time series, we were able to calculate 

the vintage weights for building and 

fixed equipment and for movable 

equipment. Each of these sets of vintage 

weights is explained in more detail 

below. 

For the proposed building and fixed 

equipment vintage weights, we used the 

real annual capital purchase amounts 

for building and fixed equipment to 

capture the actual amount of the 

physical acquisition, net of the effect of 

price inflation. This real annual 

purchase amount for building and fixed 

equipment was produced by deflating 

the nominal annual purchase amount by 

the building and fixed equipment price 

proxy, BEA’s chained price index for 

nonresidential construction for 

hospitals and special care facilities. 

Because building and fixed equipment 

have an expected life of 26 years, the 

vintage weights for building and fixed 

equipment are deemed to represent the 

average purchase pattern of building 

and fixed equipment over 26-year 

periods. With real building and fixed 

equipment purchase estimates available 

from 2008 back to 1963, we averaged 

twenty 26-year periods to determine the 

average vintage weights for building and 

fixed equipment that are representative 

of average building and fixed equipment 

purchase patterns over time. Vintage 

weights for each 26-year period are 

calculated by dividing the real building 

and fixed capital purchase amount in 

any given year by the total amount of 

purchases in the 26-year period. This 

calculation is done for each year in the 

26-year period, and for each of the 

twenty 26-year periods. We used the 

average of each year across the twenty 

26-year periods to determine the average 

building and fixed equipment vintage 

weights for the FY 2008-based RPL 

market basket. 

For the proposed 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-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 


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24238 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

determine the average movable 

equipment vintage weights for the FY 

2008-based RPL market basket. 

For the proposed interest vintage 

weights, the nominal annual capital 

purchase amounts for total equipment 

(building and fixed, and movable) were 

used to capture the value of the debt 

instrument. Because we have 

determined that hospital debt 

instruments have an expected life of 

26 years, the vintage weights for interest 

are deemed to represent the average 

purchase pattern of total equipment 

over 26-year periods. With nominal total 

equipment purchase estimates available 

from 2008 back to 1963, twenty 26-year 

periods were averaged to determine the 

average vintage weights for interest that 

are representative of average capital 

purchase patterns over time. Vintage 

weights for each 26-year period are 

calculated by dividing the nominal total 

capital purchase amount for any given 

year by the total amount of purchases in 

the 26-year period. This calculation is 

done for each year in the 26-year period 

and for each of the twenty 26-year 

periods. We used the average of each 

year across the twenty 26-year periods 

to determine the average interest vintage 

weights for the FY 2008-based RPL 

market basket. The vintage weights for 

the capital portion of the FY 2002-based 

RPL market basket and the FY 2008- 

based RPL market basket are presented 

in Table 6. 


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After the capital cost category weights 

were computed, it was necessary to 

select appropriate price proxies to 

reflect the rate-of-increase for each 

expenditure category. We are proposing 

to use the same price proxies for the 

capital portion of the proposed 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 CIPI as described in 

the IPPS FY 2010 final rule (74 FR at 

43857). 

(5) Proposed FY 2012 Market Basket 

Increase Factor 

For FY 2012 (that is, beginning 

October 1, 2011 and ending September 

30, 2012), we are proposing to use an 

estimate of the proposed FY 2008-based 

RPL market basket increase factor based 

on the best available data. Consistent 

with historical practice, we estimate the 

RPL market basket update for the IRF 

PPS based on IHS Global Insight’s 

forecast using the most recent available 

data. IHS Global Insight (IGI), Inc. is a 

nationally recognized economic and 

financial forecasting firm that contracts 

with CMS to forecast the components of 

the market baskets. 

Based on IGI’s 1st quarter 2011 

forecast with historical data through the 

4th quarter of 2010, the projected 

market basket increase factor for FY 

2012 is 2.8 percent. Therefore, 

consistent with our historical practice of 

estimating market basket increases 

based on the best available data, we are 

proposing a market basket increase 

factor of 2.8 percent for FY 2012. 

Furthermore, because the proposed FY 

2012 update is based on the most recent 

market basket estimate for the 12-month 

period (currently 2.8 percent), we are 

also proposing that if more recent data 

are subsequently available (for example, 

a more recent estimate of the market 

basket), we would use such data, if 

appropriate, to determine the FY 2012 

update in the final rule. 

Using the current FY 2002-based RPL 

market basket and IGI’s 1st quarter 2011 

forecast for the market basket 

components, the FY 2012 update would 

be 2.8 percent. Table 7 compares the 

proposed FY 2008-based RPL market 

basket and the FY 2002-based RPL 

market basket percent changes. 

For FY 2012, the proposed FY 2008- 

based RPL market basket update is the 

same as the FY 2002-based RPL market 

basket (2.8 percent). The lower total 

compensation weight in the proposed 

FY 2008-based RPL market basket 

(62.278 percent) relative to the FY 2002- 

based RPL market basket (65.877 

percent), absent other factors, would 

have resulted in a slightly lower market 

basket update using the FY 2008-based 

RPL market basket. This impact, 

however, is partially offset by the larger 

weight associated with the Professional 

Fees category. In both market baskets, 

these expenditures are proxied by the 

ECI for Compensation for Professional 

and Related Services. The weight for 

Professional Fees in the FY 2002-based 

RPL market basket is 2.892 percent 

compared to 6.325 percent in the 

proposed FY 2008-based RPL market 

basket. The net effect is that the updates 

are the same for FY 2012 based on the 

current 2002-based RPL market basket 

and the proposed FY 2008-based RPL 

market basket. 

2. Proposed Productivity Adjustment 

According to Section 1886(j)(3)(C)(i) 

of the Act, the Secretary shall establish 

an increase factor ‘‘based on an 

appropriate percentage increase in a 

market basket of goods and services.’’ As 

described in section V.A.1 of this 

proposed rule, we are proposing to 

estimate the IRF PPS increase factor for 

FY 2012 based on the proposed FY 


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24240 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

2008-based RPL market basket. Section 

1886(j)(3)(C)(ii) of the Act then requires 

that, after establishing the increase 

factor for a FY, ‘‘the Secretary shall 

reduce such increase factor for FY 2012 

and each subsequent FY, by the 

productivity adjustment described in 

section 1886(b)(3)(B)(xi)(II)’’ of the Act. 

Section 1886(b)(3)(B)(xi)(II) of the Act 

sets forth the definition of this 

productivity adjustment. The statute 

defines the productivity adjustment to 

be equal to the 10-year moving average 

of changes in annual economy-wide 

private nonfarm business multifactor 

productivity (MFP) (as projected by the 

Secretary for the 10-year period ending 

with the applicable FY, year, cost 

reporting period, or other annual 

period) (the ‘‘MFP adjustment’’). The 

BLS is the agency that publishes the 

official measure of private nonfarm 

business MFP. Please see http:// 

www.bls.gov/mfp to obtain the historical 

BLS-published MFP data. 

The projection of MFP is currently 

produced by IGI, an economic 

forecasting firm. In order to generate a 

forecast of MFP, IGI replicated the MFP 

measure calculated by the BLS using a 

series of proxy variables derived from 

IGI’s U.S. macroeconomic models. 

These models take into account a very 

broad range of factors that influence the 

total U.S. economy. IGI forecasts the 

underlying proxy components such as 

Gross Domestic Product (GDP), capital, 

and labor inputs required to estimate 

MFP and then combines those 

projections according to the BLS 

methodology. In Table 8, we identify 

each of the major MFP component series 

employed by the BLS to measure MFP. 

We also provide the corresponding 

concepts forecasted by IGI and 

determined to be the best available 

proxies for the BLS series. 

IGI found that the historical growth 

rates of the BLS components used to 

calculate MFP and the IGI components 

identified are consistent across all series 

and therefore suitable proxies for 

calculating MFP. We have included 

below a more detailed description of the 

methodology used by IGI to construct a 

forecast of MFP, which is aligned 

closely with the methodology employed 

by the BLS. For more information 

regarding the BLS method for estimating 

productivity, see the BLS Web site at 

http://www.bls.gov/mfp/mprtech.pdf. 

At the time of this proposed rule, the 

BLS has published a historical time 

series of private nonfarm business MFP 

for 1987 through 2009, with 2009 being 

a preliminary value. Using this 

historical MFP series and the IGI 

forecasted series, IGI has developed a 

forecast of MFP for 2010 through 2021, 

as described below. 

To create a forecast of BLS’ MFP 

index, the forecasted annual growth 

rates of the ‘‘non-housing, nongovernment, non-farm, real GDP’’, 

‘‘hours of all persons in private nonfarm 

establishments adjusted for labor 

composition,’’ and ‘‘real effective capital 

stock’’ series (ranging from 2010 to 2021) 

are used to ‘‘grow’’ the levels of the ‘‘real 

value-added output,’’ ‘‘private non-farm 

business sector labor input,’’ and 

‘‘aggregate capital input’’ series 

published by the BLS. Projections of the 

‘‘hours of all persons’’ measure are 

calculated using the difference between 

projections of the BLS index of output 

per hour and real GDP. This difference 

is then adjusted to account for changes 

in labor composition in the forecast 

interval. 

Using these three key concepts, MFP 

is derived by subtracting the 

contribution of labor and capital inputs 

from output growth. However, in order 

to estimate MFP, we need to understand 

the relative contributions of labor and 

capital to total output growth. 

Therefore, two additional measures are 

needed to operationalize the estimation 

of the IGI MFP projection: Labor 

compensation and capital income. The 

sum of labor compensation and capital 

income represents total income. The 

BLS calculates labor compensation and 

capital income (in current dollar terms) 

to derive the nominal values of labor 

and capital inputs. IGI uses the ‘‘nongovernment total compensation’’ and 

‘‘flow of capital services from the total 

private non-residential capital stock’’ 

series as proxies for the BLS’ income 

measures. These two proxy measures for 

income are divided by total income to 

obtain the shares of labor compensation 

and capital income to total income. To 

estimate labor’s contribution and 

capital’s contribution to the growth in 

total output, the growth rates of the 

proxy variables for labor and capital 

inputs are multiplied by their respective 

shares of total income. These 

contributions of labor and capital to 

output growth are subtracted from total 

output growth to calculate the ‘‘change 

in the growth rates of multifactor 

productivity’’: 

MFP = Total output growth—((labor 

input growth * labor compensation 

share) + (capital input growth * 

capital income share)) 

The change in the growth rates (also 

referred to as the compound growth 

rates) of the IGI MFP are multiplied by 

100 in order to calculate the percent 


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change in growth rates (the percent 

change in growth rates are published by 

the BLS for its historical MFP measure). 

Finally, the growth rates of the IGI MFP 

are converted to index levels based to 

2005 to be consistent with the BLS’ 

methodology. For benchmarking 

purposes, the historical growth rates of 

IGI’s proxy variables were used to 

estimate a historical measure of MFP, 

which was compared to the historical 

MFP estimate published by the BLS. 

The comparison revealed that the 

growth rates of the components were 

consistent across all series, and 

therefore validated the use of the proxy 

variables in generating the IGI MFP 

projections. The resulting MFP index 

was then interpolated to a quarterly 

frequency using the Bassie method for 

temporal disaggregation. The Bassie 

technique utilizes an indicator (pattern) 

series for its calculations. IGI uses the 

index of output per hour (published by 

the BLS) as an indicator when 

interpolating the MFP index. 

3. Proposed Calculation of the IRF PPS 

Market Basket Increase Factor for FY 

2012 

To calculate the MFP-adjusted IRF 

PPS increase factor for FY 2012, in 

accordance with section 1886(j)(3)(C) of 

the Act, we propose to start with the FY 

2008-based RPL market basket increase 

factor described above in section V.A.1. 

of this proposed rule and subtract from 

that the MFP percentage adjustment 

described in section V.A.2.of this 

proposed rule. Additionally, in 

accordance with sections 

1886(j)(3)(C)(ii)(II) and (D)(ii) of the Act, 

we propose to further reduce the MFPadjusted IRF PPS increase factor by 0.1 

percentage point for FY 2012. 

Specifically, in calculating the MFP 

percentage adjustment, we propose that 

the end of the 10-year moving average 

of changes in the MFP should coincide 

with the end of the appropriate FY 

update period. Since the market basket 

update is reduced by the MFP 

adjustment to determine the annual 

update for the IRF PPS, we believe it is 

appropriate for the numbers associated 

with both components of the calculation 

(the market basket and the productivity 

adjustment) to line up so that changes 

in market conditions are aligned. 

Therefore, for the FY 2012 update, the 

MFP adjustment is calculated as the 10- 

year moving average of changes in MFP 

for the period ending September 30, 

2012. We propose to round the final 

annual adjustment to the one-tenth of 1 

percentage point level up or down as 

applicable according to conventional 

rounding rules (that is, if the number we 

are rounding is followed by 5, 6, 7, 8, 

or 9, we will round the number up; if 

the number we are rounding is followed 

by 0, 1, 2, 3, or 4, we will round the 

number down). 

Thus, in accordance with section 

1886(j)(3)(C) of the Act, the proposed 

IRF PPS increase factor for FY 2012 is 

based on the 1st quarter 2011 forecast of 

the proposed FY 2008-based RPL market 

basket update, which is estimated to be 

2.8 percent. This proposed increase 

factor is then reduced by the MFP 

adjustment (the 10-year moving average 

of MFP for the period ending FY 2012) 

of 1.2 percentage points, based on the 

proposed methodology described above 

and IHS Global Insight’s 1st quarter 

2011 forecast. The proposed increase 

factor for FY 2012 is then further 

reduced by 0.1 percentage point in 

accordance with sections 

1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) 

of the Act. The resulting proposed IRF 

PPS increase factor reduced by the 

productivity adjustment and the ‘‘other 

adjustment’’ for FY 2012 is equal to 1.5 

percent, or 2.8 percent less 1.2 

percentage points for the MFP less 0.1 

percentage point in accordance with 

sections 1886(j)(3)(C)(ii)(II) and 

1886(j)(3)(D)(ii) of the Act. Consistent 

with historical practice, we propose to 

update the market basket increase factor 

estimate and the MFP adjustment in the 

final rule to reflect the most recent 

available data. 

4. Proposed Calculation of the LaborRelated Share for FY 2012 

Section 1886(j)(6) of the Act specifies 

that ‘‘[t]he Secretary shall adjust the 

proportion (as estimated by the 

Secretary from time to time) of 

rehabilitation facilities’ costs which are 

attributable to wages and wage-related 

costs, of the prospective payment rates 

computed under paragraph (3) for area 

differences in wage levels by a factor 

(established by the Secretary) reflecting 

the relative hospital wage level in the 

geographic area of the rehabilitation 

facility compared to the national 

average wage level for such facilities. 

Not later than October 1, 2001 (and at 

least every 36 months thereafter), the 

Secretary shall update the factor under 

the preceding sentence on the basis of 

information available to the Secretary 

(and updated as appropriate) of the 

wages and wage-related costs incurred 

in furnishing rehabilitation services. 

Any adjustments or updates made under 

this paragraph for a fiscal year shall be 

made in a manner that assures that the 

aggregated payments under this 

subsection in the fiscal year are not 

greater or less than those that would 

have been made in the year without 

such adjustment.’’ 

The labor-related share is determined 

by identifying the national average 

proportion of total costs that are related 

to, influenced by, or vary with the local 

labor market. We continue to classify a 

cost category as labor-related if the costs 

are labor-intensive and vary with the 

local labor market. Given this, based on 

our definition of the labor-related share, 

we are proposing 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-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 laborintensive 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 FY 2006 IRF PPS final 

rule (70 FR 47880, 47915), the laborrelated share was defined as the sum of 

the relative importance of Wages and 

Salaries, Fringe Benefits, Professional 

Fees, Labor-intensive Services, and a 

portion of the capital share from an 

appropriate market basket. Therefore, to 

determine the labor-related share for the 

IRF PPS for FY 2011, we used the FY 

2002-based RPL market basket cost 

weights relative importance to 

determine the labor-related share for the 

IRF PPS. 

For the 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 remains 

consistent with the current labor-related 

share because this cost category was 

previously included in the Laborintensive cost category. As previously 

stated, we are proposing to establish a 

separate Administrative and Business 

Support Service cost category so that we 

can use the ECI for Compensation for 

Office and Administrative Support 

Services to more precisely proxy these 

specific expenses. 

For the FY 2002-based RPL market 

basket, we assumed that all nonmedical 

professional services (including 

accounting and auditing services, 


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24242 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

engineering services, legal services, and 

management and consulting services) 

were purchased in the local labor 

market and, therefore, all of their 

associated fees varied with the local 

labor market. As a result, we previously 

included 100 percent of these costs in 

the labor-related share. In an effort to 

more accurately determine the share of 

professional fees that should be 

included in the labor-related share, we 

surveyed hospitals regarding the 

proportion of those fees that go to 

companies that are located beyond their 

own local labor market (the results are 

discussed below). 

We continue to look for ways to refine 

our market basket approach to more 

accurately account for the proportion of 

costs influenced by the local labor 

market. To that end, we conducted a 

survey of hospitals to empirically 

determine the proportion of contracted 

professional services purchased by the 

industry that are attributable to local 

firms and the proportion that are 

purchased from national firms. We 

notified the public of our intent to 

conduct this survey on December 9, 

2005 (70 FR 73250) and received no 

comments. 

With approval from the OMB (Control 

Number 0938–1036), we contacted a 

sample of IPPS hospitals and received 

responses to our survey from 108 

hospitals. We believe that these data 

serve as an appropriate proxy for the 

purchasing patterns of professional 

services for IRFs as they are also 

institutional providers of health care 

services. Using data on FTEs to allocate 

responding hospitals across strata 

(region of the country and urban/rural 

status), we calculated post-stratification 

weights. Based on these weighted 

results, we determined that hospitals 

purchase, on average, the following 

portions of contracted professional 

services outside of their local labor 

market: 

• 34 percent of accounting and 

auditing services. 

• 30 percent of engineering services. 

• 33 percent of legal services. 

• 42 percent of management 

consulting services. 

We applied each of these percentages 

to its respective Benchmark I–O cost 

category underlying the professional 

fees cost category to determine the 

Professional Fees: Nonlabor-related 

costs. The Professional Fees: Laborrelated costs were determined to be the 

difference between the total costs for 

each Benchmark I–O category and the 

Professional Fees: Nonlabor-related 

costs. This is the methodology that we 

used to separate the FY 2008-based RPL 

market basket professional fees category 

into Professional Fees: Labor-related 

and Professional Fees: Nonlabor-related 

cost categories. In addition to the 

professional services listed above, we 

also classified expenses under NAICS 

55, Management of Companies and 

Enterprises, into the Professional Fees 

cost category as was done in previous 

rebasings. The NAICS 55 data are 

mostly comprised of corporate, 

subsidiary, and regional managing 

offices, or otherwise referred to as home 

offices. Formerly, all of the expenses 

within this category were considered to 

vary with, or be influenced by, the local 

labor market and were thus included in 

the labor-related share. Because many 

hospitals are not located in the same 

geographic area as their home office, we 

analyzed data from a variety of sources 

in order to determine what proportion 

of these costs should be appropriately 

included in the labor-related share. 

Using data primarily from the 

Medicare cost reports and a CMS 

database of Home Office Medicare 

Records (HOMER) (a database that 

provides city and state information 

(addresses) for home offices), we were 

able to determine that 19 percent of the 

total number of freestanding IRFs, IPFs, 

and LTCHs that had home offices had 

those home offices located in their 

respective local labor markets—defined 

as being in the same Metropolitan 

Statistical Area (MSA). 

The Medicare cost report requires 

hospitals to report their home office 

provider numbers. Using the HOMER 

database to determine the home office 

location for each home office provider 

number, we compared the location of 

the provider with the location of the 

hospital’s home office. We then placed 

providers into one of the following three 

groups: 

• Group 1—Provider and home office 

are located in different States. 

• Group 2—Provider and home office 

are located in the same State and same 

city. 

• Group 3—Provider and home office 

are located in the same State and 

different city. 

We found that 63 percent of the 

providers with home offices were 

classified into Group 1 (that is, different 

State) and, thus, these providers were 

determined to not be located in the 

same local labor market as their home 

office. Although there were a very 

limited number of exceptions (that is, 

providers located in different States but 

the same MSA as their home office), the 

63 percent estimate was unchanged. 

We found that 9 percent of all 

providers with home offices were 

classified into Group 2 (that is, same 

State and same city and, therefore, the 

same MSA). Consequently, these 

providers were determined to be located 

in the same local labor market as their 

home offices. 

We found that 27 percent of all 

providers with home offices were 

classified into Group 3 (that is, same 

State and different city). Using data 

from the Census Bureau to determine 

the specific MSA for both the provider 

and its home office, we found that 10 

percent of all providers with home 

offices were identified as being in the 

same State, a different city, but the same 

MSA. 

Pooling these results, we were able to 

determine that approximately 19 

percent of providers with home offices 

had home offices located within their 

local labor market (that is, 9 percent of 

providers with home offices had their 

home offices in the same State and city 

(and, thus, the same MSA), and 10 

percent of providers with home offices 

had their home offices in the same State, 

a different city, but the same MSA). We 

are proposing to apportion the NAICS 

55 expense data by this percentage. 

Thus, we are proposing to classify 19 

percent of these costs into the 

Professional Fees: Labor-related cost 

category and the remaining 81 percent 

into the Professional Fees: Nonlaborrelated Services cost category. 

Using this proposed method and the 

IHS Global Insight, Inc. forecast for the 

1st quarter 2011 of the proposed FY 

2008-based RPL market basket, the IRF 

labor-related share for FY 2012 is the 

sum of the FY 2012 relative importance 

of each labor-related cost category. 

Consistent with our proposal to update 

the labor-related share with the most 

recent available data, the labor-related 

share for this proposed rule reflects IHS 

Global Insight’s 1st quarter 2011 forecast 

of the proposed FY 2008-based RPL 

market basket. Table 9 shows the 

proposed FY 2012 relative importance 

labor-related share using the proposed 

FY 2008-based RPL market basket and 

the FY 2002-based RPL market basket. 


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The proposed labor-related share for 

FY 2012 is the sum of the proposed FY 

2012 relative importance of each laborrelated cost category, and would reflect 

the different rates of price change for 

these cost categories between the base 

year (FY 2008) and FY 2012. The sum 

of the proposed relative importance for 

FY 2012 for operating costs (Wages and 

Salaries, Employee Benefits, 

Professional Fees: Labor-Related, 

Administrative and Business Support 

Services, and All Other: Labor-related 

Services) would be 66.689 percent, as 

shown in Table 9. 

We are proposing that the portion of 

Capital that is influenced by the local 

labor market is estimated to be 46 

percent, which is the same percentage 

applied to the FY 2002-based RPL 

market basket. Since the relative 

importance for Capital-Related Costs 

would be 7.923 percent of the proposed 

FY 2008-based RPL market basket in FY 

2012, we are proposing to take 46 

percent of 7.923 percent to determine 

the proposed labor-related share of 

Capital for FY 2012. The result would 

be 3.645 percent, which we propose to 

add to 66.689 percent for the operating 

cost amount to determine the total 

proposed labor-related share for FY 

2012. Thus, the labor-related share that 

we propose to use for IRF PPS in FY 

2012 would be 70.334 percent. This 

proposed labor-related share is 

determined using the same methodology 

as employed in calculating all previous 

IRF labor-related shares. The wage 

index and the labor-related share are 

adjusted for budget neutrality. 

B. Proposed Area Wage Adjustment 

Section 1886(j)(6) of the Act requires 

the Secretary to adjust the proportion of 

rehabilitation facilities’ costs 

attributable to wages and wage related 

costs (as estimated by the Secretary from 

time to time) by a factor (established by 

the Secretary) reflecting the relative 

hospital wage level in the geographic 

area of the rehabilitation facility 

compared to the national average wage 

level for those facilities. The Secretary 

is required to update the IRF PPS wage 

index on the basis of information 

available to the Secretary on the wages 

and wage-related costs to furnish 

rehabilitation services. Any adjustment 

or updates made under section 

1886(j)(6) of the Act for a FY are made 

in a budget neutral manner. 

In the FY 2009 IRF PPS final rule 

(73 FR 46378), we maintained the 

methodology described in the FY 2006 

IRF PPS final rule to determine the wage 

index, labor market area definitions and 

hold harmless policy consistent with 

the rationale outlined in the FY 2006 

IRF PPS final rule (70 FR 47880, 47917 

through 47926). 

For FY 2012, we are maintaining the 

policies and methodologies described in 

the FY 2009 IRF PPS final rule (73 FR 

46378) relating to the labor market area 

definitions and the wage index 

methodology for areas with wage data. 

Thus, we are using the CBSA labor 

market area definitions and the FY 2011 

pre-reclassification and pre-floor 

hospital wage index data. In accordance 

with section 1886(d)(3)(E) of the Act, 

the FY 2011 pre-reclassification and 

pre-floor hospital wage index is based 

on data submitted for hospital cost 

reporting periods beginning on or after 

October 1, 2006, and ending September 

30, 2007 (that is, FY 2007 cost report 

data). 

The labor market designations made 

by the OMB include some geographic 

areas where there are no hospitals and, 

thus, no hospital wage index data on 

which to base the calculation of the IRF 

PPS wage index. We propose to 

continue to use the same methodology 

discussed in the FY 2008 IRF PPS final 

rule (72 FR 44299) to address those 

geographic areas where there are no 

hospitals and, thus, no hospital wage 

index data in which to base the 

calculation for the FY 2012 IRF PPS 

wage index. 


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Additionally, we propose to 

incorporate the CBSA changes 

published in the most recent OMB 

bulletin that applies to the hospital 

wage data used to determine the current 

IRF PPS wage index. The changes were 

nominal and did not represent 

substantive changes to the CBSA-based 

designations. Specifically, OMB added 

or deleted certain CBSA numbers and 

revised certain titles. The OMB bulletins 

are available at http://www.whitehouse.

gov/omb/bulletins/index.html. 

To calculate the wage-adjusted facility 

payment for the payment rates set forth 

in this proposed rule, we multiply the 

unadjusted Federal payment rate for 

IRFs by the proposed FY 2012 laborrelated share based on the FY 2008- 

based RPL market basket (70.334 

percent) to determine the labor-related 

portion of the standard payment 

amount. We then multiply the laborrelated portion by the applicable IRF 

wage index from the tables in the 

addendum to this proposed rule. Table 

A is for urban areas and Table B is for 

rural areas. 

Adjustments or updates to the IRF 

wage index made under section 

1886(j)(6) of the Act must be made in a 

budget neutral manner. We calculate a 

proposed budget neutral wage 

adjustment factor as established in the 

FY 2004 IRF PPS final rule (68 FR 

45689), codified at § 412.624(e)(1), as 

described in the steps below. We use the 

listed steps to ensure that the proposed 

FY 2012 IRF standard payment 

conversion factor reflects the update to 

the wage indexes (based on the FY 2007 

hospital cost report data) and the 

proposed labor-related share in a budget 

neutral manner: 

Step 1. Determine the total amount of 

the estimated FY 2011 IRF PPS rates, 

using the FY 2011 standard payment 

conversion factor and the labor-related 

share and the wage indexes from FY 

2011 (as published in the FY 2011 IRF 

PPS final rule (75 FR 42836)). 

Step 2. Calculate the total amount of 

estimated IRF PPS payments using the 

FY 2011 standard payment conversion 

factor and the proposed FY 2012 laborrelated share and CBSA urban and rural 

wage indexes. 

Step 3. Divide the amount calculated 

in step 1 by the amount calculated in 

step 2. The resulting quotient is the 

proposed FY 2012 budget neutral wage 

adjustment factor of 0.9989. 

Step 4. Apply the proposed FY 2012 

budget neutral wage adjustment factor 

from step 3 to the FY 2011 IRF PPS 

standard payment conversion factor 

after the application of the adjusted 

market basket update to determine the 

proposed FY 2012 standard payment 

conversion factor. 

We discuss the calculation of the 

proposed standard payment conversion 

factor for FY 2012 in section V.C. of this 

proposed rule. 

C. Description of the Proposed IRF 

Standard Conversion Factor and 

Payment Rates for FY 2012 

To calculate the proposed standard 

payment conversion factor for FY 2012, 

as illustrated in Table 10, we begin by 

applying the proposed adjusted market 

basket increase factor for FY 2012 that 

was adjusted in accordance with 

sections 1886(j)(3)(C) and (D) of the Act 

(1.5 percent, or 2.8 percent less a 

cumulative total adjustment of 1.3 

percentage points, as described in 

section V.A.3. of this proposed rule), to 

the standard payment conversion factor 

for FY 2011 ($13,860). Applying the 

proposed 1.5 percent adjusted market 

basket increase factor for FY 2012 to the 

standard payment conversion factor for 

FY 2011 of $13,860 yields a standard 

payment amount of $14,068. Then, we 

apply the proposed budget neutrality 

factor for the FY 2012 wage index and 

labor-related share of 0.9989, which 

results in a standard payment amount of 

$14,052. Then we apply the proposed 

budget neutrality factor for the revised 

CMG relative weights of 0.9989, which 

results in a proposed standard payment 

amount of $14,037. Finally, we apply 

the proposed budget neutrality factors 

for the updates to the rural, LIP and IRF 

teaching status adjustments of 0.9998, 

1.0327, and 1.0024, respectively, which 

results in a proposed standard payment 

amount of $14,528 for FY 2012. 


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BILLING CODE 4120–01–P 

After the application of the CMG 

relative weights described in Section III 

of this proposed rule, to the proposed 

FY 2012 standard payment conversion 

factor ($14,528), the resulting proposed 

unadjusted IRF prospective payment 

rates for FY 2012 are shown in Table 11, 

‘‘Proposed FY 2012 Payment Rates.’’ 


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BILLING CODE 4120–01–C 

D. Example of the Methodology for 

Adjusting the Proposed Federal 

Prospective Payment Rates 

Table 12 illustrates the methodology 

for adjusting the proposed Federal 

prospective payments (as described in 

sections V.A. through V.C. of this 

proposed rule). The following examples 

are based on two hypothetical Medicare 

beneficiaries, both classified into CMG 

0110 (without comorbidities). The 

proposed unadjusted Federal 

prospective payment rate for CMG 0110 

(without comorbidities) appears in 

Table 11. 

Example: One beneficiary is in Facility A, 

an IRF located in rural Spencer County, 

Indiana, and another beneficiary is in Facility 

B, an IRF located in urban Harrison County, 

Indiana. Facility A, a rural non-teaching 

hospital has a DSH percentage of 5 percent 

(which would result in a LIP adjustment of 

1.0093), a wage index of 0.8391, and a rural 

adjustment of 18.7 percent. Facility B, an 

urban teaching hospital, has a DSH 

percentage of 15 percent (which would result 

in a LIP adjustment of 1.0269 percent), a 

wage index of 0.8896, and a teaching status 

adjustment of 0.0610. 

To calculate each IRF’s labor and nonlabor portion of the proposed Federal 

prospective payment, we begin by 

taking the proposed unadjusted Federal 

prospective payment rate for CMG 0110 

(without comorbidities) from Table 11. 

Then, we multiply the proposed laborrelated share for FY 2012 (70.334 

percent) described in section V.A.4 of 

this proposed rule by the proposed 

unadjusted Federal prospective 

payment rate. To determine the nonlabor portion of the proposed Federal 

prospective payment rate, we subtract 

the labor portion of the proposed 

Federal payment from the proposed 

unadjusted Federal prospective 

payment. 

To compute the proposed wageadjusted Federal prospective payment, 

we multiply the labor portion of the 

proposed Federal payment by the 

appropriate wage index found in the 

addendum in Tables A and B. The 

resulting figure is the wage-adjusted 

labor amount. Next, we compute the 

proposed wage-adjusted Federal 

payment by adding the wage-adjusted 

labor amount to the non-labor portion. 

Adjusting the proposed wage-adjusted 

Federal payment by the facility-level 

adjustments involves several steps. 

First, we take the wage-adjusted Federal 

prospective payment and multiply it by 

the appropriate rural and LIP 

adjustments (if applicable). Second, to 

determine the appropriate amount of 

additional payment for the teaching 

status adjustment (if applicable), we 

multiply the teaching status adjustment 

(0.0610, in this example) by the wageadjusted and rural-adjusted amount (if 

applicable). Finally, we add the 

additional teaching status payments (if 

applicable) to the wage, rural, and LIPadjusted Federal prospective payment 

rates. Table 12 illustrates the 

components of the adjusted payment 

calculation. 


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Thus, the proposed adjusted payment 

for Facility A would be $32,392.77 and 

the proposed adjusted payment for 

Facility B would be $30,592.91. 

VI. Proposed Update to Payments for 

High-Cost Outliers Under the IRF PPS 

A. Proposed Update to the Outlier 

Threshold Amount for FY 2012 

Section 1886(j)(4) of the Act provides 

the Secretary with the authority to make 

payments in addition to the basic IRF 

prospective payments for cases 

incurring extraordinarily high costs. A 

case qualifies for an outlier payment if 

the estimated cost of the case exceeds 

the adjusted outlier threshold. We 

calculate the adjusted outlier threshold 

by adding the IRF PPS payment for the 

case (that is, the CMG payment adjusted 

by all of the relevant facility-level 

adjustments) and the adjusted threshold 

amount (also adjusted by all of the 

relevant facility-level adjustments). 

Then, we calculate the estimated cost of 

a case by multiplying the IRF’s overall 

CCR by the Medicare allowable covered 

charge. If the estimated cost of the case 

is higher than the adjusted outlier 

threshold, we make an outlier payment 

for the case equal to 80 percent of the 

difference between the estimated cost of 

the case and the outlier threshold. 

In the FY 2002 IRF PPS final rule (66 

FR 41362 through 41363), we discussed 

our rationale for setting the outlier 

threshold amount for the IRF PPS so 

that estimated outlier payments would 

equal 3 percent of total estimated 

payments. For the 2002 IRF PPS final 

rule, we analyzed various outlier 

policies using 3, 4, and 5 percent of the 

total estimated payments, and we 

concluded that an outlier policy set at 

3 percent of total estimated payments 

would optimize the extent to which we 

could reduce the financial risk to IRFs 

of caring for high-cost patients, while 


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still providing for adequate payments 

for all other (non-high cost outlier) 

cases. 

Subsequently, we updated the IRF 

outlier threshold amount in the FYs 

2006 through 2010 IRF PPS final rules 

and the FY 2011 notice (70 FR 47880, 

71 FR 48354, 72 FR 44284, 73 FR 46370, 

74 FR 39762, and 75 FR 42836, 

respectively) to maintain estimated 

outlier payments at 3 percent of total 

estimated payments. We also stated in 

the FY 2009 final rule (73 FR 46370 at 

46385) that we would continue to 

analyze the estimated outlier payments 

for subsequent years and adjust the 

outlier threshold amount as appropriate 

to maintain the 3 percent target. 

To update the IRF outlier threshold 

amount for FY 2012, we propose to use 

FY 2010 claims data and the same 

methodology that we used to set the 

initial outlier threshold amount in the 

FY 2002 IRF PPS final rule (66 FR 41316 

and 41362 through 41363), which is also 

the same methodology that we used to 

update the outlier threshold amounts for 

FYs 2006 through 2011. Based on an 

analysis of this updated data, we 

estimate that IRF outlier payments as a 

percentage of total estimated payments 

are approximately 2.7 percent in FY 

2011. Based on the updated analysis, we 

propose to update the outlier threshold 

amount to $11,822 to maintain 

estimated outlier payments at 

approximately 3 percent of total 

estimated aggregate IRF payments for 

FY 2012. 

The proposed outlier threshold 

amount of $11,822 for FY 2012 is 

subject to change in the final rule if 

more recent data become available for 

analysis or if any changes are made to 

any of the other proposed payment 

policies set forth in this proposed rule. 

B. Proposed Update to the IRF Cost-toCharge Ratio Ceilings 

In accordance with the methodology 

stated in the FY 2004 IRF PPS final rule 

(68 FR 45674, 45692 through 45694), we 

apply a ceiling to IRFs’ CCRs. Using the 

methodology described in that final 

rule, we propose to update the national 

urban and rural CCRs for IRFs, as well 

as the national CCR ceiling for FY 2012, 

based on analysis of the most recent 

data that is available. We apply the 

national urban and rural CCRs in the 

following situations: 

• New IRFs that have not yet 

submitted their first Medicare cost 

report. 

• IRFs whose overall CCR is in excess 

of the national CCR ceiling for FY 2012, 

as discussed below. 

• Other IRFs for which accurate data 

to calculate an overall CCR are not 

available. 

Specifically, for FY 2012, we estimate 

a proposed national average CCR of 

0.669 for rural IRFs, which we calculate 

by taking an average of the CCRs for all 

rural IRFs using their most recently 

submitted cost report data. Similarly, 

we estimate a national average CCR of 

0.520 for urban IRFs, which we 

calculate by taking an average of the 

CCRs for all urban IRFs using their most 

recently submitted cost report data. We 

apply weights to both of these averages 

using the IRFs’ estimated costs, meaning 

that the CCRs of IRFs with higher costs 

factor more heavily into the averages 

than the CCRs of IRFs with lower costs. 

For this proposed rule, we have used 

the most recent available cost report 

data (FY 2009). This includes all IRFs 

whose cost reporting periods begin on 

or after October 1, 2008, and before 

October 1, 2009. If, for any IRF, the FY 

2009 cost report was missing or had an 

‘‘as submitted’’ status, we used data from 

a previous fiscal year’s (that is, FY 2004 

through FY 2008) settled cost report for 

that IRF. We do not use cost report data 

from before FY 2004 for any IRF because 

changes in IRF utilization since FY 2004 

resulting from the 60 percent rule and 

IRF medical review activities suggest 

that these older data do not adequately 

reflect the current cost of care. 

In addition, in accordance with past 

practice, we propose to set the national 

CCR ceiling at 3 standard deviations 

above the mean CCR. Using this 

method, the national CCR ceiling is set 

at 1.55 for FY 2012. This means that, if 

an individual IRF’s CCR exceeds this 

ceiling of 1.55 for FY 2012, we would 

replace the IRF’s CCR with the 

appropriate national average CCR (either 

rural or urban, depending on the 

geographic location of the IRF). We 

estimate the national CCR ceiling by: 

Step 1. Taking the national average 

CCR (weighted by each IRF’s total costs, 

as discussed above) of all IRFs for which 

we have sufficient cost report data (both 

rural and urban IRFs combined). 

Step 2. Estimating the standard 

deviation of the national average CCR 

computed in step 1. 

Step 3. Multiplying the standard 

deviation of the national average CCR 

computed in step 2 by a factor of 3 to 

compute a statistically significant 

reliable ceiling. 

Step 4. Adding the result from step 3 

to the national average CCR of all IRFs 

for which we have sufficient cost report 

data, from step 1. 

We note that the proposed national 

average rural and urban CCRs and our 

estimate of the national CCR ceiling in 

this section are subject to change in the 

final rule if more recent data become 

available for use in these analyses. 

VII. Impact of the IPPS Data Matching 

Process Changes on the IRF PPS 

Calculation of the Low-Income 

Percentage Adjustment Factor 

Section 1886(j)(3)(A)(v) of the Act 

confers broad authority upon the 

Secretary to adjust the per unit payment 

rate ‘‘by such * * * factors as the 

Secretary determines are necessary to 

properly reflect variations in necessary 

costs of treatment among rehabilitation 

facilities.’’ For example, we adjust the 

Federal prospective payment amount 

associated with a CMG to account for 

facility-level characteristics such as an 

IRF’s LIP, teaching status, and location 

in a rural area, if applicable, as 

described in § 412.624(e). 

In the FY 2002 IRF PPS final rule (66 

FR 41359 through 41361) that 

implemented the IRF PPS, we 

established the IRF LIP adjustment. In 

that final rule, we said that we would 

calculate the LIP adjustment by using 

the same disproportionate share 

hospital (DSH) patient percentage used 

in the acute IPPS DSH adjustment. 

The DSH patient percentage is equal 

to the sum of the ‘‘Supplemental 

Security Income (SSI) fraction’’ and the 

‘‘Medicaid Fraction.’’ We compute the 

SSI fraction (also known as the ‘‘SSI 

ratio’’ or the ‘‘Medicare fraction’’) by 

dividing the number of the facility’s 

inpatient days that are furnished to 

patients who were entitled to both 

Medicare Part A (including patients 

who are enrolled in a Medicare 

Advantage (Part C) plan) and SSI 

benefits by the facility’s total number of 

patient days furnished to patients 

entitled to benefits under Medicare Part 

A (including patients who are enrolled 

in a Medicare Advantage (Part C) plan). 

To determine the number of inpatient 

days for individuals entitled to both 

Medicare Part A and SSI, as required for 

calculation of the numerator of the SSI 

fraction, CMS matches the Medicare 

records and SSI eligibility records for 

each IRF’s patients during the FY. The 

data underlying the match process are 

drawn from: (a) The Medicare Provider 

Analysis and Review (MedPAR) data 

file; and (b) SSI eligibility data provided 

by the Social Security Administration 

(SSA). CMS recently revised this data 

match. See the FY 2011 IPPS final rule 

(75 FR 50041, 50276). 

As previously stated, it is our policy 

to calculate the LIP adjustment using 

the same DSH patient percentage used 

in the acute IPPS DSH adjustment. In 

keeping with this long-standing policy, 

we will use the same matching process 


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as IPPS for calculating the SSI fractions 

for FYs 2011 and beyond. This process 

is described in the FY 2011 IPPS final 

rule, and will be used to calculate IRFs’ 

SSI fractions for FY 2011. The FY 2011 

IPPS final rule (75 FR 50277 through 

50286) gives information on this revised 

data matching process. 

VIII. Proposed Updates to the Policies 

in 42 CFR Part 412 

Prior to the implementation of the IRF 

PPS on January 1, 2002, IRFs were paid 

based on the costs that they reported on 

their Medicare cost reports, subject to 

some limits. To simplify the cost 

reporting process, both for providers 

and for CMS and the Medicare 

contractors that monitored the cost 

reports, regulations were put into place 

that carefully defined, for example, 

when and how providers could be 

considered ‘‘new’’ and when and how 

they could expand their bed size and 

square footage. Under the IRF PPS, 

however, Medicare pays IRFs according 

to Federal prospective payment rates 

that are no longer tied to an individual 

IRF’s Medicare cost reports. This new 

payment methodology has made some 

of the requirements regarding new IRFs 

and IRF expansions obsolete. 

In addition, prior to 2002, the 

regulations distinguished between 

freestanding rehabilitation hospitals and 

rehabilitation units of acute care 

hospitals, with separate regulatory 

sections for the two types of facilities 

even though many of the same 

requirements applied to both. Under the 

IRF PPS, the distinctions between 

freestanding IRFs and IRF units are no 

longer relevant because both types of 

facilities are paid the same and are 

subject to the same rules and 

requirements. The current separation of 

the regulatory sections results in 

unnecessary repetition and confusion 

about which regulations apply to which 

types of facilities. 

In addition, we added new IRF 

coverage requirements to 

§ 412.622(a)(3), (4), and (5) in the FY 

2010 IRF PPS final rule (74 FR 39762 at 

39811 through 39812) for IRF discharges 

occurring on or after January 1, 2010. 

Several of the IRF conditions of 

payment in the existing § 412.23(b) and 

§ 412.29, including the requirements for 

preadmission screenings to be 

conducted on all prospective patients, 

the requirements for IRF patients to 

receive close medical supervision, the 

requirements for plans of care to be 

developed for all IRF patients, and the 

requirements for patients to receive an 

interdisciplinary approach to care in the 

IRF, mirror some of the IRF coverage 

requirements in § 412.622(a)(3), (4), and 

(5). 

Finally, in recent years, we have 

observed an increase in the number and 

complexity of acquisitions and mergers 

occurring in this industry. In some 

cases, the current Medicare rules and 

requirements for IRFs do not adequately 

address the number and complexity of 

acquisitions and mergers because they 

simply did not occur when the 

regulations were written. In other cases, 

regulations were written to address 

issues that do not exist today. 

For all of these reasons, in this 

proposed rule we propose to 

consolidate, clarify, and revise the 

regulations for inpatient rehabilitation 

facilities at § 412.23(b), § 412.25(b), 

§ 412.29, and § 412.30 to update and 

simplify the policies, to eliminate 

unnecessary repetition and confusion, 

and to enhance the consistency with the 

IRF coverage requirements in 

§ 412.622(a)(3), (4), and (5). Since the 

proposed modifications would 

eliminate regulations that may no longer 

be strictly necessary under the IRF PPS, 

they would enable IRFs to more easily 

adjust to beneficiary changes in demand 

for IRF services, which would improve 

beneficiary access to these services. The 

proposed modifications would also 

reduce costs for providers and for the 

government by reducing the amount of 

time and expenditures devoted to 

adhering to (for providers) and 

enforcing (for the government) 

regulations that may no longer be 

strictly necessary. Since we have no 

way of determining how many IRFs 

might take advantage of the added 

flexibility these regulations afford to 

expand or change their operations, we 

are not able to quantify the savings. 

However, for example, each time an IRF 

unit submits a request to add beds to its 

facility under the current regulations, 

the Medicare contractor must determine 

whether or not the added IRF beds will 

be considered ‘‘new.’’ To be considered 

‘‘new,’’ the beds must be added at the 

start of a cost reporting period, and the 

hospital must have ‘‘obtained approval, 

under State licensure and Medicare 

certification, for an increase in its 

hospital bed capacity that is greater than 

50 percent of the number of beds it 

seeks to add to the unit.’’ We believe 

that the first requirement (that beds can 

only be added at the start of a cost 

reporting period) is difficult, and 

potentially costly, for IRFs that are 

expanding through new construction 

because the exact timing of the end of 

a construction project is often difficult 

to predict. Construction delays can 

hamper an IRF’s ability to have the 

construction completed exactly at the 

start of a cost reporting period, which 

can lead to significant revenue loss for 

the facility if the IRF is unable to add 

beds until the next cost reporting 

period. We believe that it is no longer 

necessary to require IRF beds to be 

added at the start of a cost reporting 

period. Further, the current regulations 

require Medicare contractors to expend 

unnecessary resources determining 

whether the IRF has met the second 

criteria, which requires the hospital to 

have ‘‘obtained approval, under State 

licensure and Medicare certification, for 

an increase in its hospital bed capacity 

that is greater than 50 percent of the 

number of beds it seeks to add to the 

unit.’’ The proposed modifications to the 

regulations are designed to simplify the 

regulations in order to minimize the 

amount of effort that Medicare 

contractors would need to spend 

enforcing them. Finally, the proposed 

modifications would enhance the 

consistency between the IRF coverage 

and payment requirements. 

We note that § 412.25(b) applies to 

both IRFs and inpatient psychiatric 

facilities (IPFs), so the proposed 

revisions to § 412.25(b) would also 

affect IPFs in similar ways. 

A. Proposed Consolidation of the 

Requirements for Rehabilitation 

Hospitals and Rehabilitation Units 

Under the IRF PPS, rehabilitation 

hospitals and rehabilitation units of 

acute care hospitals (and critical access 

hospitals (CAHs)) are paid the same 

and, with very few exceptions, are 

subject to the same Medicare rules and 

requirements. For this reason, we 

believe that it is no longer necessary to 

have separate sections in 42 CFR part 

412 that define the requirements for 

rehabilitation hospitals and 

rehabilitation units of acute care 

hospitals (and CAHs). This leads to 

excessive repetition and potential 

confusion about which rules apply to 

which types of facilities. 

Thus, we propose to revise and 

consolidate the regulations for 

rehabilitation facilities that are currently 

in § 412.23(b) (for rehabilitation 

hospitals), § 412.29 (for rehabilitation 

units), and § 412.30 (for rehabilitation 

units) into a revised § 412.29 that would 

contain the requirements for all IRFs, 

whether they be freestanding 

rehabilitation hospitals or rehabilitation 

units of acute care hospitals (or CAHs). 

We believe that this would simplify the 

regulations by consolidating the 

majority of the requirements for IRFs 

into just one sub-section of part 412. 

Although we are proposing slight 

modifications to the regulations in 

§ 412.25(b), as discussed in section 


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VII.C. of this proposed rule, we are not 

proposing to move the IRF regulations 

in § 412.25 to § 412.29 in this proposed 

rule. The regulations in § 412.25, such 

as the requirement to have beds that are 

physically separate from the rest of the 

hospital, the requirement that the unit 

be serviced by the same Medicare 

contractor as the rest of the hospital, 

and the requirement that the unit be 

treated as a separate cost center for cost 

finding and apportionment purposes, by 

their nature apply uniquely to units that 

are part of another hospital. Since these 

requirements are not applicable to 

freestanding IRFs, we do not believe 

that it would be appropriate to include 

them with the rest of the IRF regulations 

in § 412.29 that are intended to apply to 

both freestanding IRF hospitals and to 

IRF units of hospitals. Further, we are 

not proposing modifications to § 412.25, 

other than the proposed changes to 

§ 412.25(b) as discussed in section VII.C. 

of this proposed rule, because the 

regulations in § 412.25(a) through (g) 

(excluding (b)) remain relevant and 

important for defining IRF units of 

hospitals for payment purposes. 

However, we propose to replace the 

text that is currently located at 

§ 412.23(b) with text that simply refers 

the reader to the requirements in 

§ 412.29, and move the rest of 

§ 412.23(b) and all of § 412.30 to 

§ 412.29. We propose to leave text in 

§ 412.23(b) that refers IRFs to the 

requirements they must meet in § 412.29 

only so that we do not disturb the 

ordering of the rest of § 412.23 that 

contain the Medicare regulations for 

inpatient psychiatric facilities, 

children’s hospitals, and long-term care 

hospitals. Specifically, we propose to 

move all of the text in § 412.23(b) to 

§ 412.29 except for a new paragraph that 

refers to the requirements in § 412.29, 

which would read as follows: ‘‘(b) 

Rehabilitation hospitals. A 

rehabilitation hospital must meet the 

requirements specified in § 412.29 to be 

excluded from the prospective payment 

systems specified in § 412.1(a)(1) and to 

be paid under the prospective payment 

system specified in § 412.1(a)(3) and in 

subpart P of this part.’’ 

B. Proposed Revisions to the 

Regulations at Proposed § 412.29 

As described in section VIII.A. of this 

proposed rule, we propose to replace 

the text that is currently located at 

§ 412.23(b) with text that simply refers 

the reader to the requirements in 

§ 412.29, and move the rest of 

§ 412.23(b) and all of § 412.30 to 

§ 412.29. To eliminate any unnecessary 

repetition, and to update and clarify the 

regulations, we are also proposing 

revisions to the language from all three 

of the current sections, § 412.23(b), 

§ 412.29, and § 412.30. As stated in 

current § 412.30, a rehabilitation unit 

can only be considered ‘‘new’’ if the 

hospital has never had a rehabilitation 

unit before. We have encountered 

circumstances in which a hospital 

closed a rehabilitation unit over 20 

years ago and is now seeking to re-open 

the rehabilitation unit, and we believe 

that it would be reasonable to consider 

the rehabilitation unit to be ‘‘new.’’ 

Thus, we are proposing to revise the 

requirements for an IRF to be 

considered ‘‘new’’ to indicate that an IRF 

can be considered ‘‘new’’ if it has not 

been paid under the IRF PPS in 

42 CFR part 412, subpart P for at least 

5 calendar years. These proposed 

requirements would now apply equally 

to both rehabilitation hospitals and 

rehabilitation units of acute care 

hospitals (or CAHs), and would be 

located in proposed § 412.29(c)(1). We 

believe that 5 calendar years would 

allow a sufficient amount of time 

between an IRF closing and an IRF 

reopening to prevent IRFs from closing 

and reopening annually to avoid 

meeting certain requirements, while 

allowing IRFs more flexibility to meet 

changing demand for IRF services. 

In addition, we propose to clarify and 

simplify the rules regarding change of 

ownership (including mergers) or 

leasing, as defined in § 489.18. Changes 

of ownership or leasing, as defined in 

§ 489.18, and mergers in which the new 

owner(s) accept assignment of the 

previous owner’s provider agreements 

are transfers of the provider agreement. 

Therefore, we propose that IRFs in these 

situations would retain their excluded 

status and would continue to be paid 

under the IRF PPS before and after the 

change, as long as the IRF continues to 

meet all of the requirements specified in 

§ 412.29. However, we propose to clarify 

that a change of ownership (including 

merger) or leasing in which the new 

owner(s) do not accept assignment of 

the previous owner’s provider 

agreement would be considered a 

voluntary termination of the provider 

agreement, and the new owner(s) would 

need to reapply to the Medicare 

program as an initial applicant to 

operate a new IRF. In the case of 

changes of ownership (including 

mergers) or leasing, we propose that the 

new owner(s) would not be required to 

wait for 5 calendar years to reapply to 

operate a new IRF, but would be 

required to complete the initial hospital 

or critical access hospital certification 

process to participate in Medicare as a 

new IRF. 

Further, we also propose to revise the 

regulations regarding new IRF beds. The 

regulations currently in § 412.30(d), 

which require an IRF to obtain 

‘‘approval, under State licensure and 

Medicare certification, for an increase in 

its hospital bed capacity that is greater 

than 50 percent of the number of beds 

it seeks to add to the unit,’’ have become 

less and less relevant under a 

prospective payment system in which 

payments are no longer based on IRFs’ 

reported costs. Thus, we propose to 

eliminate these requirements and, 

instead, propose in § 412.29(c)(2) that 

IRF beds would be considered ‘‘new’’ if 

they meet all applicable State Certificate 

of Need and State licensure laws and if 

they get written approval from the 

appropriate CMS regional office (RO), as 

described below. We propose that new 

IRF beds can be added one time at any 

point during a cost reporting period 

(instead of at the start of a cost reporting 

period), but we propose to require that 

a full 12-month cost reporting period 

elapse before an IRF that has had beds 

delicensed or decertified can add new 

beds. The reason for this proposed 

requirement is to prevent IRFs from 

decreasing and increasing bed size every 

year to avoid having to meet certain 

requirements. We propose to require the 

IRF to obtain written approval from the 

appropriate CMS RO for the addition of 

the new beds in order to allow the CMS 

RO to verify that a full 12-month cost 

reporting period has elapsed before an 

IRF that has had beds delicensed or 

decertified can add new beds. 

C. Proposed Revisions to the 

Requirements for Changes in Bed Size 

and Square Footage 

Prior to the IRF PPS and the IPF PPS, 

excluded units (IRFs and IPFs) were 

paid based on their costs, as reported on 

their Medicare cost reports, subject to 

certain facility-specific cost limits. 

These cost-based payments were 

determined separately for operating and 

capital costs. Thus, under cost-based 

payments, the facilities’ capital costs 

were determined, in part, by their bed 

size and square footage. Changes in the 

bed size and square footage would 

complicate the facilities’ capital cost 

allocation. Thus, the Medicare 

regulations at § 412.25 limited the 

situations under which an IRF or IPF 

could change its bed size and square 

footage. 

Under the IRF PPS and IPF PPS, 

however, a facility’s bed size and square 

footage is not relevant for determining 

the individual facility’s Medicare 

payment. Thus, we believe it is 

appropriate to modify some of the 

restrictions on a facility’s ability to 


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change its bed size and square footage. 

We are therefore proposing in this 

proposed rule to relax the restrictions 

on a facility’s ability to increase its bed 

size and square footage. Under the 

proposed requirements in § 412.25, an 

IRF or IPF could change (either increase 

or decrease) its bed size or square 

footage one time at any point in a given 

cost reporting period as long as it 

notifies the CMS RO within 30 days of 

the proposed change and maintains the 

required documentation. We note that 

any IRF beds that are added to an 

existing IRF during the IRF’s cost 

reporting period would only be 

considered new through the end of that 

cost reporting period. Further, the new 

IRF beds would be included in the IRF’s 

compliance review calculations under 

the 60 percent rule specified in 

§ 412.29(b) beginning on the date that 

they are first added to the IRF. 

D. Proposed Revisions To Enhance 

Consistency Between the IRF Coverage 

and Payment Requirements 

In the FY 2010 IRF PPS final rule (74 

FR 39762 at 39788 through 39798), CMS 

implemented new IRF coverage 

requirements in § 412.622(a)(3),(4), and 

(5). These new IRF coverage 

requirements replaced coverage 

requirements that were 25 years old and 

no longer reflected current medical 

practice. In updating these coverage 

requirements, we added further 

specificity to some of the terms that had 

been discussed in the old coverage 

requirements. For example, we more 

clearly defined in the new IRF coverage 

requirements what we mean by an IRF 

preadmission screening, care planning, 

and close medical supervision. In the 

proposed revisions to § 412.23(b) and 

§ 412.29, we propose to enhance the 

consistency between the IRF coverage 

and payment requirements by 

incorporating some of the added 

specificity from the coverage 

requirements into the same 

requirements for payment. Specifically, 

we propose to clarify that, as in the IRF 

coverage requirements, IRF 

preadmission screenings must be 

reviewed and approved by a 

rehabilitation physician prior to each 

prospective patient’s admission to an 

IRF. As we said in the FY 2010 IRF PPS 

final rule (74 FR 39791), we believe that 

it is important to require that a 

rehabilitation physician document the 

reasoning behind the decision to admit 

a patient to an IRF, to enable medical 

reviewers to understand the rationale 

for the decision. 

Further, we propose to clarify, as we 

did in the coverage requirements at 

§ 412.622(a)(3)(iv), that close medical 

supervision in an IRF means that the 

patient receives at least 3 face-to-face 

visits per week by a licensed physician 

with specialized training and 

experience in inpatient rehabilitation to 

assess the patient both medically and 

functionally, as well as to modify the 

course of treatment as needed to 

maximize the patient’s capacity to 

benefit from the rehabilitation process. 

As we stated in the FY 2010 IRF PPS 

final rule (74 FR 39796), we believe that 

at least 3 face-to-face rehabilitation 

physician visits per week are necessary 

to coordinate the patient’s medical 

needs with his or her functional 

rehabilitation needs while in the 

facility. 

Finally, we propose to clarify that we 

believe that discharge planning, in 

addition to assessment of the patient’s 

goals and progress toward those goals, is 

an integral part of the interdisciplinary 

team approach to care that is provided 

in IRFs. 

The specific proposed changes to the 

regulations at part 412 are shown in the 

‘‘Regulation Text’’ of this proposed rule 

of this proposed rule. We encourage 

stakeholder comment on these proposed 

changes. 

IX. Quality Reporting for Inpatient 

Rehabilitation Hospitals 

A. Background and Statutory Authority 

CMS seeks to promote higher quality 

and more efficient health care for 

Medicare beneficiaries. Our efforts are, 

in part, effectuated by quality reporting 

programs coupled with the public 

reporting of data collected under those 

programs. The quality reporting 

programs exist for various settings such 

as hospital inpatient services (the 

Hospital Inpatient Quality Reporting 

(Hospital IQR) Program), hospital 

outpatient services (the Hospital 

Outpatient Quality Data Reporting 

Program (HOP QDRP)), and for 

physicians and other eligible 

professionals the Physician Quality 

Reporting System (formerly called the 

Physician Quality Reporting Initiative, 

or PQRI). We have also implemented 

quality reporting programs for home 

health agencies and skilled nursing 

facilities that are based on conditions of 

participation, and an end-stage renal 

disease quality incentive program 

(ESRD QIP) that links payment to 

performance. 

Section 3004(b) of the Affordable Care 

Act added section 1886(j)(7) to the Act, 

which requires the Secretary to 

implement a quality reporting program 

for Inpatient Rehabilitation Facilities 

(IRFs), including freestanding IRF 

hospitals and IRF units within 

hospitals. Beginning in FY 2014, section 

1886(j)(7)(A)(i) of the Act requires the 

Secretary to reduce the increase factor 

with respect to a fiscal year by 2 

percentage points for any IRFs that do 

not submit data to the Secretary in 

accordance with requirements 

established by the Secretary for that 

fiscal year. Section 1886(j)(7)(A)(ii) of 

the Act notes that this reduction may 

result in the increase factor being less 

than 0.0 for a fiscal year, and in 

payment rates under this subsection for 

a fiscal year being less than the payment 

rates for the preceding fiscal year. Any 

reduction based on failure to comply 

with the reporting requirements is, in 

accordance with section 1886(j)(7)(B) of 

the Act, limited to the particular fiscal 

year involved. The reductions are not to 

be cumulative and will not be taken into 

account in computing the payment 

amount under subsection (j) for a 

subsequent fiscal year. 

Section 1886(j)(7)(C) of the Act 

requires that each IRF submit data to the 

Secretary on quality measures specified 

by the Secretary. The data must be 

submitted in a form and manner, and at 

a time, specified by the Secretary. The 

Secretary is generally required to 

specify measures that have been 

endorsed by the entity with a contract 

under section 1890(a) of the Act. This 

contract is currently held by the 

National Quality Forum (NQF). The 

NQF is a voluntary consensus standardsetting organization with a diverse 

representation of consumer, purchaser, 

provider, academic, clinical, and other 

health care stakeholder organizations. 

The NQF was established to standardize 

health care quality measurement and 

reporting through its consensus 

development process. We have 

generally adopted NQF-endorsed 

measures in our reporting programs. 

However, section 1886(j)(7)(D)(ii)of the 

Act provides that ‘‘in the case of a 

specified area or medical topic 

determined appropriate by the Secretary 

for which a feasible and practical 

measure has not been endorsed by the 

entity with a contract under section 

1890(a) of the Act, the Secretary may 

specify a measure that is not so 

endorsed as long as due consideration is 

given to measures that have been 

endorsed or adopted by a consensusbased organization identified by the 

Secretary.’’ Under section 

1886(j)(7)(D)(iii) of the Act, the 

Secretary must publish the selected 

measures that will be applicable with 

respect to FY 2014 no later than October 

1, 2012. 

Section 1886(j)(7)(E) of the Act 

requires the Secretary to establish 

procedures for making data submitted 


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1 Klevens RM, Edward JR, et al. Estimating health 

care-associated infections and deaths in U.S. 

hospitals, 2002. Public Health Reports 

2007;122:160–166. 

under the IRF quality reporting program 

available to the public. The Secretary 

must ensure that an IRF is given the 

opportunity to review the data that is to 

be made public prior to the data being 

made public. The Secretary must report 

quality measures that relate to services 

furnished in inpatient settings in 

rehabilitation facilities on the CMS Web 

site. 

B. Quality Measures for IRF Quality 

Reporting Program for FY 2014 

1. General 

We propose to adopt 2 quality 

measures for FY 2014. These quality 

measures are: (1) Urinary CatheterAssociated Urinary Tract Infections 

(CAUTI), and (2) Pressure Ulcers that 

are New or Have Worsened. We also 

discuss below a third measure that we 

are currently developing and intend to 

propose to adopt for FY 2014 in future 

rulemaking. That measure will be the 

30-day Comprehensive All-Cause RiskStandardized Readmission Measure. 

2. Considerations in the Selection of the 

Proposed Quality Measures 

In implementing the IRF Quality 

Reporting Program, we seek to collect 

data on measures that will provide 

information on the full spectrum of the 

quality of care being furnished by IRFs 

while imposing as little burden as 

possible on IRFs. We seek to collect data 

on valid, reliable, and relevant quality 

measures and to make that data 

available to the public in accordance 

with applicable law. 

We also seek to align new Affordable 

Care Act reporting requirements for IRFs 

with HHS high priority conditions and 

topics, as reflected in the National 

Quality Strategy released by the 

Secretary (http://www.healthcare.gov/

center/reports/quality03212011a.

html#es) and to ultimately provide a 

comprehensive assessment of the 

quality of healthcare delivered. We note 

that adopting a comprehensive set of 

measures may take multiple years 

because of the time, effort and resources 

required by IRFs and CMS to develop 

and implement the data collection and 

reporting infrastructure needed to 

support an expanded quality reporting 

program. Current areas of high priority 

for HHS include patient safety, 

healthcare associated infections, and 

reduction of avoidable readmissions. 

These priorities are consistent with the 

aim of providing safe, sound care for all 

patients receiving services in any 

healthcare setting including IRFs. 

In our consideration and selection of 

a comprehensive set of quality 

measures, we have several objectives. 

First, the measures should align with 

CMS’ three-part aim for better care for 

individuals, better health for 

populations, and lower cost through 

improvement. Second, the measures 

should relate to specific priorities in the 

care setting for which they are adopted. 

For IRFs, these include improving 

patient safety (such as avoiding 

healthcare associated infections (HAI)), 

reducing adverse events, and 

encouraging better coordination of care 

and person-and-family-centered care. 

Third, the measures should address 

improved quality for the primary role of 

IRFs, which is to address the 

rehabilitation needs of the individual 

including improved functional status 

and achievement of successful return to 

the community post-discharge. 

Other considerations in proposing 

quality measures include alignment 

with other Medicare quality reporting 

programs and other private sector 

initiatives; suggestions and input 

received from multiple stakeholders and 

national subject matter experts; seeking 

measures that have a low probability of 

causing unintended adverse 

consequences; and considering 

measures that are feasible, that is, 

measures that can be technically 

implemented within the capacity of the 

CMS infrastructure for data collection, 

analyses, and calculation of reporting 

and performance rates as applicable. 

3. FY 2014 Measure #1: Healthcare 

Associated Infection Measure (HAI): 

Urinary Catheter-Associated Urinary 

Tract Infections (CAUTI) 

The first measure we propose for IRFs 

for purposes of calculating the FY 2014 

Increase Factor is an application of the 

NQF-endorsed measure developed by 

the Centers for Disease Control (CDC) 

for hospitals entitled (NQF# 0138) 

‘‘Urinary Catheter-Associated Urinary 

Tract Infection [CAUTI] for Intensive 

Care Unit Patients’’ to the IRF setting. 

This measure was developed by the 

CDC to measure the percentage of 

patients with urinary catheter associated 

urinary tract infections in the ICU 

context. At the time of this proposed 

rule, the measure we are applying 

(NQF# 0138) is undergoing measure 

maintenance review by NQF which may 

result in a change in how the CDC 

calculates the aggregated data from 

using a standard rate for CAUTI, to the 

use of a standardized infection ratio 

(SIR) of healthcare associated urinary 

catheter-associated urinary tract 

infections. We propose to adopt the 

current measure in this rulemaking 

cycle. However, we intend to propose 

the adoption of any modifications to 

this measure that may result from the 

NQF review process in future 

rulemaking. We recognize that the NQF 

has endorsed this measure for the 

hospital setting, but believe that this 

measure is highly relevant to IRFs in 

that urinary catheters are commonly 

used in the IRF setting. Section 

1886(j)(7)(D)(ii) provides that ‘‘in the 

case of a specified area or medical topic 

determined appropriate by the Secretary 

for which a feasible and practical 

measure has not been endorsed by the 

entity with a contract under section 

1890(a), the Secretary may specify a 

measure that is not so endorsed as long 

as due consideration is given to 

measures that have been endorsed or 

adopted by a consensus-based 

organization identified by the 

Secretary.’’ We reviewed the NQF’s 

consensus endorsed measures, and were 

unable to identify any NQF-endorsed 

measures for urinary catheter-associated 

urinary tract infections for the IRF 

setting. We are unaware of any other 

measures of urinary tract infections that 

have been approved by voluntary 

consensus standards bodies. 

Having given due consideration to 

other measures that have been endorsed 

or adopted by a consensus entity, we 

propose to adopt an application of the 

NQF-endorsed CAUTI measure under 

the Secretary’s authority to select nonNQF endorsed measures where NQFendorsed measures do not exist for a 

specified area or medical topic. While 

we are proposing to adopt the measure 

under the exception authority provided 

in section 1886(j)(7)(D)(ii), we note that 

we intend to ask NQF to formally 

extend its endorsement of the existing 

CAUTI measure to the IRF setting. 

Urinary tract infections (UTIs) are a 

common cause of morbidity and 

mortality. The urinary tract is the most 

common site of healthcare-associated 

infection, accounting for more than 30 

percent of infections reported by acute 

care hospitals.1 Healthcare-associated 

UTIs are commonly attributed to 

catheterization of the urinary tract. 

CAUTI can lead to complications as 

cystitis, pyelonephritis, gram-negative 

bacteremia, prostatitis, epididymitis, 

and orchitis in males and, less 

commonly, endocarditis, vertebral 

osteomyelitis, septic arthritis, 

endophthalmitis, and meningitis in all 

patients. Complications associated with 

CAUTI include discomfort to the 

patient, prolonged hospital stay, and 

increased cost and mortality. Each year, 

more than 13,000 deaths are associated 


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24254 Federal Register / Vol. 76, No. 83 / Friday, April 29, 2011 / Proposed Rules 

2Wong ES. Guideline for prevention of catheterassociated urinary tract infections. Infect Control 

1981; 2:126–30. 

with UTIs.1 Prevention of CAUTIs is 

discussed in the CDC/HICPAC 

document, Guideline for Prevention of 

Catheter-associated Urinary Tract 

Infections.2 The NQF endorsed CAUTI 

measure we are proposing is currently 

collected by the CDC’s National 

Healthcare Safety Network (NHSN), a 

secure Internet-based health 

surveillance system, and we note that 

the CDC is also collecting data on this 

measure from IRFs. NHSN is currently 

used, in part, as one means by which 

certain State-mandated reporting and 

surveillance data are collected. 

The HHS National Action Plan to 

Prevent HAI (http://www.hhs.gov/ash/

initiatives/hai/actionplan/index.html) 

identified catheter-associated urinary 

tract infections as the leading type of 

HAI that is largely preventable. The 

technical expert panel (TEP) convened 

by the CMS measure-developercontractor on February 4, 2011 

(https://www.cms.gov/LTCH-IRFHospice-Quality-Reporting/) also 

identified CAUTI as a high priority 

quality issue for IRFs. 

4. FY 2014 Measure #2: Percent of 

Patients With Pressure Ulcers That are 

New or Worsened 

The second measure we propose for 

IRFs for purposes of calculating the FY 

2014 increase factor is an application of 

a CMS developed NQF-endorsed 

measure for short-stay nursing home 

patients; (NQF# NH–012–10) ‘‘Percent of 

Residents with Pressure Ulcers that Are 

New or Worsened.’’ This is the 

percentage of patients who have one or 

more stage 2–4 pressure ulcers that are 

new or worsened, when assessed at the 

time of discharge as compared with the 

patient’s condition when it was assessed 

at admission. We recognize NQF 

endorsement of this measure is limited 

to short-stay nursing home patients, but 

believe that this measure is highly 

relevant and a high priority quality 

issue in the care of IRF patients. 

Currently, there are no other NQFendorsed pressure ulcer measures that 

are applicable to IRFs and we were 

unable to identify other measures for 

pressure ulcers that have been endorsed 

or adopted for the IRF context by a 

consensus organization. We are also 

unaware of any other measures of 

pressure ulcers that have been approved 

by voluntary consensus standards 

bodies. For these reasons, we propose to 

adopt an application of this NQFendorsed measure under the Secretary’s 

authority to select non-NQF endorsed 

measures where measures do not exist 

for a specified area or medical topic. We 

also intend to ask NQF to extend its 

endorsement of the existing short-stay 

nursing home pressure ulcer measure to 

the IRF setting. 

Pressure ulcers are high-volume and 

high-cost adverse events across the 

spectrum of health care settings from 

acute hospitals to home health. Patients 

in the IRF setting may have medically 

complex conditions and severe 

functional limitations, and are therefore 

at high risk for the development, or 

worsening, of pressure ulcers. Pressure 

ulcers are serious medical conditions 

and an important measure of quality. 

Pressure ulcers can lead to serious, lifethreatening infections, which 

substantially increase the total cost of 

care. As reported in the August 22, 

2007, Inpatient Hospital PPS Final Rule 

for FY 2008 (72 FR 47205) in 2006 there 

were 322,946 reported cases of Medicare 

patients with a pressure ulcer as a 

secondary diagnosis in acute care 

hospitals. 

5. Potential FY 2014 measure #3: 30-day 

Comprehensive All-Cause RiskStandardized Readmission Measure 

Avoidable hospital readmissions are a 

high priority for HHS and CMS. We are 

currently developing setting-specific 

risk adjusted 30-day all-condition allcause risk-standardized readmission 

measures for hospitals, IRFs, long term 

care hospitals and nursing homes. The 

main features of the measure 

methodology will be consistent with 

that of the NQF-endorsed CMS hospital 

risk-adjusted 30-day readmission 

measures for the Acute Myocardial 

Infarction (AMI), Heart Failure (HF), 

Pneumonia and Percutaneous Coronary 

Intervention (PCI). We plan to cover the 

maximum number of patient conditions 

possible in the all-condition measures. 

We will consult literature and national 

experts and conduct analyses on the 

types and comorbidities of the patients 

of each setting in order to establish 

appropriate risk-adjustment of the 

measures as well as the meaning/ 

definition of readmission and the 

appropriate time-window for 

readmission for each care setting. To 

expand beyond the condition-specific 

measures to an all-condition 

readmission measure for each setting, 

we will conduct analyses to determine 

whether it is statistically and clinically 

sound to derive the all-condition 

measures from one single risk 

adjustment model, or if it would be 

better to form a composite of multiple 

models for multiple conditions. We plan 

to use hierarchical logistic regression 

modeling to take into account the effects 

of the clustering of patients and the 

sample size in the IRF setting. This 

measure is expected to be completed in 

late 2011, at which time it will be 

submitted to the entity with a contract 

under section 1890(a) of the Act for 

endorsement. 

We invite public comments on the 

proposed quality measures for FY 2014: 

(1) Urinary Catheter-Associated Urinary 

Tract Infections (CAUTI); (2) Pressure 

Ulcers that are New or Have Worsened. 

We also invite public comment on our 

intent to propose a 30-day 

Comprehensive All-Cause RiskStandardized Readmission Measure. 

C. Data Submission Requirements 

1. Proposed Method of Data Submission 

for HAI Measure (CAUTI) 

We propose to require that IRFs 

submit data on the Urinary CatheterAssociated Urinary Tract Infection 

(CAUTI) measure through the Centers 

for Disease Control (CDC)/National 

Healthcare Safety Network (NHSN). As 

we noted above, the NHSN is a secure, 

Internet-based surveillance system 

maintained by the CDC that can be 

utilized by all types of healthcare 

facilities in the United States, including 

acute care hospitals, long term acute 

care hospitals, psychiatric hospitals, 

rehabilitation hospitals, outpatient 

dialysis centers, ambulatory surgery 

centers, and long term care facilities. 

The NHSN enables healthcare facilities 

to collect and use data about HAIs, 

including information on clinical 

practices known to prevent HAIs, 

information on the incidence or 

prevalence of multidrug-resistant 

organisms within their organizations, 

and information on other adverse 

events. Some States use the NHSN as a 

means of collecting state law mandated 

HAI reporting. NHSN collects data via a 

Web-based tool hosted by the CDC 

(http://www.cdc.gov/). This reporting 

service is provided free of charge to 

healthcare facilities. Additionally, the 

ability of the CDC to receive NHSN 

measures data from electronic health 

records (EHR) may be possible in the 

near future. Currently, more than 

20 States require hospitals to report 

HAIs using NHSN, and the CDC 

supports more 4,000 hospitals that are 

using the NHSN. 

We propose for IRFs to submit the 

data elements needed to calculate the 

Urinary Catheter-Associated Urinary 

Tract Infection measure using the 

NHSN’s standard data submission 

requirements which requires 

submission of data on HAI events on all 

patients. Collecting data on all patients 

will provide CMS with the most robust, 


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accurate reflection of the quality of care 

delivered to Medicare beneficiaries as 

compared with non-Medicare patients. 

Therefore, to measure the quality of care 

that is delivered to Medicare 

beneficiaries in the IRF setting, we are 

proposing to collect quality data related 

to HAI events on all patients regardless 

of payor. 

CDC/NHSN requirements may 

include adherence to training 

requirements, use of CDC measure 

specifications, data element definitions, 

data submission requirements and 

instructions, data reporting timeframes, 

as well as NHSN participation forms 

and indications to CDC allowing CMS to 

access data for this measure for the IRF 

quality reporting program purposes. 

Detailed requirements for NHSN 

participation, measure specifications, 

and data collection can be found at 

http://www.cdc.gov/nhsn/. We propose 

to require IRFs to use the specifications 

and data collection tools for the 

proposed Urinary Catheter-Associated 

Urinary Tract Infections as required by 

CDC as of the time that the data is 

submitted. 

For purposes of calculating the FY 

2014 increase factor we propose to 

collect data on CAUTI events that occur 

from October 1, 2012 through December 

31, 2012, the final fiscal quarter of FY 

2013. We propose that all subsequent 

IRF quality reporting cycles would be 

based on a full calendar year (CY) cycle 

(that is January 1 through December 31 

of the applicable year). For example, the 

FY 2015 payment determinations will 

be made based on CY 2013 data 

submitted to CDC. We welcome 

comments on the proposed reporting 

cycle for IRFs. 

Should this proposed measure be 

finalized, further details regarding data 

submission and reporting requirements 

for this measure will be posted on the 

CMS Web site http://www.cms.gov/

LTCH-IRF-Hospice-Quality-Reporting/ 

by no later than January 31, 2012. 

IRFs are also encouraged to visit the 

CDC Web site http://www.cdc.gov/nhsn/ 

in order to review the NHSN 

enrollment and reporting requirements. 

2. Proposed Method of Data Submission 

for the Percent of Patients With New or 

Worsened Pressure Ulcer Measure 

We seek to implement the IRF Quality 

Reporting Program in a manner that 

imposes as little burden as possible. 

IRFs already are required to submit 

certain data for purposes of determining 

payment via the current Inpatient 

Rehabilitation Facility-Patient 

Assessment Instrument (IRF–PAI). The 

IRF–PAI also includes currently 

optional ‘‘quality indicators’’ (QI). To 

support the standardized collection and 

calculation of quality measures 

specifically focused on IRF services, we 

propose to modify the current IRF–PAI 

by replacing the current optional 

pressure ulcer items in the QI section of 

the IRF–PAI with mandatory pressure 

ulcer data elements for the proposed 

measure. 

We propose for IRFs to submit the 

data needed to calculate the measure 

‘‘Percent of Patients with New or 

Worsened Pressure Ulcers’’ on all 

Medicare patients. Therefore, to 

measure the quality of care that is 

delivered to Medicare beneficiaries in 

the IRF setting, we are proposing to 

collect quality data related to new or 

worsening pressure ulcers on all 

Medicare patients. 

We propose to use the IRF–PAI to 

collect pressure ulcer data elements that 

would be similar to those collected 

through the Minimum Data Set 3.0 

(MDS 3.0), which is a reporting 

instrument that is used in nursing 

homes. A draft of the proposed IRF–PAI 

revisions with the new pressure ulcer 

elements is available on the CMS Web 

site at http://www.cms.gov/Inpatient

RehabFacPPS/04_IRFPAI.asp#

TopOfPage. The current MDS 3.0 

pressure ulcer items evolved as an 

outgrowth of CMS’ work to develop a 

standardized patient assessment 

instrument, now referred to as CARE 

(Continuity Assessment Record & 

Evaluation). 

The CARE assessment instrument was 

developed and tested in the post-acute 

care payment reform demonstration 

(PAC–PRD) which included IRFs as 

required by section 5008 of the 2005 

Deficit Reduction Act (DRA) (Pub. L. 

109–171, enacted February 8, 2006) 

(more information may be found at 

http://www.pacdemo.rti.org). We note 

that the MDS data elements were 

supported by the National Pressure 

Ulcer Advisory Panel (NPUAP). We 

believe that modifying the current IRF– 

PAI pressure ulcer items to be 

consistent with the standardized data 

elements now used in the MDS 3.0, will 

drive uniformity across settings that will 

lead to better quality of care in IRFs and 

ultimately, across the continuum of care 

settings. If this proposal is finalized, 

additional details regarding the use of 

modified IRF–PAI data elements to 

calculate this measure will be published 

on the CMS Web site at http://www.cms.

gov/LTCH-IRF-Hospice-QualityReporting/ by no later than January 31, 

2012. We invite comments on these 

proposals for the submission of data on 

the proposed quality measure for 

pressure ulcers. 

3. Potential Method of Data Submission 

for the 30-day Comprehensive All-Cause 

Risk-Standardized Readmission 

Measure 

In the FY 2013 rule cycle we 

anticipate being able to propose using 

claims data otherwise submitted by the 

IRF as the data to calculate this 

measure. As such, we anticipate not 

needing additional reporting to fulfill 

the data needs if this measure is 

proposed and adopted. We generally 

anticipate calculating the measure based 

on 3 years of claims data in order to 

provide a sufficient number of 

discharges to calculate this measure. 

D. Public Reporting 

Under section 1886(j)(7)(E) of the Act, 

the Secretary is required to establish 

procedures for making data submitted 

by IRFs under the IRF quality reporting 

program available to the public. In 

accordance with this provision, we 

propose to establish procedures to make 

the data available to the public. We do 

not intend to make individual patient 

data public. We believe that existing 

laws governing access to agency records 

will adequately address requests for 

such data. We will adopt procedures 

that will ensure that an IRF has the 

opportunity to review the data to be 

made public prior to the data being 

made public. Additionally, as required 

under section 1886(j)(7)(E) of the Act, 

we will report quality measures that 

relate to services furnished in IRFs on 

CMS Web site. 

E. Quality Measures for Future 

Consideration for Determination of 

Increase Factors for Future Fiscal Year 

Payments 

As indicated previously in this 

section, we ultimately seek to adopt a 

comprehensive set of quality measures 

to be available for widespread use for 

informed decision making and quality 

improvement. While we are beginning 

with a limited set of measures in the IRF 

context, we expect to expand the 

measure set through rulemaking which 

will allow us, for example, to assess an 

IRF patient’s functional status and 

whether he/she has achieved his or her 

rehabilitation goals and potential. As 

noted above, IRFs are currently required 

to submit certain data for purposes of 

determining payment via the IRF–PAI. 

The IRF–PAI currently includes 

optional QIs, and, if finalized, it would 

include mandatory data elements for 

use in the calculation of the pressure 

ulcer measure. Only a small number of 

IRFs are currently submitting data on 

the optional QI data elements. 


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We intend to propose a more robust 

set of measures for the IRF quality 

reporting program in the FY 2013 

rulemaking cycle for the determination 

of the FY 2015 payment increase factor. 

We are considering the measures listed 

in Table 13 which include, but are not 

limited to, measure topics reported by 

providers of skilled nursing facility 

(SNF) services for short stay nursing 

home patients. We invite public 

comment on which quality measures 

would be considered most feasible and 

useful for IRFs to report for purposes of 

the FY 2015 payment update. 

The quality data on short stay nursing 

home patients, which generates the 

short stay nursing home measures, are 

generated from the MDS 3.0 data 

collection vehicle. We are currently 

analyzing the quality data collected by 

nursing homes through the 3.0 version 

of the MDS which was implemented 

nationally in nursing homes in October 

2010. Nursing homes are reporting data 

for long stay residents as well as short 

stay residents. We will be analyzing the 

performance of these nursing home 

measures through the end of 2011 and 

expect to have findings on their 

performance in the nursing home setting 

by early 2012. Next steps would include 

analyzing whether any of these 

measures would be appropriate for 

application in the IRF setting. We would 

invite public comment on the 

application of some or all of the short 

stay nursing home measures listed 

below. We are seeking NQF 

endorsement of these measures by 

August 2011. These measures may also 

be found at the NQF Web site http:// 

www.qualityforum.org/. CMS’ short stay 

nursing home measures undergoing 

NQF endorsement include NH–010–10 

percent of residents who self-report 

moderate to severe pain; NH–014–10 

percent of residents assessed and 

appropriately given the seasonal 

influenza vaccine; NH–016–10 percent 

of residents assessed and appropriately 

given the seasonal pneumococcal 

vaccine and NH–009–10 percentage of 

residents on a scheduled pain 

medication regimen on admission who 

self-report a decrease in pain intensity 

or frequency. 

If any of the short stay nursing home 

measures are appropriate for application 

to the IRF setting we would intend to 

propose some or all of those measures 

in the FY 2013 rulemaking cycle. Any 

added measures proposed through the 

FY 2013 rulemaking cycle would apply 

to the payment determination for FY 

2015. We expect that any measures 

proposed through the FY 2013 

rulemaking cycle would require changes 

to the IRF–PAI as a data collection 

vehicle and changes to the supporting 

information technology (IT) 

infrastructure. We expect that it would 

take providers, vendors, and CMS 

approximately one year to make the 

necessary changes to their IT systems to 

support the collection and reporting of 

new or modified IRF–PAI data elements. 

We would expect providers, vendors, 

and CMS to complete any needed 

changes to their IT systems by August 

2013. We would intend to propose IRFs 

submit any additional or revised IRF– 

PAI data elements starting October 1, 

2013 through December 31, 2013 for the 

FY 2015 payment update. Alternatively, 

we are considering and invite public 

comment on the possibility of basing 

future quality measures on data sources 

or assessment instruments other than 

the IRF–PAI. As stated earlier, we 

developed and tested the CARE 

assessment instrument for the postacute demonstration under section 5008 

of the DRA. We intend to submit a 

report to Congress by the end of 2011 

with findings from the three year Post 

Acute Care-Payment Reform 

Demonstration (PAC–PRD) and its use 

of the CARE patient assessment 

instrument as a data collection vehicle. 

More details on the PAC–PRD which 

concluded in late 2010 are available at 

http://www.pacdemo.rti.org. We believe 

that the data elements that were 

collected using this CARE standardized 

assessment instrument could be used 

across all post-acute care sites to 

measure functional status and other 

factors during treatment and at 

discharge which are key indicators of 

quality in IRFs and in nursing homes 

treating short stay patients requiring 

rehabilitative services. We believe the 

instrument could be beneficial in 

supporting the submission of data on 

quality measures by IRFs and other care 

settings by ensuring standardized data 

collection. We invite comments on the 

use of a standardized assessment 

instrument such as the CARE 

assessment instrument in IRFs to collect 

data that would generate additional 

quality measures for the IRF quality 

reporting program in the future. 

We also invite public comment on the 

measures and measures topics in Table 

13, as well as potential methods for 

collecting quality data on the percent of 

patients whose individually stated goals 

were met and the percent of patients for 

whom care delivered was consistent 

with patient stated care preferences. 

During the NQF endorsement process 

for nursing home quality measures 

mentioned above, the NQF steering 

committee pointed to the need for CMS 

to consider pairing pain measures with 

a measure or measures that reflect 

patients’ preferences for how their care, 

treatment and symptoms are managed 

by healthcare providers. These items, 

and other items in Table 13, are under 

consideration for future years. We also 

invite other suggestions regarding our 

implementation of the IRF quality 

measures program. 

BILLING CODE 4120–01–P 


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BILLING CODE 4120–01–C 

F. Proposed New Regulation Text for the 

IRF Quality Reporting Program 

To implement the new IRF quality 

reporting program, we propose to redesignate the existing paragraph 

§ 412.624(c)(4) as § 412.624(c)(5) and 

add a new paragraph § 412.624(c)(4). 

The specific proposed changes to the 

regulations at part 412 are shown in the 

‘‘Regulation Text’’ of this proposed rule 

of this proposed rule. We encourage 

stakeholder comment on these proposed 

changes. 


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X. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995, we are required to provide 60- 

day notice in the Federal Register and 

solicit public comment before a 

collection of information requirement is 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. In order to fairly evaluate 

whether an information collection 

should be approved by OMB, section 

3506(c)(2)(A) of the Paperwork 

Reduction Act of 1995 requires that we 

solicit comment on the following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

This proposed rule does not impose 

any new information collection 

requirements as outlined in the 

regulation text. However, this proposed 

rule does make reference to associated 

information collections that are not 

discussed in the regulation text 

contained in this document. The 

following is a discussion of these 

information collections, some of which 

have already received OMB approval. 

As stated in Section IX.B. of the 

preamble of this proposed rule, for 

purposes of calculating the FY 2014 IRF 

PPS increase factor, we propose that 

IRFs submit data on 2 quality measures. 

These quality measures are: (1) Catheter 

Associated Urinary Tract Infections; and 

(2) Pressure Ulcers that are New or Have 

Worsened. The aforementioned 

measures will be collected via the 

following respective means. 

Catheter Associated Urinary Tract 

Infections (CAUTI) 

Regarding the collection of data on 

the first quality measure, Catheter 

Associated Urinary Tract Infections, we 

propose to require as the form and 

manner of submission for the measure, 

CAUTI rate per 1000 urinary catheter 

days, to be through the Centers for 

Disease Control (CDC)/National Health 

Safety Network (NHSN). Data collection 

by the NHSN occurs via a Web-based 

tool hosted by the CDC. This reporting 

service is provided free of charge to 

healthcare facilities. In fact, some IRFs 

are already using the NHSN to collect 

and submit this data. With this 

proposed rule, CMS seeks to impose an 

information collection requirement for 

the CAUTI measure. It should be noted 

that information collection activities 

associated with the CDC/NHSN are 

currently approved under OMB control 

number 0920–0666. Detailed 

requirements for NHSN participation, 

measure specifications, and data 

collection can be found at http:// 

www.cdc.gov/nhsn/. IRFs must use the 

current specifications and data 

collection tools for Catheter Associated 

Urinary Tract Infections. 

CMS does not currently require IRFs 

to report data to NHSN; however, 

according to the CDC, there are 26 IRFs 

that already submit data to NHSN either 

voluntarily or per state mandate. In 

order to report data to NHSN, the CDC 

requires the facility to enroll into the 

NHSN and take specified training. As 

per the NHSN Web site, we estimate 

that it will take 240 minutes (4 hours) 

to register and complete the necessary 

training provided by the CDC. The 

estimated annual burden associated 

with this requirement is 268,800 

minutes/4,480 hours (240 minutes × 

1,120 IRFs) at an estimated cost of 

$186,323. This cost is estimated using 

the average hourly wage of a Registered 

Nurse which is reported by the U.S. 

Bureau of Statistics to be $41.59. Once 

each facility has been properly 

registered into NHSN and trained, they 

will need to submit two types of forms 

in order for CDC to calculate the CAUTI 

rate per 1,000 urinary catheter days. The 

first form, the Urinary Tract Infection 

(UTI) form, is submitted by facilities for 

each patient with a CAUTI. We estimate 

that it will take 15 minutes per form per 

IRF. This time estimate consists of 5 

minutes of nursing time needed to 

collect the clinical data and 10 minutes 

of clerical time necessary to enter the 

data into NHSN. We further anticipate 

that there will be approximately 2.25 

forms submitted per IRF per month. 

Based on this estimate, we expect for 

each IRF to expend 33.75 minutes 

(0.5625 hours) per month and 405 

minutes (6.75 hours) per year reporting 

to NHSN. The estimated annual burden 

to all IRFs in the U.S. for reporting to 

NHSN is 7,735.5 hours. The estimated 

cost per IRF is $186.14 per year. 

Similarly, the estimated total yearly cost 

across all IRFs is $213,322. These costs 

are estimated using an hourly wage for 

a Registered Nurse of $41.59 and a 

Medical Billing Clerk/Data Entry person 

of $20.57 as stated by the U.S. Bureau 

of Labor Statistics. The second form, the 

denominator form, is used to count 

daily the number of patients with an 

indwelling catheter device. These daily 

counts are summed and only the total 

for each month is submitted to NHSN. 

While CDC estimates that the 

denominator form takes 5 hours per 

month to complete, we estimate that it 

will take 2.5 hours per form per IRF per 

month, as the number of patients with 

an indwelling catheter is the only part 

of this form that IRFs will be required 

to complete. We anticipate that there 

will be one form submitted per IRF per 

month. Based on this estimate, we 

expect for each IRF to expend 150 

minutes (2.5 hours) per month and 

1,800 minutes (30 hours) per year 

reporting to NHSN. The estimated 

annual burden to all IRFs in the U.S. for 

reporting to NHSN is 34,380 hours. The 

estimated cost per IRF is $1,247.70 per 

year. Similarly, the estimated total 

yearly cost across all IRFs is $1,429,864. 

These costs are estimated using an 

hourly wage for a Registered Nurse of 

$41.59. 

Pressure Ulcers That Are New or Have 

Worsened 

As stated in Section IX.C.2 of this 

preamble, to support the standardized 

collection and calculation of quality 

measures specifically focused on IRF 

services, we propose to modify the 

current Inpatient Rehabilitation FacilityPatient Assessment Instrument (IRF– 

PAI) by replacing and harmonizing the 

pressure ulcer items with data elements 

similar to those collected through the 

Minimum Data Set 3.0 (MDS 3.0) used 

in nursing homes. Additionally, the 

MDS 3.0 pressure ulcer items have been 

harmonized with the Continuity 

Assessment Record and Evaluation 

(CARE) data set, which was developed 

for and broadly tested in the post-acute 

demonstration as required by section 

5008 of the Deficit Reduction Act of 

2005 (DRA) (Pub. L. 109–171, enacted 

on February 8, 2006). We believe 

modifying the IRF–PAI pressure ulcer 

items to be consistent with the 

standardized data elements now used in 

the MDS 3.0, and supported by the 

National Pressure Ulcer Advisory Panel 

(NPUAP), would provide better 

informed decision making and quality 

improvement in IRFs and ultimately, 

across the continuum of care settings. 

Since all IRFs are already required to 

complete and transmit IRF–PAIs on all 

Medicare Part A fee-for-service and 

Medicare Part C (Medicare Advantage) 

patients in order to receive payment 

from Medicare, and the number of IRFs 

submitting claims to Medicare has 

remained stable over the past several 

years, we do not estimate that there are 

any IRFs that would need to conduct 

additional training or set-up for 

completing and transmitting the IRF– 

PAI. Thus, we do not estimate any 

additional burden on IRFs for these 


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activities. In addition, we do not 

estimate any additional burden for IRFs 

to complete the IRF–PAI with the 

mandatory quality measures as the IRF– 

PAI currently contains a voluntary 

‘‘Quality Indicators’’ section. If finalized, 

the voluntary data items will be 

replaced with the proposed pressure 

ulcer question set. When the original 

burden estimates were completed for 

the IRF–PAI, we estimated that the 

‘‘Quality Indicators’’ section of the IRF– 

PAI would take about 10 minutes to 

complete, and we assumed that all IRFs 

would complete the Quality Indicators 

items, even though completion of this 

section was voluntary. Thus, removing 

the Quality Indicators items from the 

IRF–PAI would decrease the total 

estimated burden of completing each 

IRF–PAI by about 10 minutes. However, 

we estimate that it will take about 10 

minutes to complete the new pressure 

ulcer item that we are proposing to 

require IRFs to complete as part of the 

new IRF quality reporting program. 

Since the time to complete the items 

that we are proposing to remove from 

the IRF–PAI is the same as the time to 

complete the new items we are 

proposing to add, we estimate no net 

change in the amount of time associated 

with completing each IRF–PAI and no 

net change in burden. 

We will be submitting a revision to 

the IRF–PAI information collection 

request currently approved under OMB 

control number 0938–0842 for OMB 

review and approval. 

If you comment on these information 

collection and recordkeeping 

requirements, please do either of the 

following: 

1. Submit your comments 

electronically as specified in the 

ADDRESSES section of this proposed rule; 

or 

2. Submit your comments to the 

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget; Attention: CMS Desk Officer, 

CMS–1349–P; Fax: (202) 395–6974; or 

E-mail: OIRA_submission@omb.eop.gov. 

XI. Response to Public Comments 

Because of the large number of public 

comments we normally receive on 

Federal Register documents, we are not 

able to acknowledge or respond to them 

individually. We will consider all 

comments we receive by the data and 

time specified in the DATES section of 

this preamble, and, when we proceed 

with a subsequent document, we will 

respond to the comments in the 

preamble to that document. 

XII. Economic Analyses 

A. Regulatory Impact Analysis 

1. Introduction 

We have examined the impacts of this 

proposed rule as required by Executive 

Order 12866 (September 30, 1993, 

Regulatory Planning and Review), 

Executive Order 13563 on Improving 

Regulation and Regulatory Review 

(January 18, 2011), the Regulatory 

Flexibility Act (September 19, 1980, 

Pub. L. 96–354) (RFA), section 1102(b) 

of the Social Security Act, section 202 

of the Unfunded Mandates Reform Act 

of 1995 (Pub. L. 104–4), Executive Order 

13132 on Federalism (August 4, 1999), 

and the Congressional Review Act (5 

U.S.C. 804(2)). 

Executive Orders 12866 and 13563 

direct agencies to assess all costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). Executive Order 13563 

emphasizes the importance of 

quantifying both costs and benefits, of 

reducing costs, of harmonizing rules, 

and of promoting flexibility. This rule 

has been designated an ‘‘economically’’ 

significant rule, under section 3(f)(1) of 

Executive Order 12866. Accordingly, 

the rule has been reviewed by the Office 

of Management and Budget. 

2. Statement of Need 

This proposed rule updates the IRF 

prospective payment rates for FY 2012 

as required under section 1886(j)(3)(C) 

of the Act. It responds to Section 

1886(j)(5) of the Act, which requires the 

Secretary to publish in the Federal 

Register on or before the August 1 that 

precedes the start of each fiscal year, the 

classification and weighting factors for 

the IRF PPS’s case-mix groups and a 

description of the methodology and data 

used in computing the prospective 

payment rates for that fiscal year. 

This rule also proposes some policy 

changes within the statutory discretion 

afforded to the Secretary under section 

1886(j) of the Act. We believe that the 

proposed policy changes would better 

align IRF PPS policies with those of 

other Medicare payment systems and 

would clarify the current IRF payment 

regulations. Further, many of the 

proposed policy changes are designed to 

promote greater flexibility in the IRF 

PPS policies. 

This proposed rule also implements 

section 3401(d) of the Affordable Care 

Act, which amended section 

1886(j)(3)(C) of the Act and added 

section 1886(j)(3)(D) of the Act. Section 

1886(j)(3)(C) of the Act requires the 

Secretary to estimate a multi-factor 

productivity adjustment to the market 

basket increase factor, and to apply 

other adjustments as defined by the Act. 

The productivity adjustment applies to 

FYs from 2012 forward. The other 

adjustments apply to FYs 2010–2019. 

Finally, this proposed rule discusses 

the IRF quality measures that we are 

proposing to adopt for the first year of 

implementation of a new IRF quality 

reporting program, as required by 

section 3004(b) of the Affordable Care 

Act. 

3. Overall Impacts 

We estimate that the total impact of 

these proposed changes for estimated 

FY 2012 payments compared to 

estimated FY 2011 payments would be 

an increase of approximately $120 

million (this reflects a $100 million 

increase from the update to the payment 

rates and a $20 million increase due to 

the proposed update to the outlier 

threshold amount to increase estimated 

outlier payments from approximately 

2.7 percent in FY 2011 to 3 percent in 

FY 2012). 

4. Detailed Economic Analysis 

i. Basis and Methodology of Estimates 

This proposed rule sets forth updates 

of the IRF PPS rates contained in the FY 

2011 notice and proposes updates to the 

CMG relative weights and average 

length of stay values, the facility-level 

adjustments, the wage index, and the 

outlier threshold for high-cost cases. 

This proposed rule also implements a 

0.1 percentage point reduction to the 

proposed FY 2012 rebased RPL market 

basket increase factor (updated from a 

2002 base year to a 2008 base year) in 

accordance with sections 

1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) 

of the Act and a 1.2 percent productivity 

adjustment to the proposed FY 2012 

rebased RPL market basket increase 

factor as required by section 

1886(j)(3)(C)(ii)(I) of the Act. 

We estimate that the FY 2012 impact 

would be a net increase of $120 million 

in payments to IRF providers (this 

reflects a $100 million estimated 

increase from the proposed update to 

the payment rates and a $20 million 

estimated increase due to the proposed 

update to the outlier threshold amount 

to increase the estimated outlier 

payments from approximately 2.7 

percent in FY 2011 to 3.0 percent in FY 

2012). The impact analysis in Table 14 

of this proposed rule represents the 

projected effects of the proposed policy 


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changes in the IRF PPS for FY 2012 

compared with estimated IRF PPS 

payments in FY 2011 without the 

proposed policy changes. We estimate 

the effects by estimating payments 

while holding all other payment 

variables constant. We use the best data 

available, but we do not attempt to 

predict behavioral responses to these 

proposed changes, and we do not make 

adjustments for future changes in such 

variables as number of discharges or 

case-mix. 

We note that certain events may 

combine to limit the scope or accuracy 

of our impact analysis, because such an 

analysis is future-oriented and, thus, 

susceptible to forecasting errors because 

of other changes in the forecasted 

impact time period. Some examples 

could be legislative changes made by 

the Congress to the Medicare program 

that would impact program funding, or 

changes specifically related to IRFs. 

Although some of these changes may 

not necessarily be specific to the IRF 

PPS, the nature of the Medicare program 

is such that the changes may interact, 

and the complexity of the interaction of 

these changes could make it difficult to 

predict accurately the full scope of the 

impact upon IRFs. 

In updating the rates for FY 2012, we 

are proposing a number of standard 

annual revisions and clarifications 

mentioned elsewhere in this proposed 

rule (for example, the proposed update 

to the wage index and market basket 

increase factor used to adjust the 

Federal rates). We estimate that these 

proposed revisions would increase 

payments to IRFs by approximately 

$100 million (all due to the update to 

the market basket increase factor, since 

the update to the wage index is done in 

a budget neutral manner—as required 

by statute—and therefore neither 

increases nor decreases aggregate 

payments to IRFs). 

The aggregate change in estimated 

payments associated with this proposed 

rule is estimated to be an increase in 

payments to IRFs of $120 million for FY 

2012. The market basket increase of 

$100 million and the $20 million 

increase due to the proposed update to 

the outlier threshold amount to increase 

estimated outlier payments from 

approximately 2.7 percent in FY 2011 to 

3.0 percent in FY 2012 would result in 

a net change in estimated payments 

from FY 2011 to FY 2012 of $120 

million. 

The effects of the proposed changes 

that impact IRF PPS payment rates are 

shown in Table 14. The following 

proposed changes that affect the IRF 

PPS payment rates are discussed 

separately below: 

• The effects of the proposed update 

to the outlier threshold amount, from 

approximately 2.7 to 3.0 percent of total 

estimated payments for FY 2012, 

consistent with section 1886(j)(4) of the 

Act. 

• The effects of the 2.8 percent 

annual market basket update for FY 

2012 (using the proposed rebased RPL 

market basket) to IRF PPS payment 

rates, as required by section 

1886(j)(3)(A)(i) and section 1886(j)(3)(C) 

of the Act, including a 0.1 percentage 

point reduction for FY 2012 in 

accordance with sections 

1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) 

of the Act and a 1.2 percent productivity 

adjustment as required by section 

1886(j)(3)(C)(ii)(I) of the Act. 

• The effects of applying the budgetneutral labor-related share and wage 

index adjustment, as required under 

section 1886(j)(6) of the Act. 

• The effects of the proposed budgetneutral changes to the CMG relative 

weights and average length of stay 

values, under the authority of section 

1886(j)(2)(C)(i) of the Act. 

• The effects of the proposed budgetneutral changes to the facility-level 

adjustment factors, as permitted under 

section 1886(j)(3)(A)(v) of the Act. 

• The effect of the data matching 

process to compute the DSH patient 

percentage used in the IPPS DSH 

adjustment that is also used by IRF PPS 

to compute the low-income percentage 

adjustment factor. 

• The effect of the proposed IRF 

quality reporting program, Beginning in 

FY 2013. 

• The total proposed change in 

estimated payments based on the FY 

2012 proposed policies relative to 

estimated FY 2011 payments without 

the proposed policies. 

ii. Description of Table 14 

The table below categorizes IRFs by 

geographic location, including urban or 

rural location, and location with respect 

to CMS’s nine census divisions (as 

defined on the cost report) of the 

country. In addition, the table divides 

IRFs into those that are separate 

rehabilitation hospitals (otherwise 

called freestanding hospitals in this 

section), those that are rehabilitation 

units of a hospital (otherwise called 

hospital units in this section), rural or 

urban facilities, ownership (otherwise 

called for-profit, non-profit, and 

government), and by teaching status. 

The top row of the table shows the 

overall impact on the 1,146 IRFs 

included in the analysis. 

The next 12 rows of Table 14 contain 

IRFs categorized according to their 

geographic location, designation as 

either a freestanding hospital or a unit 

of a hospital, and by type of ownership; 

all urban, which is further divided into 

urban units of a hospital, urban 

freestanding hospitals, and by type of 

ownership; and all rural, which is 

further divided into rural units of a 

hospital, rural freestanding hospitals, 

and by type of ownership. There are 952 

IRFs located in urban areas included in 

our analysis. Among these, there are 749 

IRF units of hospitals located in urban 

areas and 203 freestanding IRF hospitals 

located in urban areas. There are 194 

IRFs located in rural areas included in 

our analysis. Among these, there are 174 

IRF units of hospitals located in rural 

areas and 20 freestanding IRF hospitals 

located in rural areas. There are 376 forprofit IRFs. Among these, there are 314 

IRFs in urban areas and 62 IRFs in rural 

areas. There are 710 non-profit IRFs. 

Among these, there are 589 urban IRFs 

and 121 rural IRFs. There are 60 

government-owned IRFs. Among these, 

there are 49 urban IRFs and 11 rural 

IRFs. 

The remaining three parts of Table 14 

show IRFs grouped by their geographic 

location within a region and by teaching 

status. First, IRFs located in urban areas 

are categorized with respect to their 

location within a particular one of the 

nine CMS geographic regions. Second, 

IRFs located in rural areas are 

categorized with respect to their 

location within a particular one of the 

nine CMS geographic regions. In some 

cases, especially for rural IRFs located 

in the New England, Mountain, and 

Pacific regions, the number of IRFs 

represented is small. Finally, IRFs are 

grouped by teaching status, including 

non-teaching IRFs, IRFs with an intern 

and resident to ADC ratio less than 10 

percent, IRFs with an intern and 

resident to ADC ratio greater than or 

equal to 10 percent and less than or 

equal to 19 percent, and IRFs with an 

intern and resident to ADC ratio greater 

than 19 percent. 

The estimated impacts of each 

proposed change to the facility 

categories listed above are shown in the 

columns of Table 14. The description of 

each column is as follows: 

Column (1) shows the facility 

classification categories described 

above. 

Column (2) shows the number of IRFs 

in each category in our FY 2010 analysis 

file. 

Column (3) shows the number of 

cases in each category in our FY 2010 

analysis file. 

Column (4) shows the estimated effect 

of the proposed adjustment to the 

outlier threshold amount so that 

estimated outlier payments increase 


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from approximately 2.7 percent in FY 

2011 to 3.0 percent of total estimated 

payments for FY 2012. 

Column (5) shows the estimated effect 

of the rebased market basket update to 

the IRF PPS payment rates. 

Column (6) shows the estimated effect 

of the update to the IRF labor-related 

share and wage index, in a budget 

neutral manner. 

Column (7) shows the estimated effect 

of the update to the CMG relative 

weights and average length of stay 

values, in a budget neutral manner. 

Column (8) shows the estimated 

effects of the updates to the facility-level 

adjustment factors (rural, LIP, and 

teaching status), in a budget neutral 

manner. 

Column (9) compares our estimates of 

the payments per discharge, 

incorporating all of the proposed 

changes reflected in this proposed rule 

for FY 2012, to our estimates of 

payments per discharge in FY 2011 

(without these proposed changes). 

The average estimated increase for all 

IRFs is approximately 1.8 percent. This 

estimated increase includes the effects 

of the 1.5 percent market basket update, 

which is derived from a 2.8 percent 

rebased market basket update that is 

reduced by 0.1 percentage point for FY 

2012 in accordance with sections 

1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) 

of the Act and by a 1.2 percentage point 

productivity adjustment as required by 

section 1886 (j)(3)(C)(ii)(I) of the Act. It 

also includes the 0.3 percent overall 

estimated increase (the difference 

between 2.7 percent in FY 2011 and 3.0 

percent in FY 2012) in estimated IRF 

outlier payments from the proposed 

update to the outlier threshold amount. 

Because we are making the remainder of 

the proposed changes outlined in this 

proposed rule in a budget-neutral 

manner, they would not affect total 

estimated IRF payments in the 

aggregate. However, as described in 

more detail in each section, they would 

affect the estimated distribution of 

payments among providers. 


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iii. Impact of the Proposed Update to the 

Outlier Threshold Amount 

In the FY 2011 IRF PPS notice (75 FR 

42836), we used FY 2009 patient-level 

claims data (the best, most complete 

data available at that time) to set the 

outlier threshold amount for FY 2011 so 

that estimated outlier payments would 

equal 3 percent of total estimated 

payments for FY 2011. For this 

proposed rule, we are proposing to 

update our analysis using more current 

FY 2010 data. Using the updated FY 

2010 data, we now estimate that IRF 

outlier payments, as a percentage of 

total estimated payments for FY 2011, 

decreased from 3 percent using the FY 

2009 data to approximately 2.7 percent 

using the updated FY 2010 data. As a 

result, we are proposing to adjust the 

outlier threshold amount for FY 2012 to 

$11,822, reflecting total estimated 

outlier payments equal to 3 percent of 

total estimated payments in FY 2012. 

The impact of the proposed update to 

the outlier threshold amount (as shown 

in column 4 of Table 14) is to increase 

estimated overall payments to IRFs by 

0.3 percent. We do not estimate that any 

group of IRFs would experience a 

decrease in payments from this 

proposed update. We estimate the 

largest increase in payments to be a 1.1 

percent increase in estimated payments 

to rural IRFs in the Pacific region. 

iv. Impact of the Proposed Market 

Basket Update to the IRF PPS Payment 

Rates 

The proposed adjusted market basket 

update to the IRF PPS payment rates is 

presented in column 5 of Table 14. The 

proposed FY 2008-based RPL market 

basket update is the same as the FY 

2002-based RPL market basket (2.8 

percent). In the aggregate the proposed 

update would result in a net 1.5 percent 

increase in overall estimated payments 

to IRFs. This net increase reflects the 

estimated rebased RPL market basket 

increase factor for FY 2012 of 2.8 

percent, reduced by 0.1 percentage 

point in accordance with sections 

1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) 

of the Act and a 1.2 percent productivity 

adjustment as required by section 

1886(j)(3)(C)(ii)(I) of the Act. 

v. Impact of the Proposed CBSA Wage 

Index and Labor-Related Share 

In column 6 of Table 14, we present 

the effects of the proposed budget 

neutral update of the wage index and 

labor-related share. The changes to the 

wage index and the labor-related share 

are discussed together because the wage 

index is applied to the labor-related 

share portion of payments, so the 

changes in the two have a combined 

effect on payments to providers. As 

discussed in section V.A.4 of this 

proposed rule, the labor-related share 

decreased from 75.271 percent in FY 

2011 to 70.334 percent in FY 2012. 

In the aggregate, since these updates 

to the wage index and the labor-related 

share are applied in a budget-neutral 

manner as required under section 

1886(j)(6) of the Act, we do not estimate 

that these updates will affect overall 

estimated payments to IRFs. However, 

we estimate that these proposed changes 

would have small distributional effects. 

For example, we estimate a 0.9 percent 

increase in payments to rural IRFs, with 

the largest increase in payments of 1.8 

percent for rural IRFs in the MidAtlantic region. We estimate the largest 

decrease in payments from the proposed 

update to the CBSA wage index and 

labor-related share to be a 1.1 percent 

decrease for urban IRFs in the New 

England region. 

vi. Impact of the Proposed Update to the 

CMG Relative Weights and Average 

Length of Stay Values 

In column 7 of Table 14, we present 

the effects of the proposed budget 

neutral update of the CMG relative 

weights and average length of stay 

values. In the aggregate we do not 

estimate that these proposed updates 

will affect overall estimated payments to 

IRFs. However, we estimate that these 

proposed updates will have small 

distributional effects, with the largest 

increase in payments as a result of these 

updates being a 0.2 percent increase to 

rural government IRFs. The largest 

estimated decrease in payments as a 

result of these proposed updates is a 0.1 

percent decrease to urban for-profit IRFs 

and urban IRFs in the Mountain region 

and East South Central region. 

vii. Impact of the Proposed Update to 

the Rural, LIP, and Teaching Status 

Adjustment Factors 

In column 8 of Table 14, we present 

the effects of the proposed budget 

neutral update to the rural, LIP, and 

teaching status adjustment factors. In 

the aggregate, we do not estimate that 

these proposed changes would affect 

overall estimated payments to IRFs. 

However, we estimate that these 

proposed changes would have small 

distributional effects. We estimate the 

largest increase in payments to be a 1.9 

percent increase for IRFs in the rural 

Mid-Atlantic region. We estimate the 

largest decrease in payments to be a 5.3 

percent decrease for teaching IRFs with 

resident to ADC ratios of greater than 19 

percent. 

viii. Impact of the IPPS Data Matching 

Process Changes on the IRF PPS 

Calculation of the Low-Income 

Percentage Adjustment Factor 

In section VII of this proposed rule, 

we note the recent revision of the data 

matching process that is used to 

calculate the disproportionate share 

hospital (DSH) patient percentage used 

in the acute IPPS DSH adjustment. As 

we have stated previously, it is our 

policy in calculating the LIP adjustment 

factor to use the same disproportionate 

share hospital (DSH) patient percentage 

used in the acute IPPS DSH adjustment. 

This would include the data matching 

process. We are not able to provide a 

detailed analysis of the impact of the 

revised data matching process. That is, 

it is not possible to determine whether 

IRF LIP adjustment payments will 

generally increase or decrease, because 

IRFs’ SSI fractions will vary depending 

on various factors, including the use of 

a more updated MedPAR claims data 

file, use of a more updated SSI 

eligibility data file, and the other 

features of the revised data matching 

process. See the FY 2011 IPPS final rule 

(75 FR 50663 through 50664) for more 

information on the revised data 

matching process. 

ix. Impact of the Proposed IRF Quality 

Reporting Program Beginning in FY 

2013 

As discussed in section IX.B. of this 

proposed rule, we propose to begin 

collecting data on 2 quality measures 

from October 1, 2012 through December 

31, 2012 (FY 2013). These quality 

measures are: (1) Catheter Associated 

Urinary Tract Infections; and (2) 

Pressure Ulcers that are New or Have 

Worsened. As discussed in section X. of 

this proposed rule, we estimate that 

IRFs would incur costs associated with 

the collection of these data, which we 

detail below. 

Catheter Associated Urinary Tract 

Infections 

As stated in section IX.C.1. of this 

proposed rule, we propose to collect 

data on the first quality measure, 

Catheter Associated Urinary Tract 

Infections, through the Centers for 

Disease Control (CDC)/National Health 

Safety Network (NHSN). CMS does not 

currently require IRFs to report data to 

NHSN. However, some IRFs submit data 

to NHSN either voluntarily or per state 

mandate. According to the CDC, 26 IRFs 

already report data to NHSN. We 

estimate that 1,120 IRFs (1146 minus 

the 26 IRFs that are already reporting 

data to NHSN) would incur costs for 

registering and completing the 


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necessary training provided by the CDC 

in FY 2012 in preparation for submitting 

the data beginning on October 1, 2012 

(FY 2013). We estimate that registering 

and completing the necessary training of 

the required personnel at each IRF 

would take 4 hours at a cost of $41.59 

per hour, at an estimated cost per IRF 

of $166.36 per IRF and a total estimated 

cost across all IRFs of $186,323. 

Once IRFs begin submitting data to 

the NHSN on Catheter Associated 

Urinary Tract Infections by October 1, 

2012 (FY 2013), they will need to 

submit two types of forms in order for 

CDC to calculate the CAUTI rate per 

1000 urinary catheter days. We estimate 

that the first form, the Urinary Tract 

Infection (UTI) form, will take 15 

minutes per reporting episode per IRF 

and that there will be approximately 

2.25 NHSN submissions per IRF per 

month. Based on this estimate, we 

expect for each IRF to expend 33.75 

minutes (0.5625) hours per month and 

405 minutes (6.75) hours per year 

reporting to NHSN. The estimated 

annual burden to all IRFs in the U.S. for 

reporting to NHSN is 7,735.5 hours. The 

estimated yearly cost per IRF is $186.14 

and the estimated total yearly cost 

across all IRFs is $213,322. While CDC 

estimates that the second form, the 

denominator form used to count daily 

the number of patients with an 

indwelling catheter device, will take 5 

hours per month to complete, we 

estimate that it will take 2.5 hours per 

form per IRF per month as the number 

of patients with an indwelling catheter 

is the only part of this form that IRFs 

will be required to complete. We 

anticipate that there will be one form 

submitted per IRF per month and each 

IRF will expend 150 minutes (2.5 hours) 

per month and 1,800 minutes (30 hours) 

per year reporting to NHSN. The 

estimated annual burden to all IRFs in 

the U.S. for reporting to NHSN is 34,380 

hours. The estimated cost per IRF is 

$1,247.70 per year and the estimated 

total yearly cost across all IRFs is 

$1,429,864. These costs are estimated 

using an hourly wage for a Registered 

Nurse of $41.59 and a Medical Billing 

Clerk/Data Entry person of $20.57. 

Pressure Ulcers That Are New or Have 

Worsened 

As stated in Section IX.C.2 of this 

proposed rule, we propose to modify the 

current IRF–PAI by removing the items 

currently in the ‘‘Quality Indicators’’ 

section and replacing them with 

pressure ulcer items similar to elements 

from the Minimum Data Set 3.0 (MDS 

3.0) nursing home instrument. Since all 

IRFs are already required to complete 

and transmit IRF–PAIs on all Medicare 

Part A fee-for-service and Medicare Part 

C (Medicare Advantage) patients in 

order to receive payment from 

Medicare, and since the number of IRFs 

submitting claims to Medicare has 

remained stable over the past several 

years, we do not estimate that there are 

any IRFs that would need to conduct 

additional training or set-up for 

completing and transmitting the IRF– 

PAI. Thus, we do not estimate any 

additional cost to IRFs in FY 2012 for 

these activities. In addition, since IRFs 

are already transmitting the IRF–PAI 

form to CMS, we do not estimate any 

additional transmission costs associated 

with the proposed IRF quality reporting 

program. Further, we do not estimate 

any additional burden for IRFs to 

complete an IRF–PAI with mandatory 

quality measures as the IRF–PAI 

currently contains a voluntary ‘‘Quality 

Indicators’’ section, which will be 

replaced with the proposed pressure 

ulcer question set. When the original 

burden estimates were completed for 

the IRF–PAI, we estimated that the 

‘‘Quality Indicators’’ section of the IRF– 

PAI would take about 10 minutes to 

complete, and we assumed that all IRFs 

would complete the Quality Indicators 

items, even though completion of this 

section was voluntary. Thus, removing 

the Quality Indicators items from the 

IRF–PAI would decrease the total 

estimated burden of completing each 

IRF–PAI by about 10 minutes. However, 

we estimate that it will take about 10 

minutes to complete the new pressure 

ulcer item that we are proposing to 

require IRFs to complete as part of the 

new IRF quality reporting program. 

Since the time to complete the items 

that we are proposing to remove from 

the IRF–PAI is the same as the time to 

complete the new items we are 

proposing to add, we estimate no net 

change in the amount of time or the 

costs associated with completing each 

IRF–PAI. 

5. Alternatives Considered 

Although we have determined that 

this proposed rule will not have a 

significant economic impact on a 

substantial number of small entities, we 

have voluntarily prepared a discussion 

on the alternatives considered to the IRF 

PPS. 

Section 1886(j)(3)(C) of the Act 

requires the Secretary to update the IRF 

PPS payment rates by an increase factor 

that reflects changes over time in the 

prices of an appropriate mix of goods 

and services included in the covered 

IRF services. Thus, we did not consider 

alternatives to updating payments using 

the estimated RPL market basket 

increase factor for FY 2012. In this 

proposed rule, we are proposing to 

rebase the RPL market basket for FY 

2012, as we typically do every 5 to 7 

years, from a 2002 base year to a 2008 

base year. We considered not proposing 

this rebasing of the RPL market basket 

for FY 2012; however, periodically 

rebasing the RPL market basket ensures 

that it continues to reflect the most 

accurate account of the cost of relevant 

goods and services. For FY 2012, the 

proposed update on the FY 2008-based 

RPL market basket is the same as the FY 

2002-based RPL market basket (2.8 

percent). In accordance with the 

recently amended section 1886(j)(3)(C) 

of the Act, we are proposing to update 

IRF Federal prospective payments in 

this proposed rule by 1.5 percent (which 

equals the 2.8 percent estimated rebased 

RPL market basket increase factor for FY 

2012 reduced by 0.1 percentage point, 

as required by sections 

1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) 

of the Act and reduced by a 1.2 percent 

productivity adjustment as required by 

section 1886(j)(3)(C)(ii)(I) of the Act). 

We considered maintaining the 

existing CMG relative weights and 

average length of stay values for FY 

2012. However, in light of recently 

available data and our desire to ensure 

that the CMG relative weights and 

average length of stay values are as 

reflective as possible of recent changes 

in IRF utilization and case mix, we 

believe that it is appropriate to update 

the CMG relative weights and average 

length of stay values at this time to 

ensure that IRF PPS payments continue 

to reflect as accurately as possible the 

current costs of care in IRFs. 

We also considered maintaining the 

existing rural, LIP, and teaching status 

adjustment factors for FY 2012. 

However, as a result of recent changes 

in IRF utilization that have occurred 

because of changes in the IRF 

compliance percentage and the 

consequences of recent IRF medical 

necessity reviews, we believe that it is 

important to update these adjustment 

factors at this time to ensure that 

payments to IRFs reflect as accurately as 

possible the current costs of care in 

IRFs. In estimating the proposed 

updates to the rural, LIP, and teaching 

status adjustment factors, we 

implemented a 3-year moving average 

approach to updating the facility-level 

adjustment factors in the FY 2010 IRF 

PPS final rule (74 FR 39762) to provide 

greater stability and predictability of 

Medicare payments for IRFs. 

We considered maintaining the 

existing outlier threshold amount for FY 

2012. However, the proposed update to 

the outlier threshold amount would 

have a positive impact on IRF providers 


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and, therefore, on small entities (as 

shown in Table 14, column 4). If we 

were to maintain the FY 2011 outlier 

threshold amount, less outlier cases 

would qualify for the additional outlier 

payments in FY 2012. Analysis of 

updated FY 2010 data indicates that 

estimated outlier payments would not 

equal 3 percent of estimated total 

payments for FY 2012 unless we 

proposed to update the outlier threshold 

amount. Thus, we believe that this 

update is appropriate for FY 2012. 

6. Accounting Statement 

As required by OMB Circular A–4 

(available at http://www.whitehouse.

gov/omb/circulars/a004/a-4.pdf), in 

Table 15 below, we have prepared an 

accounting statement showing the 

classification of the transfers associated 

with the provisions of this proposed 

rule. This table provides our best 

estimate of the increase in Medicare 

payments under the IRF PPS as a result 

of the proposed changes presented in 

this proposed rule based on the data for 

1,146 IRFs in our database. 

7. Conclusion 

Overall, the estimated payments per 

discharge for IRFs in FY 2012 are 

projected to increase by 1.8 percent, 

compared with those in FY 2011, as 

reflected in column 9 of Table 14. IRF 

payments are estimated to increase 1.6 

percent in urban areas and 3.4 percent 

in rural areas, per discharge, compared 

with FY 2011. Payments to 

rehabilitation units in urban areas are 

estimated to increase 1.4 percent per 

discharge. Payments to rehabilitation 

freestanding hospitals in urban areas are 

estimated to increase 1.8 percent per 

discharge. Payments to rehabilitation 

units in rural areas are estimated to 

increase 3.3 percent per discharge, 

while payments to freestanding 

rehabilitation hospitals in rural areas are 

estimated to increase 3.9 percent per 

discharge. 

Overall, the largest payment increase 

is estimated at 5.4 percent for rural IRFs 

in the Mid-Atlantic region. The only 

payment decreases we estimate are a 0.5 

percent decrease, a 1.9 percent decrease, 

and a 3.9 percent decrease for teaching 

IRFs with resident to ADC ratios less 

than 10 percent, 10 to 19 percent, and 

greater than 19 percent, respectively. 

B. Regulatory Flexibility Act Analysis 

The RFA requires agencies to analyze 

options for regulatory relief of small 

entities, if a rule has a significant impact 

on a substantial number of small 

entities. For purposes of the RFA, small 

entities include small businesses, 

nonprofit organizations, and small 

governmental jurisdictions. Most IRFs 

and most other providers and suppliers 

are small entities, either by nonprofit 

status or by having revenues of $34.5 

million in any one year. (For details, see 

the Small Business Administration’s 

Web site at http://ecfr.gpoaccess.gov/

cgi/t/text/text-idx?c=ecfr&

sid=2465b064ba6965cc1

fbd2eae60854b11&rgn=div8

&view=text&node=13:1.0.1.1.

16.1.266.9&idno=13) (refer to subsector 

622). Because we lack data on 

individual hospital receipts, we cannot 

determine the number of small 

proprietary IRFs or the proportion of 

IRFs’ revenue that is derived from 

Medicare payments. Therefore, we 

assume that all IRFs (an estimated 1,146 

IRFs that are in our analysis file by 

virtue of having submitted at least one 

IRF claim to Medicare in FY 2010 that 

we are able to match to an IRF–PAI, of 

which approximately 60 percent are 

nonprofit facilities) are considered small 

entities and that Medicare payment 

constitutes the majority of their 

revenues. The Department of Health and 

Human Services generally uses a 

revenue or cost impact of 3 to 5 percent 

as a significance threshold under the 

RFA. There is no negative estimated 

impact as a result of this proposed rule 

that is within the significance threshold 

of 3 to 5 percent. As shown in Table 14, 

we estimate that the net revenue impact, 

of this proposed rule, on all IRFs is to 

increase estimated payments by about 

1.8 percent, with an estimated increase 

in payments of 3 percent or higher for 

some categories of IRFs (such as rural 

IRFs in the New England, Mid-Atlantic, 

South Atlantic, East North Central, West 

North Central, West South Central, and 

Mountain) and an estimated decrease in 

payments of 3 percent or more for 15 

teaching IRFs with resident to ADC 

ratios greater than 19 percent. Therefore, 

the majority of IRFs will experience a 

net positive increase in payments. As a 

result, the Secretary has determined that 

this proposed rule would not have a 

significant impact on a substantial 

number of small entities. We present, in 

the Alternatives Considered section 

(XII.A.5) above, an analysis of the 

alternatives we considered for this 

proposed IRF PPS rule. Medicare fiscal 

intermediaries and carriers are not 

considered to be small entities. 

Individuals and States are not included 

in the definition of a small entity. We 

solicit comment on the RFA analysis. 

In addition, section 1102(b) of the Act 

requires us to prepare a RIA if a rule 

may have a significant impact on the 

operations of a substantial number of 

small rural hospitals. This analysis must 

conform to the provisions of section 603 

of the RFA. For purposes of section 

1102(b) of the Act, we define a small 

rural hospital as a hospital that is 

located outside of a MSA and has fewer 

than 100 beds. Based on the data of the 

174 rural units and 20 rural hospitals in 

our database of 1,146 IRFs, we estimate 

that small rural IRF hospitals would 

receive between 2.6 percent and 5.4 

percent higher net payments in FY 2012 

due to the provisions in this proposed 

rule, with no rural IRF hospitals 

estimated to receive negative net 

payments. Thus, the Secretary has 

determined that the rates and policies 

set forth in this proposed rule would not 

have a significant impact on the 

operations of a substantial number of 

small rural hospitals. 


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C. Unfunded Mandates Reform Act 

Analysis 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 also 

requires that agencies assess anticipated 

costs and benefits before issuing any 

rule whose mandates require spending 

in any one year of $100 million in 1995 

dollars, updated annually for inflation. 

In 2011, that threshold level is 

approximately $136 million. This 

proposed rule will not impose spending 

costs on State, local, or tribal 

governments, in the aggregate, or by the 

private sector, of $136 million. 

XIII. Federalism Analysis 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a 

proposed rule (and subsequent final 

rule) that imposes substantial direct 

requirement costs on State and local 

governments, preempts State law, or 

otherwise has Federalism implications. 

This proposed rule would have no 

substantial direct effect on State and 

local governments, preempt State law, 

or otherwise have Federalism 

implications. 

List of Subjects in 42 CFR 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 proposes to amend 

42 CFR chapter IV as follows: 

PART 412—PROSPECTIVE PAYMENT 

SYSTEMS FOR INPATIENT HOSPITAL 

SERVICES 

1. The authority citation for part 412 

continues to read as follows: 

Authority: Sections 1102, 1862, and 1871 

of the Social Security Act (42 U.S.C. 1302, 

1395y, and 1395hh). 

Subpart B—Hospital Services Subject 

to and Excluded From the Prospective 

Payment Systems for Inpatient 

Operating Costs and Inpatient CapitalRelated Costs 

2. Section 412.23 is amended by 

revising paragraph (b) to read as follows: 

§ 412.23 Excluded hospitals: 

Classifications. 

* * * * * 

(b) Rehabilitation hospitals. A 

rehabilitation hospital or unit must meet 

the requirements specified in § 412.29 of 

this subpart to be excluded from the 

prospective payment systems specified 

in § 412.1(a)(1) of this subpart and to be 

paid under the prospective payment 

system specified in § 412.1(a)(3) of this 

subpart and in subpart P of this part. 

* * * * * 

3. Section 412.25 is amended by 

revising paragraphs (b) and (e)(2)(ii)(A) 

to read as follows: 

§ 412.25 Excluded hospital units: Common 

requirements. 

* * * * * 

(b) Changes in the size of excluded 

units. Except in the special cases noted 

at the end of this paragraph, changes in 

the number of beds or square footage 

considered to be part of an excluded 

unit under this section are allowed one 

time during a cost reporting period if 

the hospital notifies its Medicare 

contractor and the CMS RO in writing 

of the planned change at least 30 days 

before the date of the change. The 

hospital must maintain the information 

needed to accurately determine costs 

that are attributable to the excluded 

unit. A change in bed size or a change 

in square footage may occur at any time 

during a cost reporting period and must 

remain in effect for the rest of that cost 

reporting period. Changes in bed size or 

square footage may be made at any time 

if these changes are made necessary by 

relocation of a unit to permit 

construction or renovation necessary for 

compliance with changes in Federal, 

State, or local law affecting the physical 

facility or because of catastrophic events 

such as fires, floods, earthquakes, or 

tornadoes. 

* * * * * 

(e) * * * 

(2) * * * 

(ii) * * * 

(A) For a rehabilitation unit, the 

requirements under § 412.29 of this 

subpart; or 

* * * * * 

4. Section 412.29 is revised to read as 

follows: 

§ 412.29 Classification criteria for payment 

Under the Inpatient Rehabilitation Facility 

Prospective Payment System. 

To be excluded from the prospective 

payment systems described in 

§ 412.1(a)(1) of this subpart and to be 

paid under the prospective payment 

system specified in § 412.1(a)(3) of this 

subpart, an inpatient rehabilitation 

hospital or an inpatient rehabilitation 

unit of a hospital (otherwise referred to 

as an IRF) must meet the following 

requirements: 

(a) Have (or be part of a hospital that 

has) a provider agreement under part 

489 of this chapter to participate as a 

hospital. 

(b) Except in the case of a ‘‘new’’ IRF 

or ‘‘new’’ IRF beds, as defined in 

paragraph (c) of this section, an IRF 

must show that, during its most recent, 

consecutive, and appropriate 12-month 

time period (as defined by CMS or the 

Medicare contractor), it served an 

inpatient population that meets the 

following criteria: 

(1) For cost reporting periods 

beginning on or after July 1, 2004, and 

before July 1, 2005, the IRF served an 

inpatient population of whom at least 

50 percent, and for cost reporting 

periods beginning on or after July 1, 

2005, the IRF served an inpatient 

population of whom at least 60 percent 

required intensive rehabilitation 

services for treatment of one or more of 

the conditions specified at paragraph 

(b)(2) of this section. A patient with a 

comorbidity, as defined at § 412.602 of 

this part, may be included in the 

inpatient population that counts toward 

the required applicable percentage if— 

(i) The patient is admitted for 

inpatient rehabilitation for a condition 

that is not one of the conditions 

specified in paragraph (b)(2) of this 

section; 

(ii) The patient has a comorbidity that 

falls in one of the conditions specified 

in paragraph (b)(2) of this section; and 

(iii) The comorbidity has caused 

significant decline in functional ability 

in the individual that, even in the 

absence of the admitting condition, the 

individual would require the intensive 

rehabilitation treatment that is unique to 

inpatient rehabilitation facilities paid 

under subpart P of this part and that 

cannot be appropriately performed in 

another care setting covered under this 

title. 

(2) List of conditions. 

(i) Stroke. 

(ii) Spinal cord injury. 

(iii) Congenital deformity. 

(iv) Amputation. 

(v) Major multiple trauma. 

(vi) Fracture of femur (hip fracture). 

(vii) Brain injury. 

(viii) Neurological disorders, 

including multiple sclerosis, motor 

neuron diseases, polyneuropathy, 

muscular dystrophy, and Parkinson’s 

disease. 

(ix) Burns. 

(x) Active, polyarticular rheumatoid 

arthritis, psoriatic arthritis, and 

seronegative arthropathies resulting in 

significant functional impairment of 

ambulation and other activities of daily 

living that have not improved after an 

appropriate, aggressive, and sustained 

course of outpatient therapy services or 

services in other less intensive 

rehabilitation settings immediately 

preceding the inpatient rehabilitation 

admission or that result from a systemic 

disease activation immediately before 

admission, but have the potential to 


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improve with more intensive 

rehabilitation. 

(xi) Systemic vasculidities with joint 

inflammation, resulting in significant 

functional impairment of ambulation 

and other activities of daily living that 

have not improved after an appropriate, 

aggressive, and sustained course of 

outpatient therapy services or services 

in other less intensive rehabilitation 

settings immediately preceding the 

inpatient rehabilitation admission or 

that result from a systemic disease 

activation immediately before 

admission, but have the potential to 

improve with more intensive 

rehabilitation. 

(xii) Severe or advanced osteoarthritis 

(osteoarthrosis or degenerative joint 

disease) involving two or more major 

weight bearing joints (elbow, shoulders, 

hips, or knees, but not counting a joint 

with a prosthesis) with joint deformity 

and substantial loss of range of motion, 

atrophy of muscles surrounding the 

joint, significant functional impairment 

of ambulation and other activities of 

daily living that have not improved after 

the patient has participated in an 

appropriate, aggressive, and sustained 

course of outpatient therapy services or 

services in other less intensive 

rehabilitation settings immediately 

preceding the inpatient rehabilitation 

admission but have the potential to 

improve with more intensive 

rehabilitation. (A joint replaced by a 

prosthesis no longer is considered to 

have osteoarthritis, or other arthritis, 

even though this condition was the 

reason for the joint replacement.) 

(xiii) Knee or hip joint replacement, 

or both, during an acute hospitalization 

immediately preceding the inpatient 

rehabilitation stay and also meet one or 

more of the following specific criteria: 

(A) The patient underwent bilateral 

knee or bilateral hip joint replacement 

surgery during the acute hospital 

admission immediately preceding the 

IRF admission. 

(B) The patient is extremely obese 

with a Body Mass Index of at least 50 

at the time of admission to the IRF. 

(C) The patient is age 85 or older at 

the time of admission to the IRF. 

(c) In the case of new IRFs (as defined 

in paragraph (c)(1) of this section) or 

new IRF beds (as defined in paragraph 

(c)(2)of this section), the IRF must 

provide a written certification that the 

inpatient population it intends to serve 

meets the requirements of paragraph (b) 

of this section. This written certification 

will apply until the end of the IRF’s first 

full 12-month cost reporting period or, 

in the case of new IRF beds, until the 

end of the cost reporting period during 

which the new beds are added to the 

IRF. 

(1) New IRFs. An IRF hospital or IRF 

unit is considered new if it has not been 

paid under the IRF PPS in subpart P of 

this part for at least 5 calendar years. A 

new IRF will be considered new from 

the point that it first participates in 

Medicare as an IRF until the end of its 

first full 12-month cost reporting period. 

(2) New IRF beds. Any IRF beds that 

are added to an existing IRF must meet 

all applicable State Certificate of Need 

and State licensure laws. New IRF beds 

may be added one time at any point 

during a cost reporting period and will 

be considered new for the rest of that 

cost reporting period. A full 12-month 

cost reporting period must elapse 

between the delicensing or 

decertification of IRF beds in an IRF 

hospital or IRF unit and the addition of 

new IRF beds to that IRF hospital or IRF 

unit. Before an IRF can add new beds, 

it must receive written approval from 

the appropriate CMS RO, so that the 

CMS RO can verify that a full 12-month 

cost reporting period has elapsed since 

the IRF has had beds delicensed or 

decertified. New IRF beds are included 

in the compliance review calculations 

under paragraph (b) of this section from 

the time that they are added to the IRF. 

(3) Change of Ownership or Leasing. 

An IRF hospital or IRF unit that 

undergoes a change of ownership or 

leasing, as defined in § 489.18 of this 

chapter, retains its excluded status and 

will continue to be paid under the 

prospective payment system specified 

in § 412.1(a)(3) of this subpart before 

and after the change of ownership or 

leasing if the new owner(s) of the IRF 

accept assignment of the previous 

owners’ Medicare provider agreement 

and the IRF continues to meet all of the 

requirements for payment under the IRF 

prospective payment system. If the new 

owner(s) do not accept assignment of 

the previous owners’ Medicare provider 

agreement, the IRF is considered to be 

voluntarily terminated and the new 

owner(s) may re-apply to participate in 

the Medicare program. If the IRF does 

not continue to meet all of the 

requirements for payment under the IRF 

prospective payment system, then the 

IRF loses its excluded status and is paid 

according to the prospective payment 

systems described in § 412.1(a)(1). 

(4) Mergers. If an IRF hospital (or a 

hospital with an IRF unit) merges with 

another hospital and the owner(s) of the 

merged hospital accept assignment of 

the IRF hospital’s provider agreement 

(or the provider agreement of the 

hospital with the IRF unit), then the IRF 

hospital or IRF unit retains its excluded 

status and will continue to be paid 

under the prospective payment system 

specified in § 412.1(a)(3) of this subpart 

before and after the merger, as long as 

the IRF hospital or IRF unit continues 

to meet all of the requirements for 

payment under the IRF prospective 

payment system. If the owner(s) of the 

merged hospital do not accept 

assignment of the IRF hospital’s 

provider agreement (or the provider 

agreement of the hospital with the IRF 

unit), then the IRF hospital or IRF unit 

is considered voluntarily terminated 

and the owner(s) of the merged hospital 

may reapply to the Medicare program to 

operate a new IRF. 

(d) Have in effect a preadmission 

screening procedure under which each 

prospective patient’s condition and 

medical history are reviewed to 

determine whether the patient is likely 

to benefit significantly from an intensive 

inpatient hospital program. Each 

prospective patient’s preadmission 

screening must be reviewed and 

approved by a rehabilitation physician 

prior to the patient’s admission to the 

IRF. 

(e) Ensure that the patients receive 

close medical supervision, as evidenced 

by at least 3 face-to-face visits per week 

by a licensed physician with specialized 

training and experience in inpatient 

rehabilitation to assess the patient both 

medically and functionally, as well as to 

modify the course of treatment as 

needed to maximize the patient’s 

capacity to benefit from the 

rehabilitation process. 

(f) Furnish, through the use of 

qualified personnel, rehabilitation 

nursing, physical therapy, and 

occupational therapy, plus, as needed, 

speech-language pathology, social 

services, psychological services 

(including neuropsychological services), 

and orthotic and prosthetic services. 

(g) Have a director of rehabilitation 

who— 

(1) Provides services to the IRF 

hospital and its inpatients on a full-time 

basis or, in the case of a rehabilitation 

unit, at least 20 hours per week; 

(2) Is a doctor of medicine or 

osteopathy; 

(3) Is licensed under State law to 

practice medicine or surgery; and 

(4) Has had, after completing a oneyear hospital internship, at least 2 years 

of training or experience in the medicalmanagement of inpatients requiring 

rehabilitation services. 

(h) Have a plan of treatment for each 

inpatient that is established, reviewed, 

and revised as needed by a physician in 

consultation with other professional 

personnel who provide services to the 

patient. 


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(i) Use a coordinated interdisciplinary 

team approach in the rehabilitation of 

each inpatient, as documented by the 

periodic clinical entries made in the 

patient’s medical record to note the 

patient’s status in relationship to goal 

attainment and discharge plans, and 

that team conferences are held at least 

once per week to determine the 

appropriateness of treatment. 

(j) Retroactive adjustments. If a new 

IRF (or new beds that are added to an 

existing IRF) are excluded from the 

prospective payment systems specified 

in § 412.1(a)(1) of this subpart and paid 

under the prospective payment system 

specified in § 412.1(a)(3) of this subpart 

for a cost reporting period under 

paragraph (c) of this section, but the 

inpatient population actually treated 

during that period does not meet the 

requirements of paragraph (b) of this 

section, we adjust payments to the IRF 

retroactively in accordance with the 

provisions in § 412.130 of this subpart. 

§ 412.30 [Removed and Reserved] 

5. Section 412.30 is removed and 

reserved. 

Subpart P—Prospective payment for 

inpatient rehabilitation hospitals and 

rehabilitation units 

6. Section 412.624 is amended by: 

A. Re-designating paragraph (c)(4) as 

(c)(5). 

B. Adding a new paragraph (c)(4). 

The addition reads as follows: 

§ 412.624 Methodology for calculating the 

Federal prospective payment rates. 

* * * * * 

(c) * * * 

(4) Applicable increase factor for 

fiscal year 2014 and for subsequent 

fiscal years. Subject to the provisions of 

paragraphs (c)(4)(i) and (c)(4)(ii) of this 

section, the applicable increase factor 

for fiscal year 2014 and for subsequent 

years for updating the standard payment 

conversion factor is the increase factor 

described in paragraph (a)(3) of this 

section, including adjustments 

described in paragraph (d) of this 

section as appropriate. 

(i) In the case of an IRF that is paid 

under the prospective payment system 

specified in § 412.1(a)(3) of this part that 

does not submit quality data to CMS, in 

the form and manner specified by CMS, 

the applicable increase factor specified 

in paragraph (a)(3) of this section is 

reduced by 2 percentage points. 

(ii) Any reduction of the increase 

factor will apply only to the fiscal year 

involved and will not be taken into 

account in computing the applicable 

increase factor for a subsequent fiscal 

year. 

* * * * * 

Authority: (Catalog of Federal Domestic 

Assistance Program No. 93.773, Medicare— 

Hospital Insurance; and Program No. 93.774, 

Medicare—Supplementary Medical 

Insurance Program) 

Dated: March 18, 2011. 

Donald M. Berwick, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Approved: April 18, 2011. 

Kathleen Sebelius, 

Secretary. 

The following addendum will not 

appear in the Code of Federal 

Regulations. 

Addendum 

In this addendum, we provide the wage 

index tables referred to throughout the 

preamble to this proposed rule. The tables 

presented below are as follows: 

Table A.—Proposed Inpatient 

Rehabilitation Facility Wage Index for Urban 

Areas for Discharges Occurring from October 

1, 2011 through September 30, 2012. 

Table B—Proposed Inpatient Rehabilitation 

Facility Wage Index for Rural Areas for 

Discharges Occurring from October 1, 2011 

through September 30, 2012. 

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[FR Doc. 2011–10159 Filed 4–22–11; 4:15 pm] 

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