[Federal Register Volume 73, Number 89 (Wednesday, May 7, 2008)]
[Notices]
[Pages 25709-25749]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 08-1213]



[[Page 25709]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

[CMS-1401-N]
RIN 0938-AO92


Medicare Program; Inpatient Psychiatric Facilities Prospective 
Payment System Payment Update for Rate Year Beginning July 1, 2008 (RY 
2009)

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

ACTION: Notice.

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SUMMARY: This notice updates the prospective payment rates for Medicare 
inpatient psychiatric hospital services provided by inpatient 
psychiatric facilities (IPFs). These changes are applicable to IPF 
discharges occurring during the rate year beginning July 1, 2008 
through June 30, 2009.

DATES: Effective Date: The updated IPF prospective payment rates are 
effective for discharges occurring on or after July 1, 2008 through 
June 30, 2009.

FOR FURTHER INFORMATION CONTACT: 
Dorothy Myrick or Jana Lindquist, (410) 786-4533 (for general 
information).
Heidi Oumarou, (410) 786-7942 (for information regarding the market 
basket and labor-related share).
Theresa Bean, (410) 786-2287 (for information regarding the regulatory 
impact analysis).
Matthew Quarrick, (410) 786-9867 (for information on the wage index).

SUPPLEMENTARY INFORMATION: 

Table of Contents

    To assist readers in referencing sections contained in this 
document, we are providing the following table of contents.
I. Background.
    A. Annual Requirements for Updating the IPF PPS.
    B. Overview of the Legislative Requirements of the IPF PPS.
    C. IPF PPS-General Overview.
II. Transition Period for Implementation of the IPF PPS.
III. Updates to the IPF PPS for RY Beginning July 1, 2008.
    A. Determining the Standardized Budget-Neutral Federal Per Diem 
Base Rate.
    1. Standardization of the Federal Per Diem Base Rate and 
Electroconvulsive Therapy Rate.
    2. Calculation of the Budget Neutrality Adjustment.
    a. Outlier Adjustment.
    b. Stop-Loss Provision Adjustment.
    c. Behavioral Offset.
    B. Update of the Federal Per Diem Base Rate and 
Electroconvulsive Therapy Rate.
    1. Market Basket for IPFs Reimbursed Under the IPF PPS.
    a. Market Basket Index for the IPF PPS.
    b. Overview of the RPL Market Basket.
    2. Labor-Related Share.
    3. IPFs Paid Based on a Blend of the Reasonable Cost-based 
Payments.
IV. Update of the IPF PPS Adjustment Factors.
    A. Overview of the IPF PPS Adjustment Factors.
    B. Patient-Level Adjustments.
    1. Adjustment for MS-DRG Assignment.
    2. Payment for Comorbid Conditions.
    3. Patient Age Adjustments.
    4. Variable Per Diem Adjustments.
    C. Facility-Level Adjustments.
    1. Wage Index Adjustment.
    a. Clarification of New England Deemed Counties.
    b. Multi-campus-Wage Index Data Collection.
    c. OMB Bulletins.
    2. Adjustment for Rural Location.
    3. Teaching Adjustment.
    4. Cost of Living Adjustment for IPFs Located in Alaska and 
Hawaii.
    5. Adjustment for IPFs With a Qualifying Emergency Department 
(ED).
    D. Other Payment Adjustments and Policies.
    1. Outlier Payments.
    a. Update to the Outlier Fixed Dollar Loss Threshold Amount.
    b. Statistical Accuracy of Cost-to-Charge Ratios.
    2. Stop-Loss Provision.
V. Waiver of Proposed Rulemaking.
VI. Collection of Information Requirements.
VII. Regulatory Impact Analysis.
Addenda.

Acronyms

    Because of the many terms to which we refer by acronym in this 
notice, we are listing the acronyms used and their corresponding terms 
in alphabetical order below:
BBRA Medicare, Medicaid and SCHIP [State Children's Health Insurance 
Program] Balanced Budget Refinement Act of 1999, (Pub. L. 106-113).
CBSA Core-Based Statistical Area.
CCR Cost-to-charge ratio.
CMSA Consolidated Metropolitan Statistical Area.
DSM-IV-TR Diagnostic and Statistical Manual of Mental Disorders Fourth 
Edition--Text Revision.
DRGs Diagnosis-related groups.
FY Federal fiscal year.
ICD-9-CM International Classification of Diseases, 9th Revision, 
Clinical Modification.
IPFs Inpatient psychiatric facilities.
IRFs Inpatient rehabilitation facilities.
LTCHs Long-term care hospitals.
MedPAR Medicare provider analysis and review file.
MSA Metropolitan Statistical Area.
RY Rate Year.
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, (Pub. L. 97-
248).

I. Background

A. Annual Requirements for Updating the IPF PPS

    In November 2004, we implemented the IPF PPS in a final rule that 
appeared in the November 15, 2004 Federal Register (69 FR 66922). In 
developing the IPF PPS, in order to ensure that the IPF PPS is able to 
account adequately for each IPF's case-mix, we performed an extensive 
regression analysis of the relationship between the per diem costs and 
certain patient and facility characteristics to determine those 
characteristics associated with statistically significant cost 
differences on a per diem basis. For characteristics with statistically 
significant cost differences, we used the regression coefficients of 
those variables to determine the size of the corresponding payment 
adjustments.
    In that final rule, we explained that we believe it is important to 
delay updating the adjustment factors derived from the regression 
analysis until we have IPF PPS data that includes as much information 
as possible regarding the patient-level characteristics of the 
population that each IPF serves. Therefore, we indicated that we did 
not intend to update the regression analysis and recalculate the 
Federal per diem base rate and the patient- and facility-level 
adjustments until we complete that analysis. Until that analysis is 
complete, we stated our intention to publish a notice in the Federal 
Register each spring to update the IPF PPS (71 FR 27041).
    Updates to the IPF PPS as specified in 42 CFR 412.428 include the 
following:
    <bullet> A description of the methodology and data used to 
calculate the updated Federal per diem base payment amount.
    <bullet> The rate of increase factor as described in Sec.  
412.424(a)(2)(iii), which is based on the excluded hospital with 
capital market basket under the update methodology of section 
1886(b)(3)(B)(ii) of the Act for each year.
    <bullet> For discharges occurring on or after July 1, 2006, the 
rate of increase factor for the Federal portion of the IPF's payment, 
which is based on the rehabilitation, psychiatric, and long-term care 
(RPL) market basket.
    <bullet> For discharges occurring on or after October 1, 2005, the 
rate of increase factor for the reasonable cost portion of the IPF's 
payment, which is based on the 2002-based excluded hospital market 
basket.
    <bullet> The best available hospital wage index and information 
regarding

[[Page 25710]]

whether an adjustment to the Federal per diem base rate, is needed to 
maintain budget neutrality.
    <bullet> Updates to the fixed dollar loss threshold amount in order 
to maintain the appropriate outlier percentage.
    <bullet> Description of the ICD-9-CM coding and DRG classification 
changes discussed in the annual update to the hospital inpatient 
prospective payment system (IPPS) regulations.
    <bullet> Update to the electroconvulsive therapy (ECT) payment by a 
factor specified by CMS.
    <bullet> Update to the national urban and rural cost-to-charge 
ratio medians and ceilings.
    <bullet> Update to the cost of living adjustment factors for IPFs 
located in Alaska and Hawaii, if appropriate.
    Our most recent annual update occurred in the May 2007 IPF PPS 
notice (72 FR 25602) that set forth updates to the IPF PPS payment 
rates for RY 2008.
    This notice does not initiate any policy changes with regard to the 
IPF PPS; rather, it simply provides an update to the rates for RY 2009 
(that is, the prospective payment rates applicable for discharges 
beginning July 1, 2008 through June 30, 2009). In establishing these 
payment rates, we update the IPF per diem payment rates that were 
published in the May 2007 IPF PPS notice in accordance with our 
established policies.

B. Overview of the Legislative Requirements for the IPF PPS

    Section 124 of the Medicare, Medicaid, and SCHIP (State Children's 
Health Insurance Program) Balanced Budget Refinement Act of 1999, (Pub. 
L. 106-113) (BBRA) required implementation of the IPF PPS. 
Specifically, section 124 of the BBRA mandated that the Secretary 
develop a per diem PPS for inpatient hospital services furnished in 
psychiatric hospitals and psychiatric units that includes an adequate 
patient classification system that reflects the differences in patient 
resource use and costs among psychiatric hospitals and psychiatric 
units.
    Section 405(g)(2) of the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 (MMA) (Pub. L. 108-173) extended the IPF 
PPS to distinct part psychiatric units of critical access hospitals 
(CAHs).
    To implement these provisions, we published various proposed and 
final rules in the Federal Register. For more information regarding 
these rules, see the CMS Web sites http://www.cms.hhs.gov/InpatientPsychFacilPPS/ and http://www.cms.hhs.gov/InpatientpsychfacilPPS/02_regulations.asp.

C. IPF PPS--General Overview

    The November 2004 IPF PPS final rule (69 FR 66922) established the 
IPF PPS, as authorized under section 124 of the BBRA and codified at 
subpart N of part 412 of the Medicare regulations. The November 2004 
IPF PPS final rule set forth the per diem Federal rates for the 
implementation year (that is, the 18-month period from January 1, 2005 
through June 30, 2006) that provided payment for the inpatient 
operating and capital costs to IPFs for covered psychiatric services 
they furnish (that is, routine, ancillary, and capital costs), but not 
costs of approved educational activities, bad debts, and other services 
or items that are outside the scope of the IPF PPS. Covered psychiatric 
services include services for which benefits are provided under the 
fee-for-service Part A (Hospital Insurance Program) Medicare program.
    The IPF PPS established the Federal per diem base rate for each 
patient day in an IPF derived from the national average daily routine 
operating, ancillary, and capital costs in IPFs in FY 2002. The average 
per diem cost was updated to the midpoint of the first year under the 
IPF PPS, standardized to account for the overall positive effects of 
the IPF PPS payment adjustments, and adjusted for budget neutrality.
    The Federal per diem payment under the IPF PPS is comprised of the 
Federal per diem base rate described above and certain patient- and 
facility-level payment adjustments that were found in the regression 
analysis to be associated with statistically significant per diem cost 
differences.
    The patient-level adjustments include age, DRG assignment, 
comorbidities, and variable per diem adjustments to reflect higher per 
diem costs in the early days of an IPF stay. Facility-level adjustments 
include adjustments for the IPF's wage index, rural location, teaching 
status, a cost of living adjustment for IPFs located in Alaska and 
Hawaii, and presence of a qualifying emergency department (ED).
    The IPF PPS provides additional payments for: Outlier cases; stop-
loss protection (which is applicable only during the IPF PPS transition 
period); interrupted stays; and a per treatment adjustment for patients 
who undergo ECT.
    A complete discussion of the regression analysis appears in the 
November 2004 IPF PPS final rule (69 FR 66933 through 66936).
    Section 124 of BBRA does not specify an annual update rate strategy 
for the IPF PPS and is broadly written to give the Secretary discretion 
in establishing an update methodology. Therefore, in the November 2004 
IPF PPS final rule (69 FR 66966), we implemented the IPF PPS using the 
following update strategy--(1) calculate the final Federal per diem 
base rate to be budget neutral for the 18-month period of January 1, 
2005 through June 30, 2006; (2) use a July 1 through June 30 annual 
update cycle; and (3) allow the IPF PPS first update to be effective 
for discharges on or after July 1, 2006 through June 30, 2007.

II. Transition Period for Implementation of the IPF PPS

    In the November 2004 IPF PPS final rule, we established Sec.  
412.426 to provide for a 3-year transition period from reasonable cost-
based reimbursement to full prospective payment for IPFs. The purpose 
of the transition period is to allow existing IPFs time to adjust their 
cost structures and to integrate the effects of changing to the IPF 
PPS.
    New IPFs, as defined in Sec.  412.426(c), are paid 100 percent of 
the Federal per diem payment amount. For those IPFs that are 
transitioning to the new system, payment is based on an increasing 
percentage of the PPS payment and a decreasing percentage of each IPF's 
facility-specific Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA) reimbursement rate.

                                   Table 1.--IPF PPS Transition Blend Factors
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                                                                                                      IPF PPS
                Transition Year                      Cost reporting periods         TEFRA rate     federal rate
                                                      beginning on or after         percentage      percentage
----------------------------------------------------------------------------------------------------------------
1.............................................   January 1, 2005................              75              25
2.............................................   January 1, 2006................              50              50
3.............................................   January 1, 2007................              25              75

[[Page 25711]]

 
                                                January 1, 2008.................               0             100
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    Changes to the blend percentages occur at the beginning of an IPF's 
cost reporting period. However, regardless of when an IPF's cost 
reporting year begins, the payment update will be effective for 
discharges occurring on or after July 1, 2008 through June 30, 2009. 
IPFs with cost reporting periods beginning January 1, 2008 will have 
completed the transition period and will receive 100 percent IPF PPS 
payments. Other IPFs with cost reporting periods beginning after 
January 1, 2008, during 2008, will also begin to receive 100 percent 
IPF PPS payments. This means that beginning January 1, 2009, all IPFs 
will receive 100 percent IPF PPS payments and the IPF PPS transition 
period will have ended.
    For RY 2009, the transition period established in the November 2004 
IPF PPS final rule will no longer be applied.

III. Updates to the IPF PPS for RY Beginning July 1, 2008

    The Federal per diem base rate is used as the standard payment per 
day under the IPF PPS and is adjusted by the applicable wage index 
factor and the patient- and facility-level adjustments that are 
applicable to the IPF stay. A detailed explanation of how we calculated 
the average per diem cost appears in the November 2004 IPF PPS final 
rule (69 FR 66926).

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

    Section 124(a)(1) of the BBRA requires that we implement the IPF 
PPS in a budget neutral manner. In other words, the amount of total 
payments under the IPF PPS, including any payment adjustments, must be 
projected to be equal to the amount of total payments that would have 
been made if the IPF PPS were not implemented. Therefore, we calculated 
the budget-neutrality factor by setting the total estimated IPF PPS 
payments to be equal to the total estimated payments that would have 
been made under the TEFRA methodology had the IPF PPS not been 
implemented.
    Under the IPF PPS methodology, we calculated the final Federal per 
diem base rate to be budget neutral during the IPF PPS implementation 
period (that is, the 18-month period from January 1, 2005 through June 
30, 2006) using a July 1 update cycle. We updated the average cost per 
day to the midpoint of the IPF PPS implementation period (that is, 
October 1, 2005), and this amount was used in the payment model to 
establish the budget-neutrality adjustment.
    A step-by-step description of the methodology used to estimate 
payments under the TEFRA payment system appears in the November 2004 
IPF PPS final rule (69 FR 66926).
1. Standardization of the Federal Per Diem Base Rate and 
Electroconvulsive Therapy Rate
    In the November 2004 IPF PPS final rule, we describe how we 
standardized the IPF PPS Federal per diem base rate in order to account 
for the overall positive effects of the IPF PPS payment adjustment 
factors. To standardize the IPF PPS payments, we compared the IPF PPS 
payment amounts calculated from the FY 2002 Medicare Provider Analysis 
and Review (MedPAR) file to the projected TEFRA payments from the FY 
2002 cost report file updated to the midpoint of the IPF PPS 
implementation period (that is, October 2005). The standardization 
factor was calculated by dividing total estimated payments under the 
TEFRA payment system by estimated payments under the IPF PPS. The 
standardization factor was calculated to be 0.8367.
    As described in detail in the May 2006 IPF PPS final rule (71 FR 
27045), in reviewing the methodology used to simulate the IPF PPS 
payments used for the November 2004 IPF PPS final rule, we discovered 
that due to a computer code error, total IPF PPS payments were 
underestimated by about 1.36 percent. Since the IPF PPS payment total 
should have been larger than the estimated figure, the standardization 
factor should have been smaller (0.8254 vs. 0.8367). In turn, the 
Federal per diem base rate and the ECT rate should have been reduced by 
0.8254 instead of 0.8367.
    To resolve this issue, in RY 2007, we amended the Federal per diem 
base rate and the ECT payment rate prospectively. Using the 
standardization factor of 0.8254, the average cost per day was 
effectively reduced by 17.46 percent (100 percent minus 82.54 percent = 
17.46 percent).
2. Calculation of the Budget Neutrality Adjustment
    To compute the budget neutrality adjustment for the IPF PPS, we 
separately identified each component of the adjustment, that is, the 
outlier adjustment, stop-loss adjustment, and behavioral offset.
    A complete discussion of how we calculate each component of the 
budget neutrality adjustment appears in the November 2004 IPF PPS final 
rule (69 FR 66932 through 66933) and in the May 2006 IPF PPS final rule 
(71 FR 27044 through 27046).
a. Outlier Adjustment
    Since the IPF PPS payment amount for each IPF includes applicable 
outlier amounts, we reduced the standardized Federal per diem base rate 
to account for aggregate IPF PPS payments estimated to be made as 
outlier payments. The outlier adjustment was calculated to be 2 
percent. As a result, the standardized Federal per diem base rate was 
reduced by 2 percent to account for projected outlier payments.
b. Stop-Loss Provision Adjustment
    As explained in the November 2004 IPF PPS final rule, we provided a 
stop-loss payment during the transition from cost-based reimbursement 
to the per diem payment system to ensure that an IPF's total PPS 
payments were no less than a minimum percentage of their TEFRA payment, 
had the IPF PPS not been implemented. We reduced the standardized 
Federal per diem base rate by the percentage of aggregate IPF PPS 
payments estimated to be made for stop-loss payments. As a result, the 
standardized Federal per diem base rate was reduced by 0.39 percent to 
account for stop-loss payments. Since the transition will be completed 
for RY 2009, for cost reporting periods beginning on or after January 
1, 2008, IPFs will be paid 100 percent PPS and, therefore, the stop 
loss provision will no longer be applicable. We indicated in the 
November 2004 IPF PPS final rule that we would remove this 0.39 percent 
adjustment to the Federal per diem base rate after the transition (69 
FR 66932). Therefore, for RY 2009, the Federal per diem base rate and 
ECT rates will be increased by 0.39 percent.

[[Page 25712]]

c. Behavioral Offset
    As explained in the November 2004 IPF PPS final rule, 
implementation of the IPF PPS may result in certain changes in IPF 
practices especially with respect to coding for comorbid medical 
conditions. As a result, Medicare may make higher payments than assumed 
in our calculations. Accounting for these effects through an adjustment 
is commonly known as a behavioral offset.
    Based on accepted actuarial practices and consistent with the 
assumptions made in other PPSs, we assumed in determining the 
behavioral offset that IPFs would regain 15 percent of potential 
``losses'' and augment payment increases by 5 percent. We applied this 
actuarial assumption, which is based on our historical experience with 
new payment systems, to the estimated ``losses'' and ``gains'' among 
the IPFs. The behavioral offset for the IPF PPS was calculated to be 
2.66 percent. As a result, we reduced the standardized Federal per diem 
base rate by 2.66 percent to account for behavioral changes. As 
indicated in the November 2004 IPF PPS final rule, we do not plan to 
change adjustment factors or projections, including the behavioral 
offset, until we analyze IPF PPS data. At that time, we will re-assess 
the accuracy of the behavioral offset along with the other factors 
impacting budget neutrality.
    If we find that an adjustment is warranted, the percent difference 
may be applied prospectively to the established PPS rates to ensure the 
rates accurately reflect the payment level intended by the statute. In 
conducting this analysis, we will be interested in the extent to which 
improved documentation and coding of patients' principal and other 
diagnoses, which may not reflect real increases in underlying resource 
demands, has occurred under the PPS.

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

1. Market Basket for IPFs Reimbursed Under the IPF PPS
    As described in the November 2004 IPF PPS final rule, the average 
per diem cost was updated to the midpoint of the implementation year 
(69 FR 66931). This updated average per diem cost of $724.43 was 
reduced by 17.46 percent to account for standardization to projected 
TEFRA payments for the implementation period, by 2 percent to account 
for outlier payments, by 0.39 percent to account for stop-loss 
payments, and by 2.66 percent to account for the behavioral offset. The 
Federal per diem base rate in the implementation year was $575.95, the 
per diem base rate for RY 2007 was $595.09, and the per diem base rate 
for RY 2008 was $614.99.
    Applying the market basket increase of 3.2 percent, the stop-loss 
adjustment of 0.39 percent, and the wage index budget neutrality factor 
of 1.0010 yields a Federal per diem base rate of $637.78 for RY 2009. 
Similarly, applying the market basket increase, stop-loss adjustment, 
and wage index budget neutrality factor to the RY 2008 ECT rate yields 
an ECT rate of $274.58 for RY 2009.
a. Market Basket Index for the IPF PPS
    The market basket index that was used to develop the IPF PPS was 
the excluded hospital with capital market basket. The market basket was 
based on 1997 Medicare cost report data and included data for Medicare 
participating IPFs, inpatient rehabilitation facilities (IRFs), long-
term care hospitals (LTCHs), cancer, and children's hospitals.
    We are presently unable to create a separate market basket 
specifically for psychiatric hospitals due to the following two 
reasons: (1) There is a very small sample size for free-standing 
psychiatric facilities; and (2) there are limited expense data for some 
categories on the free-standing psychiatric cost reports (for example, 
approximately 4 percent of free-standing psychiatric facilities 
reported contract labor cost data for FY 2002). However, since all 
IRFs, LTCHs, and IPFs are now paid under a PPS, we are updating PPS 
payments made under the IRF PPS, the IPF PPS, and the LTCH PPS, using a 
market basket reflecting the operating and capital cost structures for 
IRFs, IPFs, and LTCHs (hereafter referred to as the rehabilitation, 
psychiatric, long-term care (RPL) market basket).
    We have 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 are implemented in 
regulations at Sec.  413.40. They are not reimbursed under a PPS. Also, 
the FY 2002 cost structures for cancer and children's hospitals are 
noticeably different than the cost structures of the IRFs, IPFs, and 
LTCHs.
    The services offered in IRFs, IPFs, and LTCHs are typically more 
labor-intensive than those offered in cancer and children's hospitals. 
Therefore, the compensation cost weights for IRFs, IPFs, and LTCHs are 
larger than those in cancer and children's hospitals. In addition, the 
depreciation cost weights for IRFs, IPFs, and LTCHs are noticeably 
smaller than those for cancer and children's hospitals.
    A complete discussion of the RPL market basket appears in the May 
2006 IPF PPS final rule (71 FR 27046 through 27054).
b. Overview of the RPL Market Basket
    The RPL market basket is a fixed weight, Laspeyres-type price 
index. A market basket is described as a fixed-weight index because it 
answers the question of how much it would cost, at another time, to 
purchase the same mix of goods and services purchased to provide 
hospital services in a base period. The effects on total expenditures 
resulting from changes in the quantity or mix of goods and services 
(intensity) purchased subsequent to the base period are not measured. 
In this manner, the market basket measures only pure price change. Only 
when the index is rebased would the quantity and intensity effects be 
captured in the cost weights. Therefore, we rebase the market basket 
periodically so that cost weights reflect changes in the mix of goods 
and services that hospitals purchase (hospital inputs) to furnish 
patient care between base periods.
    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, 
shifting the base year cost structure from FY 1997 to FY 2002). 
Revising means changing data sources, methodology, or price proxies 
used in the input price index. In 2006, we rebased and revised the 
market basket used to update the IPF PPS. Table 2 below sets forth the 
completed FY 2002-based RPL market basket including the cost 
categories, weights, and price proxies.

[[Page 25713]]



                                     Table 2.--FY 2002-Based RPL Market Basket Cost Categories, Weights, and Proxies
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                              FY 2002-based
                                                RPL market
             Expense categories                basket cost                           FY 2002-based RPL market basket price proxies
                                                  weight
--------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL......................................          100.000
Compensation...............................           65.877
    Wages and Salaries *...................           52.895  ECI-Wages and Salaries, Civilian Hospital Workers.
    Employee Benefits *....................           12.982  ECI-Benefits, Civilian Hospital Workers.
Professional Fees, Non-Medical 1A*.........            2.892  ECI-Compensation for Professional & Related occupations.
Utilities..................................            0.656
    Electricity............................            0.351  PPI-Commercial Electric Power.
    Fuel Oil, Coal, etc....................            0.108  PPI-Commercial Natural Gas.
    Water and Sewage.......................            0.197  CPI-U--Water & Sewage Maintenance.
Professional Liability Insurance...........            1.161  CMS Professional Liability Premium Index.
All Other Products and Services                       19.265
    All Other Products                                13.323
        Pharmaceuticals....................            5.103  PPI Prescription Drugs.
        Food: Direct Purchases.............            0.873  PPI Processed Foods & Feeds.
        Food: Contract Service.............            0.620  CPI-U Food Away From Home.
        Chemicals..........................            1.100  PPI Industrial Chemicals.
        Medical Instruments................            1.014  PPI Medical Instruments & Equipment.
        Photographic Supplies..............            0.096  PPI Photographic Supplies.
        Rubber and Plastics................            1.052  PPI Rubber & Plastic Products.
        Paper Products.....................            1.000  PPI Converted Paper & Paperboard Products.
        Apparel............................            0.207  PPI Apparel.
        Machinery and Equipment............            0.297  PPI Machinery & Equipment.
        Miscellaneous Products **..........            1.963  PPI Finished Goods less Food & Energy.
    All Other Services                                 5.942
        Telephone..........................            0.240  CPI-U Telephone Services.
        Postage............................            0.682  CPI-U Postage.
        All Other: Labor Intensive *.......            2.219  ECI-Compensation for Private Service Occupations.
        All Other: Non-labor Intensive.....            2.800  CPI-U All Items.
Capital-Related Costs ***                             10.149
    Depreciation                                       6.186
        Fixed Assets.......................            4.250  Boeckh Institutional Construction 23-year useful life.
        Movable Equipment..................            1.937  WPI Machinery & Equipment 11-year useful life.
Interest Costs                                         2.775
    Nonprofit..............................            2.081  Average yield on domestic municipal bonds (Bond Buyer 20 bonds) vintage-weighted (23
                                                               years).
    For Profit.............................            0.694  Average yield on Moody's Aaa bond vintage-weighted (23 years).
Other Capital-Related Costs................            1.187  CPI-U Residential Rent.
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Labor-related.
** Blood and blood-related products is included in miscellaneous products.
*** A portion of capital costs (0.46) are labor-related.
Note: Due to rounding, weights may not sum to total.

    For RY 2009, 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 Consumer Price Indexes (CPIs), 
Producer Price Indexes (PPIs), and Employment Cost Indexes (ECIs) used 
as proxies in this market basket meet these criteria.
    We note that the proxies are the same as those used for the FY 
1997-based excluded hospital with capital market basket. Because these 
proxies meet our criteria of reliability, timeliness, availability, and 
relevance, we believe they continue to be the best measure of price 
changes for the cost categories. For further discussion on the FY 1997-
based excluded hospital with capital market basket, see the August 1, 
2002 IPPS final rule (67 FR at 50042).
    The RY 2009 (that is, beginning July 1, 2008) update for the IPF 
PPS using the FY 2002-based RPL market basket and Global Insight's 1st 
quarter 2008 forecast for the market basket components is 3.2 percent. 
This includes increases in both the operating section and the capital 
section for the 12-month RY period (that is, July 1, 2008 through June 
30, 2009). Global Insight, Inc. is a nationally recognized economic and 
financial forecasting firm that contracts with CMS to forecast the 
components of the market baskets.
2. Labor-Related Share
    Due to the variations in costs and geographic wage levels, we 
believe that payment rates under the IPF PPS should continue to be 
adjusted by a geographic wage index. This wage index applies to the 
labor-related portion of the Federal per diem base rate, hereafter 
referred to as the labor-related share.
    The labor-related share is determined by identifying the national 
average proportion of operating costs that are related to, influenced 
by, or vary with the local labor market. Using our current definition 
of labor-related, the labor-related share is 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. We used the FY 2002-based RPL market basket 
cost weights

[[Page 25714]]

relative importance to determine the labor-related share for the IPF 
PPS.
    The labor-related share for RY 2009 is the sum of the RY 2009 
relative importance of each labor-related cost category, and reflects 
the different rates of price change for these cost categories between 
the base year (FY 2002) and RY 2009. The sum of the relative importance 
for the RY 2009 operating costs (wages and salaries, employee benefits, 
professional fees, and labor-intensive services) is 71.681, as shown in 
Table 3 below. The portion of capital that is influenced by the local 
labor market is estimated to be 46 percent, which is the same 
percentage used in the FY 1997-based IRF and IPF payment systems.
    Since the relative importance for capital is 8.586 percent of the 
FY 2002-based RPL market basket in RY 2009, we are taking 46 percent of 
8.586 percent to determine the labor-related share of capital for RY 
2009. The result is 3.950 percent, which we added to 71.681 percent for 
the operating cost amount to determine the total labor-related share 
for RY 2009. Thus, the labor-related share that we are using for IPF 
PPS in RY 2009 is 75.631 percent. Table 3 below shows the RY 2009 
labor-related share using the FY 2002-based RPL market basket. We note 
that this labor-related share is determined by using the same 
methodology as employed in calculating all previous IPF labor-related 
shares.
    A complete discussion of the IPF labor-related share methodology 
appears in the November 2004 IPF PPS final rule (69 FR 66952 through 
66954).

  Table 3.--Total Labor-Related Share--Relative Importance for RY 2009
------------------------------------------------------------------------
                                         FY 2002-based    FY 2002-based
                                           RPL Market       RPL Market
                                        Basket Relative  Basket Relative
             Cost category                 Importance       Importance
                                          (Percent) RY    (Percent)  RY
                                             2008 *          2009 **
------------------------------------------------------------------------
Wages and salaries....................           52.588           52.645
Employee benefits.....................           14.127           14.004
Professional fees.....................            2.907            2.895
All other labor-intensive services....            2.145            2.137
    SUBTOTAL..........................           71.767           71.681
                                       ---------------------------------
Labor-related share of capital costs              4.021            3.950
 (0.46)...............................
                                       =================================
    TOTAL.............................           75.788           75.631
------------------------------------------------------------------------
* Based on 2007 1st Quarter forecast.
** Based on 2008 1st Quarter forecast.

3. IPFs Paid Based on a Blend of the Reasonable Cost-Based Payments
    As stated in the FY 2006 IPPS final rule (70 FR 47399), for IPFs 
that are transitioning to the fully Federal prospective payment rate, 
we will continue using the rebased and revised FY 2002-based excluded 
hospital market basket to update the reasonable cost-based portion of 
their payments.
    For RY 2009, all IPFs will have fully transitioned to PPS payment 
and therefore, be paid based on 100 percent IPF PPS. The reasonable 
cost-based payment which is subject to TEFRA limits will no longer be 
applied.

IV. Update of the IPF PPS Adjustment Factors

A. Overview of the IPF PPS Adjustment Factors

    The IPF PPS payment adjustments were derived from a regression 
analysis of 100 percent of the FY 2002 MedPAR data file, which 
contained 483,038 cases. We used the same results of this regression 
analysis to implement the November 2004 and May 2006 IPF PPS final 
rules. While we have since used more recent claims data to set the 
fixed dollar loss threshold amount, we use the same results of this 
regression analysis to update the IPF PPS for RY 2008 as well as RY 
2009.
    As previously stated, we do not plan to update the regression 
analysis until we analyze IPF PPS data. We plan to monitor claims and 
payment data independently from cost report data to assess issues, or 
whether changes in case-mix or payment shifts have occurred between 
free standing governmental, non-profit and private psychiatric 
hospitals, and psychiatric units of general hospitals, and other issues 
of importance to psychiatric facilities.
    A complete discussion of the data file used for the regression 
analysis appears in the November 2004 IPF PPS final rule (69 FR 66935 
through 66936).

B. Patient-Level Adjustments

    In the May 2006 IPF PPS final rule (71 FR 27040) for RY 2007 and in 
the May 2007 IPF PPS notice (72 FR 25602) for RY 2008, we provided 
payment adjustments for the following patient-level characteristics: 
DRG assignment of the patient's principal diagnosis; selected 
comorbidities; patient age; and the variable per diem adjustments. As 
previously stated in the November 2004 IPF PPS final rule, we do not 
intend to update the adjustment factors derived from the regression 
analysis until we analyze IPF PPS data that include as much information 
as possible regarding the patient-level characteristics of the 
population that each IPF serves.
1. Adjustment for MS-DRG Assignment
    The IPF PPS includes payment adjustments for the psychiatric DRG 
assigned to the claim based on each patient's principal diagnosis. In 
the May 4, 2007 IPF PPS update notice (72 FR 25602), we explained that 
the IPF PPS includes 15 diagnosis-related group (DRG) adjustment 
factors. The adjustment factors were expressed relative to the most 
frequently reported psychiatric DRG in FY 2002, that is, DRG 430 
(psychoses). The coefficient values and adjustment factors were derived 
from the regression analysis.
    In accordance with Sec.  412.27(a), payment under the IPF PPS is 
conditioned on IPFs admitting ``only patients whose admission to the 
unit is required for active treatment, of an intensity that can be 
provided appropriately only in an inpatient hospital setting, of a 
psychiatric principal diagnosis that is listed in the Fourth Edition, 
Text Revision of the American Psychiatric Association's Diagnostic and 
Statistical Manual, (DSM-IV-TR) or in Chapter Five (``Mental 
Disorders'') of the

[[Page 25715]]

International Classification of Diseases, Ninth Revision, Clinical 
Modification [(ICD-9-CM)].'' IPF claims with a principal diagnosis 
included in Chapter Five of the ICD-9-CM or the DSM-IV-TR will be paid 
the Federal per diem base rate under the IPF PPS, and all other 
applicable adjustments, including any applicable DRG adjustment. 
Psychiatric principal diagnoses that do not group to one of the 15 
designated DRGs still receive the Federal per diem base rate and all 
other applicable adjustments, but the payment would not include a DRG 
adjustment.
    The Standards for Electronic Transaction final rule published in 
the Federal Register on August 17, 2000 (65 FR 50312) adopted the ICD-
9-CM as the designated code set for reporting diseases, injuries, 
impairments, other health related problems, their manifestations, and 
causes of injury, disease, impairment, or other health related 
problems. Therefore, we use the ICD-9-CM as the designated code set for 
the IPF PPS.
    We believe that it is important to maintain the same diagnostic 
coding and DRG classification for IPFs that are used under the IPPS for 
providing the same psychiatric care. Therefore, when the IPF PPS was 
implemented for cost reporting periods beginning on or after January 1, 
2005, we adopted the same diagnostic code set and DRG patient 
classification system (that is, the CMS DRGs) that was utilized at the 
time under the hospital inpatient prospective payment system (IPPS). 
Since the inception of the IPF PPS, the DRGs used as the patient 
classification system under the IPF PPS have corresponded exactly with 
the CMS DRGs applicable under the IPPS for acute care hospitals.
    Every year, changes to the ICD-9-CM coding system are addressed in 
the IPPS proposed and final rules. The changes to the codes are 
effective October 1 of each year and must be used by acute care 
hospitals under the IPPS to report diagnostic and procedure 
information. The IPF PPS has always incorporated those ICD-9-CM coding 
changes made in the annual IPPS update. The IPF PPS announces the 
changes in a change request, at the same time the coding changes to 
IPPS and LTCH PPS are announced. Those ICD-9-CM coding changes are also 
published in the next IPF PPS RY update, in either the proposed and 
final rules, or in an update notice.
    As part of CMS' effort to better recognize resource use and the 
severity of illness among patients, CMS adopted the new Medicare 
Severity diagnosis related groups (MS-DRGs) for the IPPS in the FY 2008 
IPPS final rule with comment period (72 FR 47130). By better accounting 
for patients' severity of illness in Medicare payment rates, the MS-
DRGs encourage hospitals to improve their coding and documentation of 
patient diagnoses. The MS-DRGs, which are based on the CMS DRGs, 
represent a significant increase in the number of DRGs (from 538 to 
745, an increase of 207). For a full description of the development and 
implementation of the MS-DRGs, see the FY 2008 IPPS final rule with 
comment period (72 FR 47141 through 47175). Also see Transmittal 1374 
(change request 5748), dated November 7, 2007, for the ICD-9-CM coding 
changes.
    All of the ICD-9-CM coding changes are reflected in the FY 2008 
GROUPER, Version 25.0, effective for IPPS discharges occurring on or 
after October 1, 2007 through September 30, 2008. The GROUPER Version 
25.0 software package assigns each case to a DRG on the basis of the 
diagnosis and procedure codes and demographic information (that is age, 
sex, and discharge status). The Medicare Code Editor (MCE) 24.0 uses 
the new ICD-9-CM codes to validate coding for IPPS discharges on or 
after October 1, 2007. For additional information on the GROUPER 
Version 25.0 and MCE 24.0, see Transmittal 1374, dated November 7, 
2007. The IPF PPS has always used the same GROUPER and Code Editor as 
the IPPS. Therefore, the ICD-9-CM changes, which were reflected in the 
GROUPER Version 25.0 and MCE 24.0 on October 1, 2007, also became 
effective for the IPF PPS for discharges occurring on or after October 
1, 2007.
    The impact of the new MS-DRGs on the IPF PPS is negligible. Mapping 
the current DRGs to the MS-DRGs, there are now 17 MS-DRGs, instead of 
the original 15, for which the IPF PPS provides an adjustment. In 
addition, although the code set is updated, the same associated 
adjustment factors apply now that have been in place since 
implementation of the IPF PPS, with one exception that is unrelated to 
the update to the codes. When DRGs 521 and 522 were consolidated into 
MS-DRG 895, we carried over the adjustment factor of 1.02 from DRG 521 
to the newly consolidated MS-DRG. This was done to reflect the higher 
claims volume under DRG 521, with more than eight times the number of 
claims than billed under DRG 522. The updated codes, which were 
effective October 1, 2007, must be used to report diagnostic or 
procedure information on IPF PPS claims. These updates are reflected in 
Table 4.
    The official version of the ICD-9-CM is available on CD-ROM from 
the U.S. Government Printing Office. The FY 2008 version can be ordered 
by contacting the Superintendent of Documents, U.S. Government Printing 
Office, Department 50, Washington, DC 20402-9329, telephone number 
(202) 512-1800. Questions concerning the ICD-9-CM should be directed to 
Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination and 
Maintenance Committee, CMS, Center for Medicare Management, Hospital 
and Ambulatory Policy Group, Division of Acute Care, Mailstop C4-08-06, 
7500 Security Boulevard, Baltimore, Maryland 21244-1850.
    Further information concerning the official version of the ICD-9-CM 
can be found in the IPPS final rule with comment period, ``Changes to 
Hospital Inpatient Prospective Payment System and Fiscal Year 2008 
Rates'' in the August 22, 2007 Federal Register (72 FR 47130) and at 
http://www.cms.hhs.gov/QuarterlyProviderUpdates/downloads/cms1533fc.pdf.
    Table 4 below lists the FY 2008 new ICD-9-CM diagnosis codes that 
group to one of the 17 MS-DRGs for which the IPF PPS provides an 
adjustment. This table is only a listing of FY 2008 changes and does 
not reflect all of the currently valid and applicable ICD-9-CM codes 
classified in the MS-DRGs. When coded as a principal code or diagnosis, 
these codes receive the correlating MS-DRG adjustment.

                  Table 4.--FY 2008 New Diagnosis Codes
------------------------------------------------------------------------
           Diagnosis code                  Description          MS-DRG
------------------------------------------------------------------------
315.34.............................  Speech and language             886
                                      developmental delay
                                      due to hearing loss.
331.5..............................  Idiopathic normal          056, 057
                                      pressure
                                      hydrocephalus (INPH).
------------------------------------------------------------------------

    Since we do not plan to update the regression analysis until we 
analyze IPF PPS data, the MS-DRG adjustment factors, shown in Table 5 
below, will continue to be paid for RY 2009. Table 5 reflects the 
changes that were made to the DRGs under the IPF PPS in a crosswalk of 
DRGs prior to October 1, 2007 to the new MS-DRGs, which were effective 
October 1, 2007.

[[Page 25716]]



  Table 5.--FY 2008 Crosswalk of Current DRGs to New MS-DRGs Applicable for the Principal Diagnosis Adjustment
----------------------------------------------------------------------------------------------------------------
                                              (v25) MS-DRG                                          Adjustment
        (v24) DRG prior to 10/01/07          after 10/01/07          MS-DRG descriptions              factor
----------------------------------------------------------------------------------------------------------------
                                                        056  Degenerative nervous system          ..............
                                                              disorders w MCC.
12.........................................             057  Degenerative nervous system                    1.05
                                                              disorders w/o MCC.
                                                        080  Nontraumatic stupor & coma w MCC...  ..............
023........................................             081  Nontraumatic stupor & coma w/o MCC.            1.07
424........................................             876  O.R. procedure w principal                     1.22
                                                              diagnoses of mental illness.
425........................................             880  Acute adjustment reaction &                    1.05
                                                              psychosocial dysfunction.
426........................................             881  Depressive neuroses................            0.99
427........................................             882  Neuroses except depressive.........            1.02
428........................................             883  Disorders of personality & impulse             1.02
                                                              control.
429........................................             884  Organic disturbances & mental                  1.03
                                                              retardation.
430........................................             885  Psychoses..........................            1.00
431........................................             886  Behavioral & developmental                     0.99
                                                              disorders.
432........................................             887  Other mental disorder diagnoses....            0.92
433........................................             894  Alcohol/drug abuse or dependence,              0.97
                                                              left AMA.
521........................................             895  Alcohol/drug abuse or dependence w             1.02
                                                              rehabilitation therapy.
                                                        896  Alcohol/drug abuse or dependence w/  ..............
                                                              o rehabilitation therapy w MCC.
523........................................             897  Alcohol/drug abuse or dependence w/            0.88
                                                              o rehabilitation therapy w/o MCC.
----------------------------------------------------------------------------------------------------------------

2. Payment for Comorbid Conditions
    The intent of the comorbidity adjustment is to recognize the 
increased costs associated with comorbid conditions by providing 
additional payments for certain concurrent medical or psychiatric 
conditions that are expensive to treat. In the May 2007 IPF PPS update 
notice (72 FR 25602), we explained that the IPF PPS includes 17 
comorbidity categories and identified the new, revised and deleted ICD-
9-CM diagnosis codes that generate a comborbid condition payment 
adjustment under the IPF PPS for RY 2008 (72 FR 25609-13).
    Comorbidities are specific patient conditions that are secondary to 
the patient's principal diagnosis, and that require treatment during 
the stay. Diagnoses that relate to an earlier episode of care and have 
no bearing on the current hospital stay are excluded and should not be 
reported on IPF claims. Comorbid conditions must exist at the time of 
admission or develop subsequently, and affect the treatment received, 
affect the length of stay (LOS) or affect both treatment and LOS.
    For each claim, an IPF may receive only one comorbidity adjustment 
per comorbidity category, but it may receive an adjustment for more 
than one comorbidity category. Billing instructions require that IPFs 
must enter the full ICD-9-CM codes for up to 8 additional diagnoses if 
they co-exist at the time of admission or develop subsequently.
    The comorbidity adjustments were determined based on the regression 
analysis using the diagnoses reported by hospitals in FY 2002. The 
principal diagnoses were used to establish the DRG adjustment and were 
not accounted for in establishing the comorbidity category adjustments, 
except where ICD-9-CM ``code first'' instructions apply. As we 
explained in the May 2007 IPF PPS notice (72 FR 25602), the code first 
rule applies when a condition has both an underlying etiology and a 
manifestation due to the underlying etiology. For these conditions, the 
ICD-9-CM has a coding convention that requires the underlying 
conditions to be sequenced first followed by the manifestation. 
Whenever a combination exists, there is a ``use additional code'' note 
at the etiology code and a ``code first'' note at the manifestation 
code.
    As discussed in the DRG section, it is our policy to maintain the 
same diagnostic coding set for IPFs that is used under the IPPS for 
providing the same psychiatric care. Although the ICD-9-CM code set has 
been updated, the same adjustment factors have been in place since the 
implementation of the IPF PPS. Table 6 below lists the FY 2008 new ICD 
diagnosis codes that impact the comorbidity adjustments under the IPF 
PPS. Table 6 is not a list of all currently valid ICD codes applicable 
for the IPF PPS comorbidity adjustments.

     Table 6.--FY 2008 New ICD Codes Applicable for the Comorbidity
                          Adjustments Diagnosis
------------------------------------------------------------------------
                                                           Comorbidity
        Diagnosis code                Description           category
------------------------------------------------------------------------
040.41........................  Infant botulism.......  Infectious
                                                         Diseases.
040.42........................  Wound botulism........  Infectious
                                                         Diseases.
058.10........................  Roseola infantum,       Infectious
                                 unspecified.            Diseases.
058.11........................  Roseola infantum due    Infectious
                                 to human herpesvirus    Diseases.
                                 6.
058.12........................  Roseola infantum due    Infectious
                                 to human herpesvirus    Diseases.
                                 7.
058.21........................  Human herpesvirus 6     Infectious
                                 encephalitis.           Diseases.
058.29........................  Other human             Infectious
                                 herpesvirus             Diseases.
                                 encephalitis.
058.81........................  Human herpesvirus 6     Infectious
                                 infection.              Diseases.
058.82........................  Human herpesvirus 7     Infectious
                                 infection.              Diseases.
058.89........................  Other human             Infectious
                                 herpesvirus infection.  Diseases.
200.30........................  Marginal zone           Oncology
                                 lymphoma, unspecified   Treatment.
                                 site, extranodal and
                                 solid organ sites.
200.31........................  Marginal zone           Oncology
                                 lymphoma, lymph nodes   Treatment.
                                 of head, face, and
                                 neck.
200.32........................  Marginal zone           Oncology
                                 lymphoma,               Treatment.
                                 intrathoracic lymph
                                 nodes.

[[Page 25717]]

 
200.33........................  Marginal zone           Oncology
                                 lymphoma,               Treatment.
                                 intraabdominal lymph
                                 nodes.
200.34........................  Marginal zone           Oncology
                                 lymphoma, lymph nodes   Treatment.
                                 of axilla and upper
                                 limb.
200.35........................  Marginal zone           Oncology
                                 lymphoma, lymph nodes   Treatment.
                                 of inguinal region
                                 and lower limb.
200.36........................  Marginal zone           Oncology
                                 lymphoma, intrapelvic   Treatment.
                                 lymph nodes.
200.37........................  Marginal zone           Oncology
                                 lymphoma, spleen.       Treatment.
200.38........................  Marginal zone           Oncology
                                 lymphoma, lymph nodes   Treatment.
                                 of multiple sites.
200.40........................  Mantle cell lymphoma,   Oncology
                                 unspecified site,       Treatment.
                                 extranodal and solid
                                 organ sites.
200.41........................  Mantle cell lymphoma,   Oncology
                                 lymph nodes of head,    Treatment.
                                 face, and neck.
200.42........................  Mantle cell lymphoma,   Oncology
                                 intrathoracic lymph     Treatment.
                                 nodes.
200.43........................  Mantle cell lymphoma,   Oncology
                                 intra-abdominal lymph   Treatment.
                                 nodes.
200.44........................  Mantle cell lymphoma,   Oncology
                                 lymph nodes of axilla   Treatment.
                                 and upper limb.
200.45........................  Mantle cell lymphoma,   Oncology
                                 lymph nodes of          Treatment.
                                 inguinal region and
                                 lower limb.
200.46........................  Mantle cell lymphoma,   Oncology
                                 intrapelvic lymph       Treatment.
                                 nodes.
200.47........................  Mantle cell lymphoma,   Oncology
                                 spleen.                 Treatment.
200.48........................  Mantle cell lymphoma,   Oncology
                                 lymph nodes of          Treatment.
                                 multiple sites.
200.50........................  Primary central         Oncology
                                 nervous system          Treatment.
                                 lymphoma, unspecified
                                 site, extranodal and
                                 solid organ sites.
200.51........................  Primary central         Oncology
                                 nervous system          Treatment.
                                 lymphoma, lymph nodes
                                 of head, face, and
                                 neck.
200.52........................  Primary central         Oncology
                                 nervous system          Treatment.
                                 lymphoma,
                                 intrathoracic lymph
                                 nodes.
200.53........................  Primary central         Oncology
                                 nervous system          Treatment.
                                 lymphoma, intra-
                                 abdominal lymph nodes.
200.54........................  Primary central         Oncology
                                 nervous system          Treatment.
                                 lymphoma, lymph nodes
                                 of axilla and upper
                                 limb.
200.55........................  Primary central         Oncology
                                 nervous system          Treatment.
                                 lymphoma, lymph nodes
                                 of inguinal region
                                 and lower limb.
200.56........................  Primary central         Oncology
                                 nervous system          Treatment.
                                 lymphoma, intrapelvic
                                 lymph nodes.
200.57........................  Primary central         Oncology
                                 nervous system          Treatment.
                                 lymphoma, spleen.
200.58........................  Primary central         Oncology
                                 nervous system          Treatment.
                                 lymphoma, lymph nodes
                                 of multiple sites.
200.60........................  Anaplastic large cell   Oncology
                                 lymphoma, unspecified   Treatment.
                                 site, extranodal and
                                 solid organ sites.
200.61........................  Anaplastic large cell   Oncology
                                 lymphoma, lymph nodes   Treatment.
                                 of head, face, and
                                 neck.
200.62........................  Anaplastic large cell   Oncology
                                 lymphoma,               Treatment.
                                 intrathoracic lymph
                                 nodes.
200.63........................  Anaplastic large cell   Oncology
                                 lymphoma, intra-        Treatment.
                                 abdominal lymph nodes.
200.64........................  Anaplastic large cell   Oncology
                                 lymphoma, lymph nodes   Treatment.
                                 of axilla and upper
                                 limb.
200.65........................  Anaplastic large cell   Oncology
                                 lymphoma, lymph nodes   Treatment.
                                 of inguinal region
                                 and lower limb.
200.66........................  Anaplastic large cell   Oncology
                                 lymphoma, intrapelvic   Treatment.
                                 lymph nodes.
200.67........................  Anaplastic large cell   Oncology
                                 lymphoma, spleen.       Treatment.
200.68........................  Anaplastic large cell   Oncology
                                 lymphoma, lymph nodes   Treatment.
                                 of multiple sites.
200.70........................  Large cell lymphoma,    Oncology
                                 unspecified site,       Treatment.
                                 extranodal and solid
                                 organ sites.
200.71........................  Large cell lymphoma,    Oncology
                                 lymph nodes of head,    Treatment.
                                 face, and neck.
200.72........................  Large cell lymphoma,    Oncology
                                 intrathoracic lymph     Treatment.
                                 nodes.
200.73........................  Large cell lymphoma,    Oncology
                                 intra-abdominal lymph   Treatment.
                                 nodes.
200.74........................  Large cell lymphoma,    Oncology
                                 lymph nodes of axilla   Treatment.
                                 and upper limb.
200.75........................  Large cell lymphoma,    Oncology
                                 lymph nodes of          Treatment.
                                 inguinal region and
                                 lower limb.
200.76........................  Large cell lymphoma,    Oncology
                                 intrapelvic lymph       Treatment.
                                 nodes.
200.77........................  Large cell lymphoma,    Oncology
                                 spleen.                 Treatment.
200.78........................  Large cell lymphoma,    Oncology
                                 lymph nodes of          Treatment.
                                 multiple sites.
202.70........................  Peripheral T cell       Oncology
                                 lymphoma, unspecified   Treatment.
                                 site, extranodal and
                                 solid organ sites.
202.71........................  Peripheral T cell       Oncology
                                 lymphoma, lymph nodes   Treatment.
                                 of head, face, and
                                 neck.
202.72........................  Peripheral T cell       Oncology
                                 lymphoma,               Treatment.
                                 intrathoracic lymph
                                 nodes.
202.73........................  Peripheral T cell       Oncology
                                 lymphoma, intra-        Treatment.
                                 abdominal lymph nodes.
202.74........................  Peripheral T cell       Oncology
                                 lymphoma, lymph nodes   Treatment.
                                 of axilla and upper
                                 limb.
202.75........................  Peripheral T cell       Oncology
                                 lymphoma, lymph nodes   Treatment.
                                 of inguinal region
                                 and lower limb.
202.76........................  Peripheral T cell       Oncology
                                 lymphoma, intrapelvic   Treatment.
                                 lymph nodes.
202.77........................  Peripheral T cell       Oncology
                                 lymphoma, spleen.       Treatment.

[[Page 25718]]

 
202.78........................  Peripheral T cell       Oncology
                                 lymphoma, lymph nodes   Treatment.
                                 of multiple sites.
233.30........................  Carcinoma in situ,      Oncology
                                 unspecified female      Treatment.
                                 genital organ.
233.31........................  Carcinoma in situ,      Oncology
                                 vagina.                 Treatment.
233.32........................  Carcinoma in situ,      Oncology
                                 vulva.                  Treatment.
233.39........................  Carcinoma in situ,      Oncology
                                 other female genital    Treatment.
                                 organ.
------------------------------------------------------------------------

    .Table 7 lists the invalid ICD-9-CM codes no longer applicable for 
the comorbidity adjustment. .

    Table 7.--FY 2008 Invalid ICD Codes No Longer Applicable for the
                         Comorbidity Adjustment
------------------------------------------------------------------------
                                                           Comorbidity
        Diagnosis code                Description           category.
------------------------------------------------------------------------
233.3.........................  Carcinoma in situ,      Oncology
                                 other and unspecified   Treatment.
                                 female genital organs.
------------------------------------------------------------------------

    The seventeen comorbidity categories for which we are providing an 
adjustment, their respective codes, including the new FY 2008 ICD 
codes, and their respective adjustment factors, are listed below in 
Table 8. .

Table 8.--RY 2009 Diagnosis Codes and Adjustment Factors for Comorbidity
                               Categories
------------------------------------------------------------------------
                                                            Adjustment
   Description of comorbidity          ICD-9CM code           factor
------------------------------------------------------------------------
Developmental Disabilities.....  317, 3180, 3181, 3182,             1.04
                                  and 319.
Coagulation Factor Deficits....  2860 through 2864......            1.13
Tracheostomy...................  51900--through 51909               1.06
                                  and V440.
Renal Failure, Acute...........  5845 through 5849,                 1.11
                                  63630, 63631, 63632,
                                  63730, 63731, 63732,
                                  6383, 6393, 66932,
                                  66934, 9585.
Renal Failure, Chronic.........  40301, 40311, 40391,               1.11
                                  40402, 40412, 40413,
                                  40492, 40493, 5853,
                                  5854, 5855, 5856,
                                  5859, 586, V451, V560,
                                  V561, and V562.
Oncology Treatment.............  1400 through 2399 with             1.07
                                  a radiation therapy
                                  code 92.21-92.29 or
                                  chemotherapy code
                                  99.25.
Uncontrolled Diabetes-Mellitus   25002, 25003, 25012,               1.05
 with or without complications.   25013, 25022, 25023,
                                  25032, 25033, 25042,
                                  25043, 25052, 25053,
                                  25062, 25063, 25072,
                                  25073, 25082, 25083,
                                  25092, and 25093.
Severe Protein Calorie           260 through 262........            1.13
 Malnutrition.
Eating and Conduct Disorders...  3071, 30750, 31203,                1.12
                                  31233, and 31234.
Infectious Disease.............  01000 through 04110,               1.07
                                  042, 04500 through
                                  05319, 05440 through
                                  05449, 0550 through
                                  0770, 0782 through
                                  07889, and 07950
                                  through 07959.
Drug and/or Alcohol Induced      2910, 2920, 29212,                 1.03
 Mental Disorders.                2922, 30300, and 30400.
Cardiac Conditions.............  3910, 3911, 3912,                  1.11
                                  40201, 40403, 4160,
                                  4210, 4211, and 4219.
Gangrene.......................  44024 and 7854.........            1.10
Chronic Obstructive Pulmonary    49121, 4941, 5100,                 1.12
 Disease.                         51883, 51884, V4611
                                  and V4612, V4613 and
                                  V4614.
Artificial Openings-Digestive    56960 through 56969,               1.08
 and Urinary.                     9975, and V441 through
                                  V446.
Severe Musculoskeletal and       6960, 7100, 73000                  1.09
 Connective Tissue Diseases.      through 73009, 73010
                                  through 73019, and
                                  73020 through 73029.
Poisoning......................  96500 through 96509,               1.11
                                  9654, 9670 through
                                  9699, 9770, 9800
                                  through 9809, 9830
                                  through 9839, 986,
                                  9890 through 9897.
------------------------------------------------------------------------

3. Patient Age Adjustments
    As explained in the November 2004 IPF PPS final rule, we analyzed 
the impact of age on per diem cost by examining the age variable (that 
is, the range of ages) for payment adjustments.
    In general, we found that the cost per day increases with 
increasing age. The older age groups are more costly than the under 45 
age group, the differences in per diem cost increase for each 
successive age group, and the differences are statistically 
significant.
    For RY 2009, we are continuing to use the patient age adjustments 
currently in effect and shown in Table 9 below.

             Table 9.--Age Groupings and Adjustment Factors
------------------------------------------------------------------------
                                                            Adjustment
                           Age                                factor
------------------------------------------------------------------------
Under 45................................................            1.00
45 and under 50.........................................            1.01
50 and under 55.........................................            1.02
55 and under 60.........................................            1.04
60 and under 65.........................................            1.07
65 and under 70.........................................            1.10
70 and under 75.........................................            1.13
75 and under 80.........................................            1.15
80 and over.............................................            1.17
------------------------------------------------------------------------


[[Page 25719]]

4. Variable Per Diem Adjustments
    We explained in the November 2004 IPF PPS final rule that a 
regression analysis indicated that per diem cost declines as the LOS 
increases (69 FR 66946). The variable per diem adjustments to the 
Federal per diem base rate account for ancillary and administrative 
costs that occur disproportionately in the first days after admission 
to an IPF.
    We used a regression analysis to estimate the average differences 
in per diem cost among stays of different lengths. As a result of this 
analysis, we established variable per diem adjustments that begin on 
day 1 and decline gradually until day 21 of a patient's stay. For day 
22 and thereafter, the variable per diem adjustment remains the same 
each day for the remainder of the stay. However, the adjustment applied 
to day 1 depends upon whether the IPF has a qualifying ED. If an IPF 
has a qualifying ED, it receives a 1.31 adjustment factor for day 1 of 
each patient stay. If an IPF does not have a qualifying ED, it receives 
a 1.19 adjustment factor for day 1 of the stay. The ED adjustment is 
explained in more detail in section IV.C.5 of this notice.
    For RY 2009, we are continuing to use the variable per diem 
adjustment factors currently in effect as shown in Table 10 below.
    A complete discussion of the variable per diem adjustments appears 
in the November 2004 IPF PPS final rule (69 FR 66946).

                Table 10.--Variable Per Diem Adjustments
------------------------------------------------------------------------
                                                            Adjustment
                       Day-of-stay                            factor
------------------------------------------------------------------------
Day 1--IPF Without a Qualified ED.......................            1.19
Day 1--IPF With a Qualified ED..........................            1.31
Day 2...................................................            1.12
Day 3...................................................            1.08
Day 4...................................................            1.05
Day 5...................................................            1.04
Day 6...................................................            1.02
Day 7...................................................            1.01
Day 8...................................................            1.01
Day 9...................................................            1.00
Day 10..................................................            1.00
Day 11..................................................            0.99
Day 12..................................................            0.99
Day 13..................................................            0.99
Day 14..................................................            0.99
Day 15..................................................            0.98
Day 16..................................................            0.97
Day 17..................................................            0.97
Day 18..................................................            0.96
Day 19..................................................            0.95
Day 20..................................................            0.95
Day 21..................................................            0.95
After Day 21............................................            0.92
------------------------------------------------------------------------

C. Facility-Level Adjustments

    The IPF PPS includes facility-level adjustments for the wage index, 
IPFs located in rural areas, teaching IPFs, cost of living adjustments 
for IPFs located in Alaska and Hawaii, and IPFs with a qualifying ED.
1. Wage Index Adjustment
    As discussed in the May 2006 IPF PPS final rule, and in the May 
2007 notice, in providing an adjustment for area wage levels, the 
labor-related portion of an IPF's Federal prospective payment is 
adjusted using an appropriate wage index. An IPF's area wage index 
value is determined based on the actual location of the IPF in an urban 
or rural area as defined in Sec.  412.64(b)(1)(ii)(A) through (C).
    Since the inception of the IPF PPS, we have used hospital wage data 
in developing a wage index to be applied to IPFs. We are continuing 
that practice for RY 2009. We apply the wage index adjustment to the 
labor-related portion of the Federal rate, which is 75.631 percent. 
This percentage reflects the labor-related relative importance of the 
RPL market basket for RY 2009. The IPF PPS uses the pre-floor, pre-
reclassified hospital wage index. Changes to the wage index are made in 
a budget neutral manner, so that updates do not increase expenditures.
    For RY 2009, we are applying the most recent hospital wage index 
using the most recent hospital wage data, and applying an adjustment in 
accordance with our budget neutrality policy. This policy requires us 
to estimate the total amount of IPF PPS payments in RY 2008 and divide 
that amount by the total estimated IPF PPS payments in RY 2009. The 
estimated payments are based on FY 2006 IPF claims, inflated to the 
appropriate RY. This quotient is the wage index budget neutrality 
factor, and it is applied in the update of the Federal per diem base 
rate for RY 2009. The wage index budget neutrality factor for RY 2009 
is 1.0010.
    The wage index applicable for RY 2009 appears in Table 1 and Table 
2 in Addendum B of this notice. As explained in the May 2006 IPF PPS 
final rule for RY 2007 (71 FR 27061), and in the IPF PPS May 2007 
notice for RY 2008 (72 FR 25602), the IPF PPS applies the hospital wage 
index without a hold-harmless policy, and without an out-commuting 
adjustment or out-migration adjustment because we feel these policies 
apply only to the IPPS.
    In the May 2006 IPF PPS final rule for RY 2007 (71 FR 27061), we 
adopted the changes discussed in the Office of Management and Budget 
(OMB) Bulletin No. 03-04 (June 6, 2003), which announced revised 
definitions for Metropolitan Statistical Areas (MSAs), and the creation 
of Micropolitan Statistical Areas and Combined Statistical Areas. In 
adopting the OMB Core-Based Statistical Area (CBSA) geographic 
designations, since the IPF PPS was already in a transition period from 
TEFRA payments to PPS payments, we did not provide a separate 
transition for the wage index.
    As was the case in RY 2008, for RY 2009, we will be using the full 
CBSA-based wage index values as presented in Tables 1 and 2 in Addendum 
B of this notice.
    Finally, we continue to use the same methodology discussed in the 
IPF PPS proposed rule for RY 2007 (71 FR 3633), and finalized in the 
May 2006 IPF PPS final rule for RY 2007 (71 FR 27061) to address those 
geographic areas where there are no hospitals and, thus, no hospital 
wage index data on which to base the calculation of the RY 2009 IPF PPS 
wage index. For RY 2009, those areas consist of rural Massachusetts, 
rural Puerto Rico and urban CBSA (25980) Hinesville-Fort Stewart, GA.
    A complete discussion of the CBSA labor market definitions appears 
in the May 2006 IPF PPS final rule (71 FR 27061 through 27067).
a. Clarification of New England Deemed Counties
    We are also taking this opportunity to address the change in the 
treatment of ``New England deemed counties'' (that is, those counties 
in New England listed in Sec.  412.64(b)(1)(ii)(B) that were deemed to 
be parts of urban areas under section 601(g) of the Social Security 
Amendments of 1983) that was made in the FY 2008 IPPS final rule with 
comment period. These counties include the following: Litchfield 
County, Connecticut; York County, Maine; Sagadahoc County, Maine; 
Merrimack County, New Hampshire; and Newport County, Rhode Island. Of 
these five ``New England deemed counties,'' three (York County, 
Sagadahoc County, and Newport County) are also included in metropolitan 
statistical areas defined by OMB and are considered urban under both 
the current IPPS and IPF PPS labor market area definitions in Sec.  
412.64(b)(1)(ii)(A). The remaining two, Litchfield County and Merrimack 
County, are geographically located in areas that are considered rural 
under the current IPPS (and IPF PPS) labor market area definitions 
(however, they have been previously deemed urban under the IPPS in 
certain circumstances as discussed below).

[[Page 25720]]

    In the FY 2008 IPPS final rule with comment period (72 FR 47337 
through 47338), Sec.  412.64(b)(1)(ii)(B) was revised such that the two 
``New England deemed counties'' that are still considered rural under 
the OMB definitions (Litchfield County, CT and Merrimack County, NH), 
are no longer considered urban effective for discharges occurring on or 
after October 1, 2007, and therefore, are considered rural in 
accordance with Sec.  412.64(b)(1)(ii)(C). However, for purposes of 
payment under the IPPS, acute-care hospitals located within those areas 
are treated as being reclassified to their deemed urban area effective 
for discharges occurring on or after October 1, 2007 (see 72 FR 47337 
through 47338). We note that the IPF PPS does not provide for such 
geographic reclassification (71 FR 27061 through 27067). Also in the FY 
2008 IPPS final rule with comment period (72 FR 47338), we explained 
that we limited this policy change for the ``New England deemed 
counties'' only to IPPS hospitals, and any change to non-IPPS provider 
wage indices would be addressed in the respective payment system rules.
    Accordingly, as stated above, we are taking the opportunity to 
clarify the treatment of ``New England deemed counties'' under the IPF 
PPS in this notice. As discussed above, under existing Sec.  412.402 
and Sec.  412.424(d)(1)(i), an IPF's wage index is determined based on 
the location of the IPF in an urban or rural area as defined in Sec.  
412.64(b)(1)(ii)(A) through (C). Under existing Sec.  412.402, an urban 
area under the IPF PPS is currently defined at Sec.  
412.64(b)(1)(ii)(A) and (B), and a rural area is defined at Sec.  
412.64(b)(1)(ii)(C) as any area outside of an urban area.
    Historical changes to the labor market area/geographic 
classifications and annual updates to the wage index values under the 
IPF PPS are made effective July 1 each year. When we established the 
most recent IPF PPS payment rate update, effective for IPF discharges 
occurring on or after July 1, 2007 through June 30, 2008, we considered 
the ``New England deemed counties'' (including Litchfield County, CT 
and Merrimack County, NH) as urban for RY 2008 (in accordance with the 
definitions of urban and rural stated in the RY 2008 IPF PPS notice (72 
FR 25602) and as evidenced by the inclusion of Litchfield County as one 
of the constituent counties of urban CBSA 25540 (Hartford-West 
Hartford-East Hartford, CT), and the inclusion of Merrimack County as 
one of the constituent counties of urban CBSA 31700 (Manchester-Nashua, 
NH)). (See 72 FR 25643 and 25651, respectively).
    As noted above, existing Sec.  412.402 indicates that the terms 
``rural'' and ``urban'' are defined according to the definitions of 
those terms in Sec.  412.64(b)(1)(ii)(A) through (C). Effective for 
discharges on or after July 1, 2008, Sec.  412.64(b)(1)(ii)(B) is no 
longer applicable under the IPF PPS. Therefore, as Litchfield County, 
CT and Merrimack County, NH would be considered rural areas in 
accordance with our regulations at Sec.  412.402, these two counties 
will be ``rural'' under the IPF PPS effective with the next update of 
the IPF PPS payment rates, which will be July 1, 2008 (under the IPF 
PPS effective for discharges on or after July 1, 2008, Litchfield 
County, CT and Merrimack County, NH are not urban under Sec.  
412.64(b)(1)(ii)(A) through (B), as revised under the RY 2008 IPPS 
final rule with comment period, and therefore are rural under Sec.  
412.64(b)(1)(ii)(C)). Litchfield County, CT and Merrimack County, NH 
will be considered ``rural'' effective for IPF PPS discharges occurring 
on or after July 1, 2008, and will no longer be considered as being 
part of urban CBSA 25540 (Hartford-West Hartford-East Hartford, CT) and 
urban CBSA 31700 (Manchester-Nashua, NH), respectively. We do not need 
to make any changes to our regulations to effectuate this change. We 
note that this policy is consistent with our policy of not taking into 
account IPPS geographic reclassifications in determining payments under 
the IPF PPS.
    Four IPFs (two in Litchfield County, CT, and two in Merrimack 
County, NH) greatly benefit from treating the counties in which they 
are located as rural. These IPFs will begin to receive the rural 
facility adjustment and see an approximate 17 percent increase in 
payments. Five IPFs in NH that are currently treated as rural will 
experience an approximate 3 percent decrease in payments because the 
rural NH wage index value decreases when this change is made. One IPF 
in CT that is currently treated as rural will experience an approximate 
4 percent decrease in payments because the rural CT wage index value is 
lower when this change is made.
    The area wage index values for CBSAs 31700 and 25540 increase with 
the change. No other IPFs in CT or NH are affected by treating 
Litchfield and Merrimack Counties as rural.
b. Multi-Campus--Wage Index Data Collection
    Historically, under the IPF PPS, we have established IPF PPS wage 
index values calculated from acute care IPPS hospital wage data without 
taking into account geographic reclassification under sections 
1886(d)(8) and (d)(10) of the Act. As we discussed in the May 2006 IPF 
PPS final rule (71 FR 27040), hospitals that are excluded from the IPPS 
are not required to provide wage-related information on the Medicare 
cost report (which is needed in order to make geographic 
reclassifications). Thus, the wage adjustment established under the IPF 
PPS is based on an IPF's actual location without regard to the urban or 
rural designation of any related or affiliated provider.
    In the RY 2008 IPF PPS notice (72 FR 25602), we established IPF PPS 
wage index values for the RY 2008 calculated from the same data 
(collected from cost reports submitted by hospitals for cost reporting 
periods beginning during FY 2003) used to compute the FY 2007 acute 
care hospital inpatient wage index data without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act because that was the best available data at that time. The IPF 
PPS wage index values applicable for discharges occurring on or after 
July 1, 2007 through June 30, 2008 are shown in Table 1 (for urban 
areas) and Table 2 (for rural areas) in the Addendum to the RY 2008 IPF 
PPS final rule (72 FR 25627 through 25673).
    For RY 2009, the same data (collected from cost reports submitted 
by hospitals for cost reporting periods beginning during FY 2004) used 
to compute the FY 2008 acute care hospital inpatient wage index data 
without taking into account geographic reclassification under sections 
1886(d)(8) and (d)(10) of the Act was used to determine the applicable 
wage index values under the IPF PPS because these data (FY 2004) are 
the most recent complete data. (For information on the data used to 
compute the FY 2008 IPPS wage index, refer to the FY 2008 IPPS final 
rule with comment period (72 FR 47308 through 47309, 47315)). We are 
continuing to use IPPS wage data as a proxy to determine the IPF wage 
index values for RY 2009 because both IPFs and acute-care hospitals are 
required to meet the same certification criteria set forth in section 
1861(e) of the Act to participate as a hospital in the Medicare program 
and they both compete in the same labor markets, and therefore, 
experience similar wage-related costs. We note that the IPPS wage data 
used to determine the RY 2009 IPF wage index values reflects our policy 
that was adopted under the IPPS beginning in FY 2008 that apportions 
the wage data for multi-campus hospitals located in different

[[Page 25721]]

labor market areas (CBSAs) to each CBSA where the campuses are located 
(see the FY 2008 IPPS final rule with comment period (72 FR 47317 
through 47320)). The RY 2009 IPF PPS wage index values presented in 
this notice were computed consistent with our pre-reclassified IPPS 
wage index policy (that is, our historical policy of not taking into 
account IPPS geographic reclassifications in determining payments under 
the IPF PPS).
    For the RY 2009 IPF PPS, the wage index was computed from IPPS wage 
data (submitted by hospitals for cost reporting periods beginning in FY 
2004 (just like the FY 2008 IPPS wage index)), which allocated salaries 
and hours to the campuses of two multi-campus hospitals with campuses 
that are located in different labor areas, one in Massachusetts and 
another in Illinois. Thus, the RY 2009 IPF PPS wage index values for 
the following CBSAs are affected by this policy: Boston-Quincy, MA 
(CBSA 14484), Providence-New Bedford-Falls River, RI-MA (CBSA 39300), 
Chicago-Naperville-Joliet, IL (CBSA 16974) and Lake County-Kenosha 
County, IL-WI (CBSA 29404) (refer to Table 1 in the Addendum of this 
notice).
    The table below describes the change in wage index value and the 
number of IPFs affected by the multi-campus hospital policy change:

   Table 11.--IPFs Affected by the Multi-Campus Hospital Policy Change
------------------------------------------------------------------------
                                                 No. of     Wage index
                     CBSA                         IPFs     value change
------------------------------------------------------------------------
14484 (Boston-Quincy, MA)....................         17          0.0153
16974 (Chicago-Naperville-Joliet, IL)........         47          -0.002
29404 (Lake County-Kenosha County, IL-WI)....          2          0.0288
39300 (Providence-New Bedford-Falls River, RI-        12         -0.0111
 MA).........................................
------------------------------------------------------------------------

c. OMB Bulletins
    The Office of Management and Budget (OMB) publishes bulletins 
regarding CBSA changes, including changes to CBSA numbers and titles. 
In the May 2006 IPF PPS final rule for FY 2006 (71 FR 27040), we 
adopted the changes discussed in the OMB Bulletin No. 03-04 (June 6, 
2003), available online at http://www.whitehouse.gov/omb/bulletins/b03-04.html. Those changes were strictly nomenclature changes and did not 
represent substantive changes to the CBSA-based designations. In this 
notice, we incorporate the CBSA nomenclature changes published in the 
most recent OMB bulletin that applies to the hospital wage data used to 
determine the current IPF PPS wage index, and we expect to do the same 
for all such OMB CBSA nomenclature changes in future IPF PPS rules and 
notices, as necessary. The OMB bulletins may be accessed online at 
http://www.whitehouse.gov/omb/bulletins/index.html.
2. Adjustment for Rural Location
    In the November 2004 IPF PPS final rule, we provided a 17 percent 
payment adjustment for IPFs located in a rural area. This adjustment 
was based on the regression analysis, which indicated that the per diem 
cost of rural facilities was 17 percent higher than that of urban 
facilities after accounting for the influence of the other variables 
included in the regression. For RY 2009, we are applying a 17 percent 
payment adjustment for IPFs located in a rural area as defined at Sec.  
412.64(b)(1)(ii)(C). A complete discussion of the adjustment for rural 
locations appears in the November 2004 IPF PPS final rule (69 FR 
66954).
3. Teaching Adjustment
    In the November 2004 IPF PPS final rule, we implemented regulations 
at Sec.  412.424(d)(1)(iii) to establish a facility-level adjustment 
for IPFs that are, or are part of, teaching institutions. The teaching 
adjustment accounts for the higher indirect operating costs experienced 
by facilities that participate in graduate medical education (GME) 
programs. Payments are made based on the number of full-time equivalent 
interns and residents training in the IPF.
    Medicare makes direct GME payments (for direct costs such as 
resident and teaching physician salaries, and other direct teaching 
costs) to all teaching hospitals including those paid under the IPPS, 
and those that were once paid under the TEFRA rate-of-increase limits 
but are now paid under other PPSs. These direct GME payments are made 
separately from payments for hospital operating costs and are not part 
of the PPSs. The direct GME payments do not address the estimated 
higher indirect operating costs teaching hospitals may face.
    For teaching hospitals paid under the TEFRA rate of increase 
limits, Medicare did not make separate medical education payments 
because payments to these hospitals were based on the hospitals' 
reasonable costs. Since payments under TEFRA were based on hospitals' 
reasonable costs, the higher indirect costs that might be associated 
with teaching programs would automatically have been factored into the 
TEFRA payments.
    The results of the regression analysis of FY 2002 IPF data 
established the basis for the payment adjustments included in the 
November 2004 IPF PPS final rule. The results showed that the indirect 
teaching cost variable is significant in explaining the higher costs of 
IPFs that have teaching programs. We calculated the teaching adjustment 
based on the IPF's ``teaching variable,'' which is one plus the ratio 
of the number of full-time equivalent (FTE) residents training in the 
IPF (subject to limitations described below) to the IPF's average daily 
census (ADC).
    In the regression analysis, the logarithm of the teaching variable 
had a coefficient value of 0.5150. We converted this cost effect to a 
teaching payment adjustment by treating the regression coefficient as 
an exponent and raising the teaching variable to a power equal to the 
coefficient value. We note that the coefficient value of 0.5150 was 
based on the regression analysis holding all other components of the 
payment system constant.
    As with other adjustment factors derived through the regression 
analysis, we do not plan to rerun the regression analysis until we 
analyze IPF PPS data. Therefore, for RY 2009, we are retaining the 
coefficient value of 0.5150 for the teaching adjustment to the Federal 
per diem base rate.
    A complete discussion of how the teaching adjustment was calculated 
appears in the November 2004 IPF PPS final rule (69 FR 66954 through 
66957) and the May 2006 IPF PPS final rule (71 FR 27067 through 27070).
4. Cost of Living Adjustment for IPFs Located in Alaska and Hawaii
    The IPF PPS includes a payment adjustment for IPFs located in 
Alaska and Hawaii based upon the county in which the IPF is located. As 
we explained in the November 2004 IPF PPS final rule, the FY 2002 data

[[Page 25722]]

demonstrated that IPFs in Alaska and Hawaii had per diem costs that 
were disproportionately higher than other IPFs. Other Medicare PPSs 
(for example, the IPPS and LTCH PPS) have adopted a cost of living 
adjustment (COLA) to account for the cost differential of care 
furnished in Alaska and Hawaii.
    We analyzed the effect of applying a COLA to payments for IPFs 
located in Alaska and Hawaii. The results of our analysis demonstrated 
that a COLA for IPFs located in Alaska and Hawaii would improve payment 
equity for these facilities. As a result of this analysis, we provided 
a COLA in the November 2004 IPF PPS final rule.
    In general, the COLA accounts for the higher costs in the IPF and 
eliminates the projected loss that IPFs in Alaska and Hawaii would 
experience absent the COLA. A COLA factor for IPFs located in Alaska 
and Hawaii is made by multiplying the non-labor share of the Federal 
per diem base rate by the applicable COLA factor based on the COLA area 
in which the IPF is located.
    As previously stated, we will update the COLA factors according to 
updates established by the U.S. Office of Personnel Management (OPM), 
which issued a final rule to change COLA rates effective September 1, 
2006.
    The COLA factors are published on the OPM Web site at http://www.opm.gov/oca/cola/rates.asp.
    We note that the COLA areas for Alaska are not defined by county as 
are the COLA areas for Hawaii. In 5 CFR 591.207, the OPM established 
the following COLA areas:
    (a) City of Anchorage, and 80-kilometer (50-mile) radius by road, 
as measured from the Federal courthouse;
    (b) City of Fairbanks, and 80-kilometer (50-mile) radius by road, 
as measured from the Federal courthouse;
    (c) City of Juneau, and 80-kilometer (50-mile) radius by road, as 
measured from the Federal courthouse;
    (d) Rest of the State of Alaska.
    In the November 2004 and May 2006 IPF PPS final rules, we showed 
only one COLA for Alaska because all four areas were the same amount 
(1.25). Effective September 1, 2006, the OPM updated the COLA amounts 
and there are now two different amounts for the Alaska COLA areas (1.24 
and 1.25).
    For RY 2009, IPFs located in Alaska and Hawaii will receive the 
updated COLA factors based on the COLA area in which the IPF is located 
and as shown in Table 12 below.

           Table 12.-- COLA Factors for Alaska and Hawaii IPFs
------------------------------------------------------------------------
                                               Location            COLA
------------------------------------------------------------------------
Alaska...............................  Anchorage...............     1.24
                                       Fairbanks...............     1.24
                                       Juneau..................     1.24
                                       Rest of Alaska..........     1.25
Hawaii...............................  Honolulu County.........     1.25
                                       Hawaii County...........     1.17
                                       Kauai County............     1.25
                                       Maui County.............     1.25
                                       Kalawao County..........     1.25
------------------------------------------------------------------------

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

D. Other Payment Adjustments and Policies

    For RY 2009, the IPF PPS includes the following payment 
adjustments: An outlier adjustment to promote access to IPF care for 
those patients who require expensive care and to limit the financial 
risk of IPFs treating unusually costly patients. In this section, we 
also explain the reason for ending the stop-loss provision that was 
applicable during the transition period.
1. Outlier Payments
    In the November 2004 IPF PPS final rule, we implemented regulations 
at Sec.  412.424(d)(3)(i) to provide a per-case payment for IPF stays 
that are extraordinarily costly. Providing additional payments to IPFs 
for extremely costly cases strongly improves the accuracy of the IPF 
PPS in determining resource costs at the patient and facility level. 
These additional

[[Page 25723]]

payments reduce the financial losses that would otherwise be incurred 
in treating patients who require more costly care and, therefore, 
reduce the incentives for IPFs to under-serve these patients.
    We make outlier payments for discharges in which an IPF's estimated 
total cost for a case exceeds a fixed dollar loss threshold amount 
(multiplied by the IPF's facility-level adjustments) plus the Federal 
per diem payment amount for the case.
    In instances when the case qualifies for an outlier payment, we pay 
80 percent of the difference between the estimated cost for the case 
and the adjusted threshold amount for days 1 through 9 of the stay 
(consistent with the median LOS for IPFs in FY 2002), and 60 percent of 
the difference for day 10 and thereafter. We established the 80 percent 
and 60 percent loss sharing ratios because we were concerned that a 
single ratio established at 80 percent (like other Medicare PPSs) might 
provide an incentive under the IPF per diem payment system to increase 
LOS in order to receive additional payments. After establishing the 
loss sharing ratios, we determined the current fixed dollar loss 
threshold amount of $6,488 through payment simulations designed to 
compute a dollar loss beyond which payments are estimated to meet the 2 
percent outlier spending target.
a. Update to the Outlier Fixed Dollar Loss Threshold Amount
    In accordance with the update methodology described in Sec.  
412.428(d), we are updating the fixed dollar loss threshold amount used 
under the IPF PPS outlier policy. Based on the regression analysis and 
payment simulations used to develop the IPF PPS, we established a 2 
percent outlier policy which strikes an appropriate balance between 
protecting IPFs from extraordinarily costly cases while ensuring the 
adequacy of the Federal per diem base rate for all other cases that are 
not outlier cases.
    We believe it is necessary to update the fixed dollar loss 
threshold amount because analysis of the latest available data (that 
is, FY 2006 IPF claims) and rate increases indicates adjusting the 
fixed dollar loss amount is necessary in order to maintain an outlier 
percentage that equals 2 percent of total estimated IPF PPS payments.
    In the May 2006 IPF PPS Final Rule (71 FR 27072), we describe the 
process by which we calculate the outlier fixed dollar loss threshold 
amount. We continue to use this process for RY 2009. We begin by 
simulating aggregate payments with and without an outlier policy, and 
applying an iterative process to a fixed dollar loss amount that will 
result in outlier payments being equal to 2 percent of total estimated 
payments under the simulation. Based on this process, for RY 2009, the 
IPF PPS will use $6,113 as the fixed dollar loss threshold amount in 
the outlier calculation in order to maintain the 2 percent outlier 
policy.
b. Statistical Accuracy of Cost-to-Charge Ratios
    As previously stated, under the IPF PPS, an outlier payment is made 
if an IPF's cost for a stay exceeds a fixed dollar loss threshold 
amount. In order to establish an IPF's cost for a particular case, we 
multiply the IPF's reported charges on the discharge bill by its 
overall cost to charge ratio (CCR). This approach to determining an 
IPF's cost is consistent with the approach used under the IPPS and 
other PPSs. In FY 2004, we implemented changes to the IPPS outlier 
policy used to determine CCRs for acute care hospitals because we 
became aware that payment vulnerabilities resulted in inappropriate 
outlier payments. Under the IPPS, we established a statistical measure 
of accuracy for CCRs in order to ensure that aberrant CCR data did not 
result in inappropriate outlier payments.
    As we indicated in the November 2004 IPF PPS final rule, because we 
believe that the IPF outlier policy is susceptible to the same payment 
vulnerabilities as the IPPS, we adopted an approach to ensure the 
statistical accuracy of CCRs under the IPF PPS (69 FR 66961). 
Therefore, we adopted the following procedure in the November 2004 IPF 
PPS final rule:
    <bullet> We calculated two national ceilings, one for IPFs located 
in rural areas and one for IPFs located in urban areas. We computed the 
ceilings by first calculating the national average and the standard 
deviation of the CCR for both urban and rural IPFs.
    To determine the rural and urban ceilings, we multiplied each of 
the standard deviations by 3 and added the result to the appropriate 
national CCR average (either rural or urban). The upper threshold CCR 
for IPFs in RY 2009 is 1.8041 for rural IPFs, and 1.6724 for urban 
IPFs, based on CBSA-based geographic designations. If an IPF's CCR is 
above the applicable ceiling, the ratio is considered statistically 
inaccurate and we assign the appropriate national (either rural or 
urban) median CCR to the IPF.
    We are applying the national CCRs to the following situations:
    ++ New IPFs that have not yet submitted their first Medicare cost 
report.
    ++ IPFs whose CCR is in excess of 3 standard deviations above the 
corresponding national geometric mean (that is, above the ceiling).
    ++ Other IPFs for whom the Medicare contractor obtains inaccurate 
or incomplete data with which to calculate a CCR.
    For new IPFs, we are using these national CCRs until the facility's 
actual CCR can be computed using the first tentatively settled or final 
settled cost report, which will then be used for the subsequent cost 
report period.
    We are not making any changes to the procedures for ensuring the 
statistical accuracy of CCRs in RY 2009. However, we are updating the 
national urban and rural CCRs (ceilings and medians) for IPFs for RY 
2009 based on the CCRs entered in the latest available IPF PPS Provider 
Specific File.
    The national CCRs for RY 2009 are 0.686 for rural IPFs and 0.5370 
for urban IPFs and will be used in each of the three situations listed 
above. These calculations are based on the IPF's location (either urban 
or rural) using the CBSA-based geographic designations.
    A complete discussion regarding the national median CCRs appears in 
the November 2004 IPF PPS final rule (69 FR 66961 through 66964).
2. Stop-Loss Provision
    In the November 2004 IPF PPS final rule, we implemented a stop-loss 
policy that reduces financial risk to IPFs expected to experience 
substantial reductions in Medicare payments during the period of 
transition to the IPF PPS. This stop-loss policy guarantees that each 
facility receives total IPF PPS payments that are no less than 70 
percent of its TEFRA payments had the IPF PPS not been implemented.
    This policy is applied to the IPF PPS portion of Medicare payments 
during the 3-year transition. During the first year, for transitioning 
IPFs, three-quarters of the payment was based on TEFRA and one-quarter 
on the IPF PPS payment amount. In the second year, one-half of the 
payment was based on TEFRA and one-half on the IPF PPS payment amount. 
In the third year, one-quarter of the payment was based on TEFRA and 
three-quarters on the IPF PPS. For cost report periods beginning on or 
after January 1, 2008, payments are based 100 percent on the IPF PPS.
    The combined effects of the transition and the stop-loss policies 
ensure that the total estimated IPF PPS payments were no less than 92.5 
percent in the first year, 85 percent in the second year,

[[Page 25724]]

and 77.5 percent in the third year. Under the 70 percent policy, in the 
third year, 25 percent of an IPF's payment is TEFRA payments, and 75 
percent is IPF PPS payments, which are guaranteed to be at least 70 
percent of the TEFRA payments. The resulting 77.5 percent of TEFRA 
payments is the sum of 25 percent and 75 percent times 70 percent 
(which equals 52.5 percent).
    In the implementation year, the 70 percent of TEFRA payment stop-
loss policy required a reduction in the standardized Federal per diem 
and ECT base rates of 0.39 percent in order to make the stop-loss 
payments budget neutral.
    For the RY 2009 (that is for discharges occurring on or after July 
1, 2008 through June 30, 2009), we are not making any changes to the 
stop-loss policy for IPFs continuing to transition. However, beginning 
January 1, 2009, the stop-loss provision will have ended for all IPFs 
because it was implemented to be effective for the duration of the 
transition period, and the transition period will be completed 
beginning January 1, 2009. As indicated in ``Section III. A.2.6 of this 
notice for RY 2009, we are increasing the Federal per diem base rate 
and ECT rate by 0.39 percent because these rates were reduced by 0.39 
percent in the implementation year to ensure stop-loss payments were 
budget neutral.

V. Waiver of Proposed Rulemaking

    We ordinarily publish a notice of proposed rulemaking in the 
Federal Register to provide a period for public comment before the 
provisions of a rule take effect. We can waive this procedure, however, 
if we find good cause that notice and comment procedures are 
impracticable, unnecessary, or contrary to the public interest and we 
incorporate a statement of finding and its reasons in the notice.
    We find it is unnecessary to undertake notice and comment 
rulemaking for the update in this notice because the update does not 
make any substantive changes in policy, but merely reflects the 
application of previously established methodologies. Therefore, under 5 
U.S.C 553(b)(3)(B), for good cause, we waive notice and comment 
procedures.

VI. Collection of Information Requirement

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

VII. Regulatory Impact Analysis

A. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), Executive Order 13132 on 
Federalism, and the Congressional Review Act (5 U.S.C. 804(2)).
    Executive Order 12866 (as amended) directs agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year). 
For purposes of Title 5, United States Code, section 804(2), we 
estimate that this rulemaking is ``economically significant'' as 
measured by the $100 million threshold, and hence also a major rule 
under the Congressional Review Act. Accordingly, we have prepared a 
Regulatory Impact Analysis that to the best of our ability presents the 
costs and benefits of the rulemaking on the 1,669 IPFs.
    The updates to the IPF labor-related share and wage indices are 
made in a budget neutral manner and thus have no effect on estimated 
costs to the Medicare program. Therefore, the estimated increased cost 
to the Medicare program is due to the updated IPF payment rates, which 
results in a $140 million increase in payments, and the transition from 
75 percent PPS/25 percent TEFRA payments to 100 percent PPS payments, 
which results in a $20 million decrease in payments. The sunset of the 
stop-loss provision has a minimal impact on IPF payments in RY 2009. 
The distribution of these impacts is summarized in Table 13. The effect 
of the updates described in this notice result in an overall $120 
million increase in payments from RY 2008 to RY 2009.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses, if a rule has a significant impact on a 
substantial number of small entities. For purposes of the RFA, we 
estimate that the great majority of IPFs are small entities as that 
term is used in the RFA (include small businesses, nonprofit 
organizations, and small governmental jurisdictions). The great 
majority of hospitals and most other health care providers and 
suppliers are small entities, either by being nonprofit organizations 
or by meeting the SBA definition of a small business (having revenues 
of less than $6.5 million to $31.5 million in any 1 year) (For details, 
see the Small Business Administration's Interim final rule that set 
forth size standards at 70 FR 72577, December 6, 2005.) Because we lack 
data on individual hospital receipts, we cannot determine the number of 
small proprietary IPFs or the proportion of IPFs' revenue that is 
derived from Medicare payments. Therefore, we assume that all IPFs are 
considered small entities. As shown in Table 13, we estimate that the 
net revenue impact of this notice on all IPFs is to increase payments 
by about 2.5 percent. Thus, we anticipate that this notice will not 
have a significant impact on a substantial number of small entities. 
Medicare contractors are not considered to be small entities. 
Individuals and States are not included in the definition of a small 
entity.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a metropolitan 
statistical area and has fewer than 100 beds. With the exception of 
hospitals located in certain New England counties, for purposes of 
section 1102(b) of the Act, we previously defined a small rural 
hospital as a hospital with fewer than 100 beds that is located outside 
of a Metropolitan Statistical Area (MSA) or New England County 
Metropolitan Area (NECMA). However, under the new labor market 
definitions, we no longer employ NECMAs to define urban areas in New 
England. For purposes of this analysis, we now define a small rural 
hospital as a hospital with fewer than 100 beds that is located outside 
of an MSA. Therefore, the Secretary certifies that this notice has a 
significant impact on the operations of a substantial number of small 
rural hospitals.
    We have determined that this notice will have a significant and 
positive impact on substantial number of hospitals classified as 
located in rural areas. Since the impact on rural hospitals is 
positive, we did not consider alternatives to reduce burden on these 
IPFs.
    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also 
requires that agencies assess

[[Page 25725]]

anticipated costs and benefits before issuing any rule whose mandates 
require spending in any 1 year of $100 million in 1995 dollars, updated 
annually for inflation. In 2008, that threshold is approximately $130 
million. This notice will not impose spending costs on State, local, or 
tribal governments in the aggregate, or by the private sector, of $130 
million Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. We have reviewed this notice under the criteria set forth 
in Executive Order 13132 and have determined that the notice will not 
have any substantial impact on the rights, roles, and responsibilities 
of State, local, or tribal governments.

B. Anticipated Effects

    We discuss below the historical background of the IPF PPS and the 
impact of this notice on the Federal Medicare budget and on IPFs.
1. Budgetary Impact
    As discussed in the November 2004 and May 2006 IPF PPS final rules, 
we applied a budget neutrality factor to the Federal per diem and ECT 
base rates to ensure that total estimated payments under the IPF PPS in 
the implementation period would equal the amount that would have been 
paid if the IPF PPS had not been implemented. The budget neutrality 
factor includes the following components: Outlier adjustment, stop-loss 
adjustment, and the behavioral offset. In accordance with Sec.  
412.424(c)(3)(ii), we will evaluate the accuracy of the budget 
neutrality adjustment within the first 5 years after implementation of 
the payment system. We may make a one-time prospective adjustment to 
the Federal per diem and ECT base rates to account for differences 
between the historical data on cost-based TEFRA payments (the basis of 
the budget neutrality adjustment) and estimates of TEFRA payments based 
on actual data from the first year of the IPF PPS. As part of that 
process, we will re-assess the accuracy of all of the factors impacting 
budget neutrality.
    In addition, as discussed in section IV.C.1. of this notice, we are 
using the wage index and labor market share in a budget neutral manner 
by applying a wage index budget neutrality factor to the Federal per 
diem and ECT base rates. Thus, the budgetary impact to the Medicare 
program by the update of the IPF PPS will be due to the market basket 
updates (see section III.B. of this notice) and the planned update of 
the payment blend discussed below.
2. Impacts on Providers
    To understand the impact of the changes to the IPF PPS discussed in 
this notice on providers, it is necessary to compare estimated payments 
under the IPF PPS rates and factors for RY 2009 to estimated payments 
under the IPF PPS rates and factors for RY 2008. The estimated payments 
for RY 2008 are a blend of: 25 percent of the facility-specific TEFRA 
payment and 75 percent of the IPF PPS payment with stop-loss payment. 
The estimated payments for the RY 2009 IPF PPS will be 100 percent of 
the IPF PPS payment and the stop-loss payment will no longer be 
applied. We determined the percent change of estimated RY 2009 IPF PPS 
payments to estimated RY 2008 IPF PPS payments for each category of 
IPFs. In addition, for each category of IPFs, we have included the 
estimated percent change in payments resulting from the wage index 
changes for the RY 2009 IPF PPS, the market basket update to IPF PPS 
payments, and the transition blend for the RY 2009 IPF PPS payment and 
the facility-specific TEFRA payment.
    To illustrate the impacts of the final RY 2009 changes in this 
update notice, our analysis begins with a RY 2008 baseline simulation 
model based on FY 2006 IPF payments inflated to the midpoint of RY 2008 
using Global Insight's most recent forecast of the market basket update 
(see section III.B. of this notice); the estimated outlier payments in 
RY 2008; the estimated stop-loss payments in RY 2008; the CBSA 
designations for IPFs based on OMB's MSA definitions after June 2003; 
the FY 2007 pre-floor, pre-reclassified hospital wage index; the RY 
2008 labor-market share; and the RY 2008 percentage amount of the rural 
adjustment. During the simulation, the outlier payment is maintained at 
the target of 2 percent of total PPS payments.
    Each of the following changes is added incrementally to this 
baseline model in order for us to isolate the effects of each change:
    <bullet> The FY 2008 pre-floor, pre-reclassified hospital wage 
index and RY 2009 final labor-related share.
    <bullet> A market basket update of 3.2 percent resulting in an 
update to the IPF PPS base rates.
    <bullet> The transition to 100 percent IPF PPS payments.
    <bullet> The removal of the stop-loss provision.
    <bullet> Our final comparison illustrates the percent change in 
payments from RY 2008 (that is, July 1, 2007 to June 30, 2008) to RY 
2009 (that is, July 1, 2008 to June 30, 2009).

                                           Table 13.--Projected Impacts
----------------------------------------------------------------------------------------------------------------
                                                  CBSA wage
                                     Number of    index and      Market     Transition   Stop-loss      Total
         Facility by type            facilities  labor share     basket       blend      (percent)    (percent)
                                                  (percent)    (percent)    (percent)
----------------------------------------------------------------------------------------------------------------
(1)                                         (2)          (3)          (4)          (5)          (6)          (7)
----------------------------------------------------------------------------------------------------------------
All Facilities....................        1,669          0.0          3.2         -0.5         -0.1          2.5
    Urban.........................        1,301          0.0          3.2         -0.5          0.0          2.6
    Rural.........................          368          0.0          3.2         -0.6         -0.3          2.1
    Urban unit....................          931          0.0          3.2         -2.6         -0.1          0.4
    Rural unit....................          308          0.0          3.2         -2.4         -0.5          0.1
Freestanding IPF By Type of
 Ownership:
Urban Psychiatric Hospitals:
    Government....................          141          0.1          3.2          6.7          0.3         10.5
    Non-Profit....................           83          0.0          3.2          0.2         -0.1          3.3
    For-Profit....................          145         -0.1          3.2          5.6          0.1          9.0
Rural Psychiatric Hospitals:
    Government....................           40         -0.1          3.2          8.3          0.4         12.1
    Non-Profit....................            7          0.2          3.2          0.9          0.4          4.5
    For-Profit....................           14         -0.4          3.2          5.5          0.4          8.4

[[Page 25726]]

 
By Teaching Status:
Non-teaching......................        1,424          0.0          3.2         -0.4         -0.1          2.6
    Less than 10% interns and               137          0.0          3.2         -0.4          0.3          3.1
     residents to beds............
    10% to 30% interns and                   73          0.0          3.2         -2.0         -0.1          1.0
     residents to beds............
    More than 30% interns and                35          0.0          3.2         -1.6         -0.5          1.1
     residents to beds............
By Region:
    New England...................          121          0.4          3.2         -2.4          0.0          1.2
    Mid-Atlantic..................          284         -0.1          3.2          1.9          0.2          5.2
    South Atlantic................          226          0.0          3.2         -0.5          0.1          2.8
    East North Central............          292         -0.2          3.2         -2.3         -0.3          0.3
    East South Central............          164         -0.4          3.2         -0.2          0.0          2.5
    West North Central............          141          0.1          3.2         -1.7         -0.2          1.4
    West South Central............          228         -0.1          3.2         -1.1         -0.5          1.3
    Mountain......................           74         -0.3          3.2         -1.7         -0.7          0.5
    Pacific.......................          132          0.5          3.2          0.4          0.0          4.2
By Bed Size:
    Psychiatric Hospitals:
        Less than 12 beds.........           24         -0.1          3.2         -1.9          0.0          1.1
        12 to 25 beds.............           62         -0.1          3.2          1.2          0.1          4.2
        25 to 50 beds.............           94         -0.2          3.2          2.4         -0.5          4.9
        50 to 75 beds.............           77          0.0          3.2          5.1          0.2          8.6
        More than 75 beds.........          174          0.1          3.2          6.5          0.4         10.4
    Psychiatric Units:
        Less than 12 beds.........          489          0.0          3.2         -4.6         -0.7         -2.4
        12 to 25 beds.............          430          0.1          3.2         -2.9         -0.3          0.0
        25 to 50 beds.............          217          0.0          3.2         -2.0          0.2          1.3
        50 to 75 beds.............           55         -0.1          3.2         -1.8          0.3          1.4
        More than 75 beds.........           47          0.0          3.2          0.7          0.3          4.2
----------------------------------------------------------------------------------------------------------------

3. Results
    Table 1 above displays the results of our analysis. The table 
groups IPFs into the categories listed below based on characteristics 
provided in the Provider of Services (POS) file, the IPF provider 
specific file, and cost report data from HCRIS:
    <bullet> Facility Type
    <bullet> Location
    <bullet> Teaching Status Adjustment
    <bullet> Census Region
    <bullet> Size
    The top row of the table shows the overall impact on the 1,669 IPFs 
included in the analysis.
    In column 3, we present the effects of the budget-neutral update to 
the labor-related share and the wage index adjustment under the CBSA 
geographic area definitions announced by OMB in June 2003. This is a 
comparison of the simulated RY 2009 payments under the FY 2008 hospital 
wage index under CBSA classification and associated labor-related share 
to the simulated RY 2008 payments under the FY 2007 hospital wage index 
under CBSA classifications and associated labor-related share. There is 
no projected change in aggregate payments to IPFs, as indicated in the 
first row of column 3. There would, however, be small distributional 
effects among different categories of IPFs. For example, rural for-
profit IPFs and IPFs located in the East South Central region will 
experience a 0.4 percent decrease in payments. IPFs located in the 
Pacific region will receive the largest increase of 0.5 percent.
    In column 4, we present the effects of the market basket update to 
the IPF PPS payments by applying the TEFRA and PPS updates to payments 
under the revised budget neutrality factor and labor-related share and 
wage index under CBSA classification. In the aggregate this update is 
projected to be a 3.2 percent increase in overall payments to IPFs.
    In column 5, we present the effects of the payment change in 
transition blend percentages to the final year of the transition (TEFRA 
Rate Percentage = 0 percent, IPF PPS Federal Rate Percentage = 100 
percent) from the third year of the transition (TEFRA Rate Percentage = 
25 percent, IPF PPS Federal Rate Percentage = 75 percent) of the IPF 
PPS under the revised budget neutrality factor, labor-related share and 
wage index under CBSA classification, and TEFRA and PPS updates to RY 
2008. The overall aggregate effect, across all hospital groups, is 
projected to be a 0.5 percent decrease in payments to IPFs. There are 
distributional effects of these changes among different categories of 
IPFs. Government psychiatric hospitals will receive the largest 
increase, with rural government hospitals receiving an 8.3 percent 
increase and urban government hospitals receiving a 6.7 percent 
increase. In addition, psychiatric hospitals with more than 75 beds 
will receive a 6.5 percent increase. Alternatively, psychiatric units 
with fewer than 12 beds will receive the largest decrease of 4.6 
percent.
    In column 6, we present the effects of the removal of the stop-loss 
provision. Stop-loss payments are no longer applicable when payments 
are 100 percent IPF PPS payments. However, all IPFs will receive an 
increase in the rates of 0.39 percent. The overall aggregate effect, 
across all hospital groups, is projected to be a 0.1 percent decrease 
in payments to IPFs. While stop-loss payments were intended to be 
budget neutral, we slightly underestimated the percentage by which we 
needed to decrease the Federal per diem base rate in the implementation 
year. Therefore,

[[Page 25727]]

the aggregate impact of removing the stop-loss provision is a 0.1 
percent decrease in payments instead of 0.0 percent. There are 
distributional effects of these changes among different categories of 
IPFs. Rural freestanding psychiatric hospitals will receive the largest 
increases, with rural government hospitals, rural non-profit hospitals, 
and rural for-profit hospitals each receiving a 0.4 percent increase. 
Alternatively, psychiatric units with fewer than 12 beds and IPFs 
located in the Mountain region will receive the largest decrease of 0.7 
percent.
    Column 7 compares our estimates of the changes reflected in this 
notice for RY 2009, to our estimates of payments for RY 2008 (without 
these changes). This column reflects all RY 2009 changes relative to RY 
2008 (as shown in columns 3 through 6). The average increase for all 
IPFs is approximately 2.5 percent. This increase includes the effects 
of the market basket update resulting in a 3.2 percent increase in 
total RY 2009 payments, a 0.5 percent decrease in RY 2009 payments for 
the transition blend, and a 0.1 percent decrease in RY 2009 payments 
for the removal of the stop-loss provision.
    Overall, the largest payment increase is projected to be among 
government IPFs. Rural government psychiatric hospitals will receive a 
12.1 percent increase and urban government psychiatric hospitals will 
receive a 10.5 percent increase. In addition, psychiatric hospitals 
with more than 75 beds will receive a 10.4 percent increase. 
Psychiatric units with fewer than 12 beds will receive a 2.4 percent 
decrease.
4. Effect on the Medicare Program
    Based on actuarial projections resulting from our experience with 
other PPSs, we estimate that Medicare spending (total Medicare program 
payments) for IPF services over the next 5 years would be as follows:

                      Table 14.--Estimated Payments
------------------------------------------------------------------------
                                                              Dollars in
                         Rate year                             millions
------------------------------------------------------------------------
July 1, 2008 to June 30, 2009..............................       $4,584
July 1, 2009 to June 30, 2010..............................        4,799
July 1, 2010 to June 30, 2011..............................        5,055
July 1, 2011 to June 30, 2012..............................        5,373
July 1, 2012 to June 30, 2013..............................        5,722
------------------------------------------------------------------------

    These estimates are based on the current estimate of increases in 
the RPL market basket as follows:
    <bullet> 3.2 percent for RY 2009;
    <bullet> 2.9 percent for RY 2010;
    <bullet> 3.0 percent for RY 2011;
    <bullet> 3.2 percent for RY 2012; and
    <bullet> 3.2 percent for RY 2013.
    We estimate that there would be a change in fee-for-service 
Medicare beneficiary enrollment as follows:
    <bullet> -0.3 percent in RY 2009;
    <bullet> 0.2 percent in RY 2010;
    <bullet> 0.5 percent in RY 2011;
    <bullet> 1.5 percent in RY 2012; and
    <bullet> 2.5 percent in RY 2013.
5. Effect on Beneficiaries
    Under the IPF PPS, IPFs will receive payment based on the average 
resources consumed by patients for each day. We do not expect changes 
in the quality of care or access to services for Medicare beneficiaries 
under the RY 2009 IPF PPS. In fact, we believe that access to IPF 
services will be enhanced due to the patient and facility level 
adjustment factors, all of which are intended to adequately reimburse 
IPFs for expensive cases. Finally, the outlier policy is intended to 
assist IPFs that experience high-cost cases.

C. Alternatives Considered

    The statute does not specify an update strategy for the IPF PPS and 
is broadly written to give the Secretary discretion in establishing an 
update methodology. Therefore, we are updating the IPF PPS similar to 
the update approach used in other hospital PPSs and as published in the 
November 15, 2004, final rule. We note that this notice does not 
initiate any policy changes with regard to the IPF PPS; rather, it 
simply provides an update to the rates for RY 2009. Therefore, no other 
options were considered.

D. 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 
expenditures associated with the provisions of this notice. This table 
provides our best estimate of the increase in Medicare payments under 
the IPF PPS as a result of the changes presented in this notice based 
on the data for 1,669 IPFs in our database. All expenditures are 
classified as transfers to Medicare providers (that is, IPFs).

      Table 15.--Accounting Statement: Classification of Estimated
      Expenditures, From the 2008 IPF PPS RY to the 2009 IPF PPS RY
                              [in Millions]
------------------------------------------------------------------------
                 Category                             Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers............  $120.
From Whom To Whom?                          Federal Government To IPFs
                                             Medicare Providers.
------------------------------------------------------------------------

E. Conclusion

    This notice does not initiate any policy changes with regard to the 
IPF PPS; rather, it simply provides an update to the rates for RY 2009 
using established methodologies. In accordance with the provisions of 
Executive Order 12866, this rule was previously reviewed by OMB.

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

    Dated: March 14, 2008.
Kerry Weems,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: April 4, 2008.
Michael O. Leavitt,
Secretary.

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[FR Doc. 08-1213 Filed 5-1-08; 4:00 pm]
BILLING CODE 4120-01-C